When it comes to building wealth and getting wealthy, our money habits have a profound effect. They literally control – sometimes unconsciously, how we operate each and every day.
For example, our habits control when we go to bed and get up, the route we take on our commute to work, the path we follow to get to our desks, our lunchtime routine, etc.
Our habits are everywhere.
Building wealth takes time. For most of us, wealth is built over years of making good decisions and investing in appreciating assets. And, the healthier our habits are, the easier it will be to create a process that keeps us moving forward and making money.
5 Money Habits To Build Serious Wealth
These five habits are proven to build wealth over time. They take discipline and consistent resolve, but none of them are especially “difficult”. Once these habits become a part of our lives, we may no longer realize we're doing them.
Make these habits instinctual.
Habit #1: Invest in Appreciating Assets
This might sound counterintuitive, but it's true: saving money doesn't build wealth. Even if we save money in an interest-bearing savings account, our money probably isn't keeping up with inflation.
Saving money for a rainy day is smart, but it's not how most of us build serious wealth.
It's investing that makes people wealthy.
- Stock market
- Real estate (property or homes)
- Relics or historic objects
- Alternative investments
The idea behind this is simple: we buy an asset (for example, a share of stock or a piece of property) for a certain price. Over time, the asset appreciates (or increases) in value. And boom! Now we have something that’s worth more than what we paid for it.
But, here’s the magic:
Through the power of compound interest, our assets don’t just build linearly. Instead, appreciating assets build exponentially.
It’s a curve, not a straight line.
Compound interest means your assets build upon themselves.
If you invest $1,000 and it appreciates 10% (or $100) in a year, then your new base starting point in year two is $1,100. Another 10% gain is $110, not just $100.
Add a couple of zeros to those numbers and we begin talking about quite a bit of money. Enough money on which to retire.
Money habits that include appreciating assets are critical.
Habit #2: Eliminate Debts
Debts kill our chances of building wealth. Every time.
Now, let's make one thing clear: Not all debts are created equal. For example, student loans can easily benefit us in the future. According to Business Insider, college graduates earn anywhere from 38% to 133% more than non-college graduates, depending on the state.
There's no question about it: Student debt is not necessarily bad. But, there is a lot of debt that is bad.
If you look at total consumer debt in the United States (almost $14 trillion!), it won’t take long before you realize that there’s a big, big problem here.
In fact, today’s debt is above what it was during the crash in 2008.
Use debt as a tool, not as a way to spend money that you don’t have. Smart debts are those that improve our future and support our longer-term goals.
Habit #3: Use Automation
Building wealth becomes easier when we automate it.
There are several examples in life where automation can play an important rule.
Many employers offer 401k or IRA retirement plans. And, most of those companies will automatically make contributions straight from your paycheck into your investment accounts.
Once it is set up, you’ll never have to worry about it again. It just happens. No discipline. No remembering.
When we put our finances on autopilot, things happen without us having to lift a finger.
A few smart ways to use automation:
- Automatically contributed to your 401k and IRAs
- Automatically transfer money from checking into savings
- Automatically pay your credit card bills to avoid running a balance
Automation helps to ensure those repeatable and dependable processes that need to happen every month…happen. We aren’t relying on our discipline to pay bills to avoid late fees and interest.
There’s a reason why we’ve never paid a single interest charge on our credit cards. Never a late fee. No reductions in our credit score (if you even care about that).
This is all due to setting up automated processes that guarantee that things happen when they need to happen.
Habit #4: Know Where Your Money Is Going
Wealthy people are experts on their own money. They know where it comes from and where it's going to each and every month.
Another way to say this: Cashflow.
Each month, money comes in and money goes out. For the majority of us, money comes in through paychecks. It might also come from odd jobs we do for extra cash or by finding a crisp $20 on the street.
We also spend money. Our rent or mortgage. Food. Restaurants. Cable television and our cell phone bill. Anything else we buy or spend money on during the month.
That’s money out.
Together, a detailed understanding of your cash flow (money in vs. money out) means you know exactly what you’re spending money on and, ideally, how much money you have to spend.
This is one of the most basic money principles of all.
Four tips to help you master this money habit:
- Look at your bills instead of throwing them aside; make sure you understand every line item on your bill
- Discretionary spending (“fun” spending) should come after paying your bills and funding your retirement accounts
- Monthly subscriptions are notoriously forgotten; be sure that you are aware of all of your subscriptions that cost money
- Small expenses add up fast; morning coffees, lunches out, grabbing a bag of beef jerky, etc…all add up
Habit #5: Curb Lifestyle Inflation
A lot of us struggle with lifestyle inflation. It creeps up on us, too.
We start making more money and, in turn, we begin spending the majority of what we earn – simply because we have it to spend.
The causes of lifestyle inflation include:
- Earning progressively more money each year, with bonuses and raises, which provides us with extra cash to spend,
- We fund expensive vacations and huge purchases with all that “extra” money that we make year-to-year,
- Many work jobs that expect us to look successful, creating a wicked cycle of earn-and-spend (more on this below), and
- We try to keep up with our coworkers by matching (or exceeding) their level of spending on luxury items
As our incomes increase, so do our lifestyles.
Here's the problem with that: If we spend the majority of the money that we bring in, we trap ourselves into a position where we need a progressively high income, year after year, just to maintain the lifestyle that we built over the previous year.
And, we begin to live a life where we cannot get ahead due to the cost of our burgeoning lifestyles.
As we learned in the cashflow section above, keeping track of your expenses and preventing lifestyle inflation is one of the healthiest money habits that exist, and it could completely change your life.
Steve Adcock is an early retiree who writes about mental toughness, financial independence and how to get the most out of your life and career. As a regular contributor to The Ladders, CBS MarketWatch and CNBC, Adcock maintains a rare and exclusive voice as a career expert, consistently offering actionable counseling to thousands of readers who want to level-up their lives, careers, and freedom. Adcock's main areas of coverage include money, personal finance, lifestyle, and digital nomad advice. Steve lives in a 100% off-grid solar home in the middle of the Arizona desert and writes on his own website at SteveAdcock.us.