I often have people who tell me how it is unfair that some people have money and some don’t. In this case, I am speaking to people that have made their money not those where wealth has transferred through the family. Either way though, the success had to start somewhere. I tell them it is not a question of fairness.
Each one of us starts out with a unique set of advantages and disadvantages, but some people do reach high levels of wealth. Somewhere, at sometime, self-made individuals start from scratch and build their wealth over time, beginning first by mastering basic money skills like budgeting and moving on to saving and investing after that. The same principles that apply to everyone.
As financial planners who work with self-made wealthy individuals know, the money habits of the newly rich are practices that just about anyone can learn from, no matter what your financial situation when you first start out.
For the purpose of this article, I focused on self-made individuals who have not inherited wealth or trust funds. These are individuals and couples that started with little. Some worked right out of high school to start their careers and worked their way up, and some graduated college with $50 in their chequing account. I looked at their financial habits that could apply to the average person.
No matter how they started, they all use the habits below to help them grow and maintain their wealth. These practices take time and discipline. These are habits that self-made individuals have incorporated into their financial life that you can, too. You can get started with one or two now and incorporating the others as your money skills improve.
Avoid debt
This may seem obvious, but dodging any debt is certainly a habit that can help your overall financial picture. Outside of the mortgages on their home, make sure to reduce and eliminate all debt. If you want to build wealth, you cannot waste money on paying interest on consumer credit, such as credit cards and even car loans.
Because most credit cards charge notoriously high interest whenever you carry a balance, prioritize paying these balances off in full every month (and on time to keep a good credit score). Only charge what you know you can pay off and avoid store credit cards in general. They are known for having low credit limits, high interest rates and limited usability.
Buy cars and keep them
For the most part, cars depreciate in value the second you drive one off the lot. Buy, instead of leasing, any new car with plans to hold onto it for a while. By keeping cars long-term, use the time between car purchases to save up cash that would otherwise go towards a monthly payment.
If you need to finance the car, pay it off as soon as you can and plan to keep the car long after that loan is paid off.
Have emergency funds
Having a solid reserve of cash that you can tap into in an emergency goes a long way. If you have an unexpected expense, such as an urgent car repair or medical bills, a rainy-day fund that is immediately available for withdrawals can help you afford it. This way, you don’t need to charge the expense onto a high-interest credit card or take out a personal loan.
Have six to nine months of their monthly expenses set aside. Financial experts generally suggest three to six months’ worth of your living expenses as a baseline, but you should do what works for your cash flow. And, know that any amount will help. This is one of the first steps someone should do in building a solid financial foundation.
Need to start building your emergency fund? Consider opening a high-yield savings account that earns you a better return on your money than a traditional savings.
Invest
Once building up an emergency fund, self-mad individuals have organized investment plans, whether its in stocks, bonds, mutual funds or exchange-traded funds.
One way to start is by setting up a monthly or bi-monthly automatic transfer of cash from your checking account into an investment account. This way, you can forget about having to remember to manually invest and you can then learn to live on the funds you have available.
Most people do not miss having that money in their cash flow and then they can use those invested savings for future car purchases, vacations or other short- or long-term goals, without incurring additional debt.
As a general rule of thumb, you should save at least roughly 20% of your income each month. This 20% goes toward your savings plans, emergency fund, retirement and investments. How much you take out of your pay to invest depends heavily on your income and investment goals, but getting used to living without that 20% is a good start for both your savings and you investments.
Before you invest, make sure you know how much risk you can take on and the time frame for when you’ll need the money. If you are in your 20s or 30s saving up for retirement, you can generally take on a little more risk in exchange for aggressive yields because you won’t need your money for several decades if you plan to retire in your early 60s. For those in their 40s or 50s, their investment time frame for retiring is much shorter. Therefore, they are generally more reluctant to take on risk so to better protect their money.
Employer offerings
It’s worth looking over your employer’s benefit plans thoroughly. Companies offer more than just retirement plans that can help you save money and even invest to earn more. Leveraging some of the below benefits can be helpful to you.
- Employer retirement match: If you can afford to do so, make sure you are contributing enough to match any employer contributions. The match is basically free money to you.
- Employer life or disability insurance: Your employer’s group plans can offer significant savings versus buying these insurance policies individually.
- Employer Health Savings Account (HSA): If you qualify for a HSA, some employers will match your contributions up to a certain amount. Your contributions are tax-deferred.
- Employer legal services: See if your employer plan offers legal services. If you ever need to have estate planning documents prepared, such as wills or trusts, you can save money in attorney fees if you use the legal services offered in your benefits plan.
- Employee Stock Purchase Plans (ESPP): If your employer offers ESPP, you can typically put up to a certain percentage of your pay into this plan that then allows you to purchase the company stock at a discount to the market price. If you feel good about your company and their stock, this can be another cost-effective way of investing to continue to build your net worth.
Don’t keep up with the Joneses
Keeping up with the Joneses is a typical way people dig themselves into debt. But living beyond your means time and time again eventually catches up to you. When building wealth, fight the need to have the latest and greatest gadgets. So much money is wasted on constant upgrades these days and can cost you both money and lost opportunity.”
It’s only human to want to compare your life to others, but take another look at your lifestyle and budget, focusing on what’s most important for your own personal goals. These are your needs and wants that truly matter to your bottom line and happiness.
Utilize tax deductions
Where you can try to minimize the taxes they pay. This includes finding some element of tax savings in everything from RRSP and TFSA investments, charitable contributions, college funding and health savings accounts. Make sure you are participating in the plans and programs that can have multiple benefits. This is an area where it is helpful to consult a financial and tax professional.
Other income streams
Diversify investment portfolios with other assets, such as rental properties that provide passive income. It’s likely that the average person doesn’t own multiple properties, but there are other rental opportunities that provide another source of passive income with little effort on your part. Some ideas include renting out a room in your home or renting out your car while you work.
Save for education early on
Education savings plans, like an RESP, helps kick-start children’s future education early so they have less of a financial burden years later. But the long-term benefits don’t stop just there. These plans also allow tax-free withdrawals when you take out money to pay for university.
By getting started early, you can save a significant amount of money in future cash flow and tax savings. IIt does not take a lot to get started, but the power of compound returns can be so beneficial to you if you have time.
Seek advice
Make a habit of being well-informed about your money. Have a basic understanding of your earnings, what you own and how much your investments cost. For many people, saving and investing money can certainly be intimidating and confusing. Luckily, there are plenty of free online resources to help guide you. You can access this educational content on the go or from the comfort of your own home.
And if you are seeking someone to speak to one-on-one, such as a financial planner or advisor, make a point to ask about the fees they charge. They should be able to be transparent about what their services cost, as well as clear on explaining your money and investments to you. Your advisor should be both a partner and educator for you.
The bottomline
As you can see from the habits of self-made individuals, there are a lot of moving pieces to having a solid life financial plan. Embracing opportunities to pay off debt, save, invest and learn, all while avoiding potential pitfalls, make a big difference on your ability to build your wealth.
Start by reducing your debts to increase cash flow and build your rainy day fund. Once these were in place, you are then able to incorporate the other investment habits and really grow your assets. No matter how simple or obvious a money habit may be, the point is that you stick to it, discipline is key and with it you can build the financial future you desire which is a primary determinant of Keeping Life Current.
