7 Smart Money Habits To Build Long-Term Wealth

Building long-term wealth requires implementing smart money habits and sticking to them over long periods of time. Create a solid financial foundation before investing, then invest early and often over the long-term while keeping your fees low. Ignore the bad money habits of your peers and avoid lifestyle inflation. Most of us aren’t looking for extravagant wealth. We simply want sustainable and long-lasting wealth that provides financial security for our families and enough money to fund the lifestyle we desire.

That kind of wealth is more attainable than most people think. But there are no shortcuts.

By consistently following a tried and true strategy over many years, long-term wealth is highly achievable with the right mindset.

To get there, the saving and investing strategies we often talk about on this blog need to become habitual, like morning coffee.

Here are seven smart money habits to help you achieve long-term wealth.

1. Maintain a Solid Financial Foundation

Constructing wealth is difficult without establishing a concrete foundation to build from. Wealth can be wobbly.

We see this when individuals come into sudden wealth through luck, a business, or celebrity, and lose it all because of loose spending, bad advice, or over-leveraging.

In a previous post about getting started with investing, I identified three basic foundations for building wealth.

Education

Acquire the education needed to succeed and grow in your chosen career. Invest in yourself to advance your earning potential.

Learn how to manage your own money. Never stop learning. The craft of investing is never mastered.

Money Mindset

The wealthy earn money and use it to build more wealth. Most everyone else earns money and spends it on material objects that become clutter or depreciation assets. The more objects you own, the more they weigh you down.

When you adjust your money mindset to fit the mold of the wealthy, you’ll handle your money more carefully, decrease how much you spend, and increase your savings rate.

Distaste for Consumer Debt

Consumer debt is a primary detriment to building wealth. This includes credit card debt, personal loans, car payments, or excessive utilization of home equity.

Borrowing to acquire stuff is much worse than acquiring with cash.

It’s perfectly normal to buy a car in exchange for five years of payments. But even at a low interest rate, the payment stifles your ability to save. Eliminate them and never go back.

If normal behavior worked, everyone would be wealthy. Right?

The earlier you put a strong financial foundation in place and keep it there, the sooner your wealth trajectory can explode upwards.

2. Invest First, Invest Often

Invest first, spend second. That way, you won’t be tempted to spend it.

An employer-sponsored retirement plan such as a 401(k) or 403(b) is the easiest way to accomplish this.

Employers take the money out right when you’re paid. The contribution lowers your taxable income and may be partially matched by your employer. Then optimize your 401(k) to maximize long-term returns.

These plans also satisfy the second part which is to invest often because the contributions occur every time you get paid.

If you don’t have an employer-sponsored plan, other tax-advantaged accounts are available in the U.S. Find the account that is right for you and set up regular withdrawals from your bank account and try to max out the limits.

Once you’re maxed out retirement accounts, then use taxable accounts for any monthly surplus.

Taxable accounts are what I focus on in my quarterly investment updates which can include no-fee stock brokers, peer lending, and real estate crowdfunding accounts.

Though taxable, the income the investments produce provides real cash flow you can reinvest and will eventually fund your early retirement.

Always be investing.

3. Minimize Fees

It’s easy to pay little attention to fees, and over the short-term, they’re barely noticeable. But over long periods of time, fees can cost you hundreds of thousands of dollars (for real).

Understand the expense ratios of any funds or ETFs you hold in your personal or employer-sponsored accounts. The expense ratio is an annual percentage taken from your holdings.

Purchase index funds and ETFs to keep fees below 0.20%.

Individual stocks cost you nothing to hold, but you may pay trading fees upfront with a traditional online broker. These fees are acceptable if you purchase large share lots (greater than $1,000 worth per trade), but not everyone can afford lots of that size in the early wealth-building stages.

That’s why I recommend a no-fee broker such as M1 Finance (read my review here) for beginner and intermediate investors. There you can buy stocks or ETFs commission-free.

Habitually keeping your fees low won’t save you much month to month, but it will save you many thousands over the course of your life.

Personal Capital has an impressive Retirement Fee Analyzer that pinpoints exactly what fees you pay on each holding and estimates the total cost of fees into retirement. It’s one of the many reasons I’ve recommended this free tool for years.

4. Increase Your Income, Not Your Outgo

Earnings from a career or business are more powerful than investment income in the early stages of wealth building. The more you focus on earning money through hard work, the more you’ll have to invest.

Over time, your investments become more powerful as compounding interest gains traction.

Grow career income

Whatever your current career path is, determine how best to increase your earnings by advancement, sales incentives, bonuses, or through business ownership. Find someone who is successful in your field and model your career after them.

If your career path has limited potential, consider alternatives. This sounds easier than it is. Pursuing another certification or degree may be the answer, but make sure the investment in education has a worthwhile return.

Reading books and taking online courses are far cheaper alternatives to formal education but can still have excellent returns on investment.

Earn side Income

Another alternative to your current career is to start a side business. Starting a side business is one way to empower yourself and your future by adding income beyond your regular paycheck and decreasing your reliance on a full-time job.

My side business kept our family afloat when I lost my job. Job satisfaction is important in the pursuit of retirement. If you’re uninspired by your career but it doesn’t make sense to change mid-life, a side business can be incredibly rewarding both personally and monetarily.

Invest for passive income

Passive income is money you earn from work you do once. The income may come from high-quality dividends stocks, rental income, products you’ve created such as a book, or from online business ideas that operate on cruise control.

I track my passive investment income on a monthly basis and share the results with readers here every quarter.

Learning to earn passive income aligns with developing a wealthy money mindset.

Read more: 20 Passive Income Ideas for 2018

Limit your outgo

In weight loss, it’s easier to not eat a donut than to burn off the calories a donut contains during exercise. For example, if a typical donut is 300 calories, the average person will need to walk about 7,000 steps to burn it off.

