When you think about wealthy people, chances are thoughts of high paying corporate jobs, trust funds, or big-time investments come to mind. But the truth is, building wealth often starts small. By actively working to form positive financial habits, you can learn to make your money work for you. Start building wealth today by incorporating these five smart money habits into your daily life.
1. Create a budget
Learning to budget is one of the most critical skills to learn and maintain. When creating a budget, start by looking at your income, including your salary and any other money you have coming in. Be sure to account for taxes, Social Security, retirement, etc., so that you have an accurate picture of what your net income really looks like. Next, list any fixed expenses, including rent or mortgage payments, insurance, monthly bills, and car payments. Finally, list all your variable expenses, such as gas, entertainment, shopping, and food. Once you've figured out how much you're spending in comparison to how much you're earning, start to think about your financial goals. Are you saving for a new car? A new house? Retirement? Do you have enough leftover money after your fixed and variable expenses to meet your goals? Based on your personal goals and aspirations, adjust your budget accordingly. If you're not saving as much as you'd like to be, consider making some lifestyle changes, whether than means moving into more affordable housing, dining out less, or taking fewer costly vacations per year.
2. Pay yourself first
A smart way to save without even thinking about it is to get in the habit of "paying yourself first." What exactly do we mean by this? Essentially, paying yourself first just means taking a set percentage or amount off the top of each paycheck and putting it into separate savings account. With the money that's left, you can spend it as you normally would, putting some towards bills, making credit card or loan payments, grocery shopping, and splurging on fun activities. Setting aside money as soon as you get paid ensures that some income makes its way into your savings account, and forces you to budget with whatever's left.
3. Live within your means
Especially in this day and age where we share so much of our lives on social media and constantly compare ourselves to friends and strangers alike, it can feel challenging to live within your means. When you see pictures on Facebook of colleagues going on tropical vacations or your childhood friend buying yet another fancy car, it can feel like you're not living up to the flashy lifestyles of those around you. But the truth is, many people do not live within their means. That vacation your colleague went on may have been something she saved up for for years or put on a credit card. Your friend's car may have been paid for with a high-interest loan than she'll be paying off for years to come. A key component to living within your means is resisting the urge to compare your financial situation to those of others. Use the budget you created as a guide, and as your priorities and/or financial situation shifts, adjust it accordingly.
4. The power of compound returns
The sooner you invest, the better. Investing even small amounts of money when you’re younger can lead to substantial gains. This is in part because when you invest long-term, you have some wiggle room to make riskier investments than you might be able to if you needed to use invested funds sooner. Additionally, you're able to take advantage of compound returns, which are essentially the returns earned on your returns. That's not to say that you shouldn't invest later in life, however, but if you do, it's usually advised to be a bit more cautious with your investment choices.
5. Be aware of the people you surround yourself with
You've probably heard Jim Rohn's famous statement that we are the average of the five people we spend the most time with. It definitely makes sense that our behavior and actions might be influenced by those with whom we surround ourselves. If your goals include being smart about money and building wealth, try to surround yourself with people who share those goals. You're more likely to build strong money habits if you choose to spend time with a friend who consciously budgets, versus a friend who has maxed out all of his credit cards traveling to exotic destinations, or worse, just eating out all the time.
At WH Cornerstone Investments, we know money, and we know people. While there are lots of financial planners out there who can manage your portfolio, we specialize in delivering so much more. We serve as your financial coach to advise, implement, and continually manage all the moving parts of your life, while helping you to achieve your goals and dreams. If you're interested in a hand-crafted financial plan, schedule a call. Our discovery session is a no-pressure way for us to get to know each other.