6/16/2014 4:45 PM ET|
9 money habits that can help you get wealthy
Change your habits -- and your mindset -- to make sure you stay on the road to prosperity.
While a six-figure inheritance or high-paying job can land you in the top 1 percent of earners, it’s the little things—your money habits—that often make the difference between a life of prosperity and one of constant financial stress.
Just ask LearnVest Planning Services CFP® David Blaylock, who doesn’t simply advise his clients on the merits of good money habits—he practices what he preaches.
For example, “I do a periodic review of all the subscriptions I have—the ones that hit my credit cards each month,” says Blaylock. “You’d be surprised at how many subscriptions we all have and how many go unused. You could create some significant savings each month just by looking at those things.”
Taking inventory of your recurring subscriptions and services is just one habit that can get you on the road to better fortune.
“If you look at the average amount of money you will earn over your lifetime, and figure out how many years you are working—most people earn more than a million dollars over their working life but very few people become millionaires,” says Nancy Butler, a Certified Financial Planner™. “How they manage what goes through their fingers usually makes the difference.”
So what are these easy changes that can help move you further along the road to prosperity? We asked two financial planners for their favorites.
No. 1: Reverse your thinking
We know: After taxes are taken out and the bills are paid, your paycheck can seem a little anemic—which can make the idea of having to save for retirement too seem like a real stretch. But to build wealth, a change in mindset is required. Namely, instead of spending the rest of your take-home pay, you’d actually take another cut of your paycheck and put it toward your biggest financial goals.
“Most people spend some money, pay their bills and save what’s left,” says Butler. “And that’s backwards: You should be saving for your financial goals first, paying your bills and and then consider spending the money you have leftover.” Another trap is putting your good money habits off till “later,” when life will get easier. The thing is, somehow the minute your income increases, the demands on your money seem to as well.
Now, keep in mind, we’re not suggesting you sock all of your money away and live on rice cakes. As Blaylock puts it: “I’m not asking you to put $1,000 away a month, I’m asking you to put away $50, or a small amount that you can afford. We really can’t underestimate the power of starting small, because most of the time that momentum builds, and once we see progress, we tend to repeat behaviors.”
No. 2: Look where you want to go
Just as performance athletes imagine themselves making the shot over and over again—check out this study for how goal setting improves motivation in athletes—knowing what you want your money to do for you gives your goals a better chance of being reached.
To get going on saving for the future, financial experts often suggest having a five-year plan, where you create specific money goals you’d like to achieve in five years and what you need to achieve those goals. (That is the goal of LearnVest’s 5-Year Planner.) For example, saving six months of income for an emergency fund, or saving for a big event, like a down payment on a house.
“Anytime we have a specific goal in mind, that helps us to save,” says Blaylock. “Whether that goal is emergency savings, or saving for a trip, or saving for college, it doesn’t matter.”
No. 3: Adopt your own private mind tricks
What if not spending $1,000 on a designer purse or new must-have gadget were as easy as following a rule that dictates you can’t spend more than $300 on something that isn’t essential to your life? The good news is you can create financial rules just like that for yourself; in fact, doing so can be a great habit to get into.
Also known as “heuristics,” these rule-of-thumb strategies we create for ourselves—such as not spending more than $15 on an item of baby clothing, or more than $50 on a pair of shoes—can help simplify the many choices we make in a day. Behavioral economists believe that adopting good heuristics can help one develop good money habits (see this piece for more on how and why they work).
If creating a great heuristic seems like an overwhelming task, Blaylock suggests starting with something simple, such as eating out only twice a week, or “not getting a cart at Target,” a heuristic that helped one of his colleagues save money.
No. 4: Live like a 'secret' rich person
For some, the image of a millionaire conjures visions of sprawling mansions and shiny Bentleys. But most millionaires don’t live large like that—rather, they tend to live well below their “means” and do more saving than spending. In other words, they’re not flashing their money, according to Dr. Thomas J. Stanley, co-author of “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.” Stanley’s book, which details more than two decades worth of surveys and personal interviews with millionaires, reveals that much of the wealth in America is more often the result of hard work, diligent savings, and living below your means.
Las Vegas–based David Sapper, who owns a successful used car business, and his real-estate broker wife make a combined income of $500,000 per year. Yet they live like “secret” rich people, only spending $2,500 per month on all bills and extracurricular expenses like eating out, unlike many of their peers. By putting 90 percent of his income into savings and investments, Sapper says he’ll be able to retire early.
His advice? “Find the point that you get what you need and you’re happy and comfortable, and just stay there,” says Sapper. “I had an ‘aha!’ moment when I was watching MTV, and LL Cool J was saying, ‘I lease a Honda Accord for $399 a month,’ while other rappers are going broke.”
No. 5: Tackle retirement now
If you’re in your twenties or thirties, retirement can seem eons away—and saving for it might not seem like a priority. It’s easy to understand: In between paying to attend weddings (which average something like $600 per guest), saving for a down payment on a home, and using anything leftover to put toward “necessities” like vacation, how are you supposed to save anything for retirement?
Unfortunately the later you start saving, the more you’ll have to save. But the sooner you sock money away, the more time it has to compound and grow.
