Creating habits regarding money management, or anything in life for that matter, will drastically improve your chances of achieving a goal. Millionaires, in particular, typically abide by certain habits, sometimes consciously and other times due to creating similar habits in other areas of their life, resulting in their ability to achieve a net worth greater than one million dollars. It may not be a specific goal to become a millionaire but instead to achieve financial stability or financial independence. However, continually repeating and reinforcing smart money habits eventually equates to becoming a millionaire. The following article outlines the millionaire money habits we’ve encountered in working with this demographic!
1. Avoid “Bad” Debt
Creating a habit of avoiding “bad debt” on the path to becoming a millionaire can help accelerate the timeline. First and foremost, avoiding paying absurdly high credit card interest and building debt on revolving lines of credit such as credit cards will undoubtedly hold anyone back from becoming a millionaire. Spending within your means and paying off ALL credit card debt every month is a money habit that everyone should abide by.
Using debt to purchase depreciating assets such as cars or boats repeatedly will make it hard for you to “get ahead” of your debt payments and limit your ability to save/invest in appreciating assets. Most people do need a car and potentially a loan to finance it; however, the debt payments shouldn’t drastically impact your ability to save or invest.
Building the habit of paying off credit cards entirely and managing balances and payments on depreciating assets is foundational to building millionaire wealth.
2. Consistently Review Cash Flow
Reviewing personal cash flow consistently helps avoid the dreaded “lifestyle creep.” Lifestyle creep alludes to the phenomenon of spending more as our income grows over time without increasing the amount we’re saving and investing alongside our spending. Adhering to lifestyle creep over long periods will almost certainly result in a situation where you cannot retire or reach financial independence. It’s prudent to ensure that your savings and investments increase over time just as much, if not more than your spending, to ensure that you can rely upon assets to provide income in retirement.
On the path to becoming a millionaire, many tend to review their cash flow consistently to ensure that they’re avoiding lifestyle creep. Naturally, spending will increase over time, but they’re reviewing cash flow to ensure that savings are as well. Reviewing monthly or annual savings rates relative to gross income and average monthly or yearly spending will help provide context as to whether you’re managing cash flow well. In addition, an extremely beneficial habit is ALWAYS to set aside at least half of any future pay increase towards long-term savings or investments, assuming it’s not needed to assist in paying off debt or other short-term goals. This will guarantee that you’re long-term financial security isn’t giving way to current lifestyle creep.
Suppose you need a place to start, first, review average monthly spending. Using the previous 3-6 months will give you a better average than the last month. Next, determine you’re average net monthly income (after deductions and tax withholdings). It’s easiest to pull the prior few paystubs to generate this number. Finally, compare your net monthly income minus your average monthly spending. Hopefully, this is a positive number. If not, you’ll need to work on reducing spending. If it is positive, try to automate more of your extra cash towards investments such as your 401(k), HSA, employee stock purchase plan, or taxable brokerage account. Automation is another excellent tool for maintaining this habit. Generally, getting your total savings/investment rate above 15-20% of your gross income will result in a solid long-term financial plan and potentially a millionaire’s net worth!
3. Confidently Negotiating Compensation
One of the most overlooked items to long-term financial success is employees’ ability to negotiate their compensation. Creating the habit of consistently communicating with your boss or employer regarding job expectations and future compensation increases is an important habit to develop. The keyword here is communication. Let your employer know that you’re interested in exceeding expectations and, in turn, want your compensation to reflect that. Too often, employees won’t communicate or negotiate on their behalf to maintain or exceed what they should be getting compensated. It’s easy to fall into the trap of maintaining loyalty to an employer for years, meanwhile, not having those sometimes uncomfortable conversations about compensation. Why is it so common for employees to receive such significant increases when leaving their employers in the tech industry? Shouldn’t their compensation reflect what the open market is willing to pay? The only way to ensure compensation keeps up with the open market is to consistently be willing to communicate with your employer regarding job expectations and compensation.
4. Understand and Manage Risk
The plethora of get-rich-quick schemes and investment ideas remain abundant. It’s part of the human condition to be intrigued by ideas that could catapult your finances without putting in the time and effort required. The habits discussed above, when consistently followed, still take many years to build a millionaire’s net worth. Therefore, the appeal of these “shortcuts” is apparent.
However, in the vast majority of cases, there are no shortcuts. Managing risk is a habit in itself that will help aid in building a solid financial future. In particular, when it comes to investing, maintaining a diversified portfolio that aligns with your investment time horizon (or when you’ll potentially need to start withdrawing from the accounts) will help reduce the risk that you’re plan fails. Taking outsized risks, such as investing most of your portfolio in crypto or single stocks, may not be the best way to achieve your goals. Even the most educated, diligent, and successful investors will not overweight an investment position they feel confident about that could capsize their overall financial plan. Sure, they may take “bets,” but they’ll remain within reason relative to their overall investment portfolio. Too many factors outside our control can capsize an investment and it’s not worth risking our financial security. Yes, it’s possible to take these outsized bets and to achieve success, but consistently doing so becomes nearly impossible the more you try to replicate the strategy. Instead, focus on what you CAN control: asset allocation, diversification, and savings rates.
