7 Habits You Should Be Doing If You Want to Build Wealth
Let’s be honest, personal finances tend to be the afterthought that we promise to handle in the future.
What many don’t realize is that time matters, especially when talking about our finances. That’s because personal finances can either compound in your favor or against it. The longer we prolong the health of our finances the more damage that will be done over time.
Conversely, the quicker we instill and develop healthy financial habits the more opportunity we have to positively impact our personal finances, currently and in the future, as well as the things we value.
So what habits can we be implementing and improving?
1. Budgeting
I know what you’re thinking, the dirty “B” word.
Budgets get a bad rap because of a lot of misinformation surrounding them. In general, people think budgets are restrictive, complex, and unneccesary.
I’m here to tell you that the opposite is true. A well-crafted budget is empowering, simple, and absolutely necessary if you care about financial progress and achieving your goals.
There are a few ways to approach budgeting and you should choose the approach that fits your strengths and preference.
The important thing is that you use a budget, in one form or another, so that you can achieve your goals and live your great life.
The two types of budgeting are zero-based, or traditional, budgeting and reverse budgeting.
Zero-Based (Traditional) Budgeting
Zero-based budgeting, or traditional budgeting, is the most well known and conventional form of budgeting and managing monthly cash flow.
It involves using a tool (I like You Need A Budget), or pen and paper, to list out all income and allocating it (ideally high priority to low) across all saving needs, living expenses, & wants.
This method of budgeting hinges on giving every dollar a specific job to do within your finances and tracking your spending in order to stay within your predetermined categories, or ranges.
The key is discipline & choosing a tool that will keep you consist with maintaining the process.
Reverse Budgeting
Reverse budgeting, also known as "paying yourself first", has become a popular budgeting method due to its time-friendly, simplistic, & guilt-free approach.
Reverse budgeting involves funding, ideally via automation, the most important items first from your income and then living off what’s left.
These goals could be saving for financial independence, a home, a car, travel, saving without a specific goal (saving just to save), or virtually any other goal that you have.
So for example, you may decide on a reverse budget that looks like this:
15% to financial independence
10% to other short to mid-term goals
15% to debt
50% to needs
10% to wants (the remaining amount you have to live off of)
By saving first you can have the peace of mind knowing the important things are being saved for each month, you’re making progress on your goals, and you can enjoy what’s left over without guilt or stress.
Like I said previously, pick the method that suits you best but the most important thing is to have a system in place.
2. Automating
I think we’ll look back on history and attribute a significant amount of credit to automation when it comes to building wealth.
Automating is putting a process or system in place that doesn’t require your attention or permission on an ongoing basis. It works in the background to get stuff done without the need for your constant discipline.
It’s like the ultimate life hack.
Automating is one of the best and easiest ways to ensure that you’re consistently making progress towards what you deem most important.
Why? Because you only need a temporary burst of discipline upfront to implement the change you desire. Can you go back and adjust later on? Absolutely. You can adjust according to your life circumstances and as your goals change.
What are some ways to create automation within your personal finances?
Building emergency reserves: set a dollar amount to be transferred to your high yield savings account each month
Funding your goals: create an automatic transfer each month to your savings account or brokerage account
Paying off debt: automate payments AND any extra payments to pay down your debt faster
Financial independence saving & future increases: set up auto transfers if saving in an IRA or set/increase your 401(k) percentage—periodically increase these amounts to fit the overall % that you want to be saving
Bill pay: set up autopay on all your bills to never miss a payment or be charged fees and/or interest
Planning for the expected: set up an auto transfer to sinking funds for infrequent expenses that will come due in the future (e.g. birthdays, anniversaries, repairs, insurance premiums, taxes, etc.)
3. Saving at Least 20% of Your Income
This ties in a little to the budgeting point above but consistently saving at least 20% of your income is a fantastic habit to develop as early as possible.
What this does is help the probability of achieving your short, intermediate, and long-term goals all while giving you options in the future.
What many don’t realize is that the more you’re able to save the more you’re able to keep your lifestyle in check. This means that you actually need less money than you would otherwise if you transition life stages maintaining a similar lifestyle.
4. Saving Just to Save
You don’t need a specific reason to save. Often times it does help to have a reason but sometimes we’re in a spot where all our identified goals are being saved for and our needs are taken care of and we still have money that we want to save and/or invest.
This is a great opportunity to save in a taxable brokerage account for the future and put the money to work growing and compounding.
This effectively gives your future self options and a head start as life changes or new goals arise.
5. Talking About Money
There are a handful of taboo topics that are deemed “unsuitable” to talk about and money is one of them.
However, talking about money is healthy and necessary. Whether you have a partner or are single it’s important to find time and space to talk about your finances. This can include expressing your emotions around money to verbalizing your vision and goals.
Couples should be overly communicative about their shared finances. This includes talking about challenges, room for improvement, accountability, vision/dreams, beliefs, and areas of disagreement. This helps combat one of the top reasons for detrimental conflict within the relationship.
Individuals should find a trusted friend, mentor, or community to discuss the aforementioned with.
6. Giving Yourself Margin for Error
Margin for error is the buffer that you give yourself if certain “factors” tend to deviate from your expectation or plan.
For example, you can build margin for error into the following areas:
Monthly budget: over budget for certain categories/expenses, minimize expenses and create margin
Financial Independence/Retirement planning: use a lower expected rate of return, be flexible on target date
Emergency fund: error on the side of a larger emergency fund
Other goals: save more than you need in case you go over budget
In the end, developing margin for error within your finances increases the likelihood of achieving your goals all while allowing you options.
7. Consistently Increasing Your Income
Your income is the best tool that you have to build wealth. Never forget that.
When it comes to increasing your income, some professions and individual circumstances make this easier to do this than others. So it really depends.
But if your life allows and you work in profession, or have an occupation, that allows for pay raises then you should be consistently increasing your income over time.
The data suggests that most pay raises come in the form of switching jobs so keep that in mind. This is because hiring budgets tend to be higher, and more easily deployed, than retention budgets.
Increasing your income is a great habit to get into because not only does it help create margin within your finances but it allows you to save more and maybe make up some lost ground.
It’s also important to note that typically with every new pay raise you receive you’re setting a new income “floor” for yourself.
My only word of caution is to be sure to keep lifestyle creep in check as your income increases.
Finally, there are other ways to increase your income such was starting your own business on the side (until it could maybe replace your existing income) or investing in real estate. It’s important to do your due diligence when potentially going down these paths.
You don’t have to wait for a new year to start great habits. Today is the best day to start.
My advice to you is to start slow and incrementally increase the change that you want to see. This ensures that you don’t “burn out” and that you have sustainable and lasting change in your life.
Remember the longer your financial habits are in place, the more benefit you’ll see from the compounding.