If, for example, you’re 30 and putting $50 a month into a retirement account with a 7 percent rate of return, that $50 a month would turn into $56,000 in 30 years, says Blaylock. Should you wait to age 40, you would need to contribute $110 per month to get to that same goal. This is because your money has less time to grow which minimizes the impact of compound interest.(For more on compound interest and why losing time on retirement can hurt you, check out “The Secret of Retirement Savings: You Can’t Make up for Lost Time.”)
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It is not that hard. Spend less than you take in, save the rest.
For the minimum wage earners...ditch the cell, the cable, the play station, the apps, the down loaded songs, the tattoos, and don't pump out babies you can't afford. Make an effort to gain better skills and make your self employable for better jobs.
Bitch and moan, give me a million thumbs down, it wont change the fact that this is the way to go.
Maybe the politicians should read this. They spend like they have free money, wait a minute they do...
They have a budget and the government sill spends in excess of it, with no penalties. Everyone expects the government to take care of them. Maybe if they managed their budget and reduced spending, the deficit and taxes the rest of us could possibly benefit from the extra money nd start saving
1) Look at your paycheck.
2) How much of it is going to pay for someone else's lifestyle
3) Vote against anyone who want to prepetuate the progressive income tax system we have in place today, that believes in a priviledged class of US citizens, and doesn't believe everyone should be treated the same under the law
You have to have a decent paying job to be in the position to save. There aren't enough good jobs to go around, so a huge segment of society is forced to work in low-paying jobs. These jobs are almost like slave labor, working 30-36 hours (no one gets 40 anymore, cuts too far into corporate profits) to pay for an apartment, lousy used car, food and all the rest.
These folks will never get ahead. There will be no retirement, no vacation, no thrill of a new car, no college, etc. For these people, the American dream is a joke. They were sold down the river, so to speak, by greed, regulation and special interests. Politicians sold their future. What I want to know is: Where is the rage? Where is the anger? Why isn't there a massive backlash against any politician over the age of 50? They were part of it, why not boot them out?
“Most people spend some money, pay their bills and save what’s left,” says Butler. “And that’s backwards: You should be saving for your financial goals first, paying your bills and and then consider spending the money you have leftover.”
WRONG. You should pay necessities FIRST. Imagine stashing away some loot, only to find out you didn't keep enough back for gas for work because you drove around all over town f*cking off. First thing I do is pay rent, so I'll have a roof over my head. Second, top off the car, so I can get to work and have a paycheck. My car insurance & cell are ACH at the beginning of the month, utilities are due the third week; then I estimate the amount I need for food & fuel for two weeks (plus some). What's left goes into the savings, usually around 15%. What I have left over I use for fun.
7 years ago my husband and I were set to clear over $100K household income for the first time (pretty good for our area). We went to a financial planner to ensure that we were being responsible with our financial future. We had been putting 10% into our 401K's and my husband wanted to see if early retirement was an option. We had a 6 month emergency fund to cover all bills just in case. The financial planner said that with just a few small tweaks, we were sitting very well for early retirement.
2 years later, due to the economy, I lost my job. It was the first time I had ever been unemployed and had at times worked two jobs. My husband also took a hit with temporary shut downs at his job and across the board pay cuts. We wiped out our emergency fund and began eating through my 401K. After over a year and only one part-time gig, I was finally able to find a full-time job at almost half my pay.
As well intentioned as this article may be, and it's good advice for those who can do it, the author doesn't really have a clue what it's like living pay check to pay check, and neither do those of you who criticize others for their lack of financial fortitude. The examples are quite frankly, laughable to those who are this predicament. Subscriptions? What subscriptions? You don't think these things have been cut to the bone or eliminated a long time ago? The decision to forego a $1000 handbag? The last time I went shopping for clothes for myself it was at the Salvation Army where I got 4 pairs of capris for $7. After daycare, groceries, gas, student loan payment, car payment, and health insurance, I have about $150/month left over. That $150 goes to incidentals like schools clothes & sports fees for my son, the occasional birthday or wedding gift, car maintenance, household repairs... I go 6 months between hair cuts just to save $. When things come up like replacing a hot water heater that went out, we are in the hole for the month. My husband's check fairs a little better and he is able to put a little into his 401K, but not at the 10% we used to or even the 7% recommended above. He also pays for things like a basic cell phone and internet service, just for the purposes of me job searching for a better job. He also has a basic dish package, and yeah, it's a luxury, but anyone who thinks they can go on a shoe string budget without a least bit of entertainment is welcome to try. Neither of us has ever had a new car and we try to keep it so we never have more than one car payment between us, though overlaps have been unavoidable at times).
I just wish people would stop thinking that everyone who is in financial distress is irresponsible. We followed all the rules and we still ended up here. If you think it can't possibly happen to you, I hope you have a trust fund to back that up.
The one positive I can say is that we still have a very good credit score even with the hit of income to debt ratio. If I decided to "pay myself first" and put 7% away for retirement, that would probably not be the case as we would have had times when other bills would have been shorted or late. I believe that better days will come and that I will find a job that pays me what I'm worth, and when that time comes, we will at least still have our credit score in tact.
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