Smart money habits will help you reach your financial goals, with patience.
Most of us aren’t looking for extravagant wealth.
We want sustainable and long-lasting wealth that provides financial security for our families and enough money to fund our desired lifestyle.
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, saving and investing strategies 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 from which to build.
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 immediately spends it all.
When you adjust your money mindset to match the wealthy, you’ll handle your money more carefully, decrease how much you spend, and increase your savings rate.
Keep more of your money and invest it to grow your wealth.
Distaste for Consumer Debt
Consumer debt is a detriment to building wealth. This includes credit card debt, personal loans, car payments, or excessive home equity utilization.
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 car payments 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. Diversify
The Nobel Prize-winning economist, Harry Markowitz, called diversification the only free lunch on Wall Street, offering 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 the stock market, look for diversification opportunities in assets not correlated to market fluctuations.
Non-traded real estate eREITs, high-quality real estate debt, and technology-enabled alternative investments are my favorites among these ideas.
Some investors have found success in cryptocurrency investing, though I haven’t dabbled yet.
Read more: 7 Ways to Invest Outside the Stock Market
3. Invest First, Invest Often
Invest first, spend second. That way, you won’t be tempted to spend.
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 when you’re paid. The contribution lowers your taxable income and may be partially matched by your employer.
These plans also satisfy the second part — 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 right account and set up regular withdrawals from your bank account to dollar-cost average, and try to max out the limits.
Once you’ve maxed out retirement accounts, then use taxable accounts for any monthly surplus.
Though taxable, the income I receive from stocks and real estate crowdfunding accounts provides real cash flow that can be reinvested and eventually support my early retirement.
Always be investing.
Read more: How to Invest in Dividend Stocks
4. Smart Money Habits – Minimize Fees
It’s easy to pay little attention to fees, and over the short term, they’re barely noticeable. But over long periods, 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, and most online brokers are now commission-free. So it’s easier to keep your fees low today than it was a decade ago.
Complicated financial advisor fees (if you use one) can be costly, or if your employer-sponsored plan is lousy (high fund fees, bad investment selection), the long-term impact on your wealth can be severe.
Habitually keeping your fees low won’t save you much month to month, but it will save you many thousands throughout your life.
Personal Capital has an impressive Retirement Fee Analyzer that pinpoints 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.
5. Increase Your Income, Not Your Outgo
Career and business earnings 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 and it doesn’t make sense to change professions mid-life, a side business can be rewarding both personally and financially.
Invest for passive income
Passive income is money you earn from work you do once. Before you start investing for passive income, make sure all of your excess cash is in a high-yield savings account earning interest.
Then start building income from high-quality dividends stocks, rental properties, products you’ve created such as a book, or from online business ideas that operate on cruise control.
Learning to earn passive income aligns with developing a wealthy money mindset.
Read more: 20 Passive Income Ideas
Limit your outgo
In weight loss, it’s easier not to eat a doughnut than to burn off the calories exercising. If a typical doughnut 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 not to spend money on something than it is to work to earn more money.
Outgo is the opposite of income. It’s the expenses you 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.
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 harm 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 an 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?
Photo by Rachel Lees via Unsplash
Photo by Danielle MacInnes via Unsplash
Favorite tools and investment services right now:
Fundrise - The easiest way to invest in high-quality real estate with as little as $10 (review)
Personal Capital - A free tool to track your net worth and analyze investments.
M1 Finance - A top online broker for long-term investors and dividend reinvestment (review)
Brad Schwartz says
Hey RBD,
Good to see you back in action! Felt like it’s been a bit since your last post.
Retire Before Dad says
Thanks. I haven’t been writing as much as I like these days. Planning to pick up the pace a bit to close out the summer and into the Fall.
Nancy Finney says
Great article, particularly for newbies. I’m forwarding this to several folks. Thanks!!
Retire Before Dad says
Thanks for sharing.