A similar concept is true with money. It’s more effective to not spend money on something than it is to work to earn more money.

Outgo is the opposite of income. It’s the expenses your incur to live your current lifestyle. Keeping your lifestyle the same even when you begin earning more is a challenge for most. Habitually resist lifestyle inflation to grow your wealth.

A penny saved is truly a penny earned.

5. Diversify

The Nobel Prize-winning economist, Harry Markowitz, called diversification the only free lunch on Wall Street, meaning it offers benefits without any cost.

Building wealth has its ups and downs. When one asset class falls, another one rises.

Instead of putting all your money into one stock, one investment class, or one real estate property, your wealth is better protected by spreading it around.

Everyone in the process of building wealth should invest in the stock market. Choose a diverse portfolio of stocks or broadly invested index funds.

Outside of stocks, look for diversification opportunities in assets not correlated to market fluctuations (see the link below for some ideas). Real estate eREITs and high-quality real estate debt investments are my favorites among these ideas.

Read more: 7 Ways to Diversify Away from Stocks

6. Think Decades not Days

The single greatest edge an investor can have is a long-term orientation. – Seth Klarman

Investors who can ignore short-term market fluctuations and invest with decades in mind instead of days have an edge on the rest of the market.

Why does this work for both individual stocks and index fund investors?

Businesses are required to report on a quarterly basis to adhere to securities regulations. As such, Wall Street analysts pick apart the results each quarter and base investments decision off of the data.

The opinions of the analysts influence their employer’s investment decisions made on behalf of their clients, therefore giving the analysts influence.

Some corporate investments in research and development take years before seeing returns. Good management will think in decades too. Sometimes short-term disappointments are a result of long-term plans.

When companies disappoint analysts in the short-term to the detriment of the stock, it can be a good opportunity to invest for the coming decades.

As for index investing, smart investors should adhere to the invest early, invest often mantra. Always be investing regardless of what the market does. When the market falls, don’t sell, continue to buy. When the market is high, don’t sell, continue to buy.

Index funds are also not on the hook for quarterly results. Managed mutual funds are. Again, the pressure to achieve short-term results impact investment decisions, sometimes negatively.

Whatever the market is doing today is not relevant to the coming decades.

7. Ignore the Money Habits of your Peers

Seeing the lives of others unfold in a constant stream of visuals every day can have an adverse effect on your psyche and your wallet.

Envy is a powerful driver. But an unhealthy one.

Watching the lifestyles of your peers or celebrities online can trigger unnecessary spending, whether on material objects, a bigger house, or and over-accessorized vehicle.

Consider what makes you and your family truly happy without the influence of your social feed. Create happiness without money, or carefully use your savings to buy experiences for your family instead of things.

When you identify what makes you truly happy, you’ll spend money intentionally and be less inclined to purchase wasteful items. More of your money will gravitate toward investing in your future instead of short-term wants, eventually leading to the security and freedom you deserve.


What smart money habits have you made part of your wealth-building strategy?
Building long-term wealth requires implementing smart money habits and sticking to them over long periods of time. Create a solid financial foundation before investing, then invest early and often over the long-term while keeping your fees low. Ignore the bad money habits of your peers and avoid lifestyle inflation.

Photo by Rachel Lees via Unsplash
Photo by Danielle MacInnes on Unsplash

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7 Responses to 7 Smart Money Habits To Build Long-Term Wealth

  1. Arrgo June 1, 2018 at 10:42 am #

    Great reminders and advice. This pretty much sums it up. I’ll add to stay out of trouble and avoid any bad habits. I also agree with buying less stuff as much of it becomes clutter and hardly will get used. A lot of money there that could have been put to better use.

  2. Dividend Diplomats June 3, 2018 at 9:55 am #

    RBD –

    Who you are surrounded by, definitely dictates quite a bit of your own habits and actions that take place. I couldn’t agree, then, with the statement about ignoring what your friends or peers are doing with their money, if they aren’t in the position that you strive/want to be. I dig it.

    -Lanny

  3. Get Rich Brothers June 9, 2018 at 3:06 pm #

    Hi RBD,

    A lot of good advice in this article. The final point may be the most important as I feel many people get too easily seduced into wanting to live the lifestyle of those around them without considering the costs. A flashy lifestyle exhibited by a friend can draw a person into the lifestyle of overconsumption and overspending. It’s important to understand one’s values and hold true to them.

    Take care,
    Ryan

  4. Mark H June 13, 2018 at 7:44 pm #

    Hi RDB,

    Another great article. I love TOS and have negotiated lower commissions, but commissions for the past 2 years have taken a major chunk of my profits due to buying small lots of expensive securities or trying to day/week trade securities.

    One strategy that I have thought about was trying a no-commission broker like M1, (I have already used Loyal3 and Foilio First and then transferring those securities later on for long term hold.

    I just transferred my holdings from FoilioFirst to TOS. Do you know if M1 has an easy plan to transfer securities to TOS?

    Thank you.

    • Retire Before Dad June 13, 2018 at 8:16 pm #

      M1 has a transfer service. Check the FAQs and there’s an email. Or call them. I’ve heard it’s very easy to transfer there.

      What is TOS? Do you mean TD Ameritrade? I’ve been happy with them, but I’m due for a fee reduction. They are known to lower trading fees for active or high balance customers.

  5. Mark H June 14, 2018 at 7:21 am #

    Hi RDB,

    Yes, I meant to say TDAmeritrade. I stated ThinkorSwim (TOS).

    Thank you!

    Keep up the great work.

    • Retire Before Dad June 14, 2018 at 7:43 am #

      Oh right. Think of Swim. TDA and TOS are the same people. TOS more geared towards option trading.

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