Why Developing Healthy Financial Habits is Better than Budgeting
Long-term financial success can largely be attributed to how we manage our monthly cash flow today. That’s not to say it 100% predicates whether we’ll be financially secure in the future, but it does greatly enhance our chances. When it comes to managing our monthly cash flow, oftentimes personal finance gurus will point to strict budgeting.
That could include reviewing expenses as often as weekly, categorizing them, and ensuring you’re spending less than what you’ve allocated to that particular line item in that given week or month. However, there’s a problem with this type of budgeting practice. It’s oftentimes temporary. The practice can be time-consuming, stressful, and unrealistic for someone to stick to over a long period of time (similar to a dieting fad). Instead, working on changing, developing, or ridding of financial HABITS, can ultimately achieve the same goal of managing monthly cash flow better, spending more in line with values, and freeing up more cash to work towards financial goals!
The Goal of Budgeting
People who practice or have practiced budgeting, typically have one goal in mind; to reduce their expenses. While this is the obvious goal of budgeting, there’s more to it than that. Identifying whether money is being spent on things you actually value, or that actually add value to your life is another eye-opening way to view a budgeting exercise. Yet, underneath it all, the real goal of budgeting is to develop healthy financial habits around spending, saving, and understanding of your cash flow. Therefore, over time, you’re not having to dedicate time to pouring over expenses, categorizing, and feeling stressed about your spending.
The Case Against Traditional Budgeting
First, let’s be clear that I’m not against the actual practice of budgeting. In fact, the traditional budgeting practice is something I have all my new clients go through. By itemizing expenses, you’re able to understand where money is being spent, is it being spent on things you actually value, how much on average, and whether there needs to be an adjustment in order to accomplish other financial goals.
Yet, this is where I diverge from others who swear by a strict budgeting practice. As I mentioned prior, I don’t believe for the vast majority of people it’s realistic to maintain a budgeting routine weekly or even monthly over a long period of time. Instead, the focus during the initial budgeting exercise should be to answer the following simple questions:
- Am I spending money on things I actually value? If not, which expenses can I cut?
- Am I spending too much on average each month that it’s inhibiting my ability to work towards other financial goals (debt pay down, retirement savings, etc)?
Now, there are a few scenarios that typically play out once the first budgeting exercise is completed. 1) You’re spending too much, 2) you’re not spending too much, but identify expenses that you’d like to cut because they don’t add value to your life, 3) your spending is in line with how you’d like to spend and you’re still able to work towards financial goals. Obviously, number 3 is where you’d eventually like to end up. However, the path to getting there doesn’t have to mean you’re pouring over your expenses each month and ensuring your not spending over the set limit on any particular category of expenses.
Instead, the focus should be on how to grow, support, or develop new healthy financial habits that can underline what you’re trying to accomplish with this initial budgeting exercise! Habits become second nature and therefore less time, effort, and stress is afforded to behavior that we just do without thinking.
How to Develop Healthy Financial Habits
Once you’ve worked through the initial budgeting exercise (you can try our free budgeting software here), identified expenses you’d like to cut or are necessary to cut, turn your focus to seeing the whole picture. Do you have high-interest debt that needs to be addressed? How much are you currently saving for retirement or the kids’ college? Regardless of what your other financial goals are, prioritize them. Which are absolutely essential versus those that can wait? Once you’ve prioritized your goals, you can determine where the extra cash flow from the “cut” expenses will go.
Next, automate the newly freed up cash flow. This will FORCE you to save, invest, or pay down the debt you’ve recently identified as your top priority. Now, you might be wondering how this will actually change behavior? Depending on the situation and how drastically spending may need to be altered, there are a few strategies that can help support the change.
- Stop using credit cards. Take them out of your purse or wallet and leave them at home. Don’t close the accounts, but STOP using them until you’ve grown into your desired spending habits. Credit cards do not reinforce good spending habits, and eliminating them from the equation until new habits are formed is key. I don’t care whether you’re missing out on cash rewards, travel points, or other perks, the long-term benefit of changing behavior is far more beneficial than any short-term perk you may receive.
- Use cash only. Without a credit card to spend you have two options; debit card or cash. If you have drastic changes to make in regards to spending, using cash only can help support that behavioral change. There’s something to say about actually SEEING your cash on hand reduced. It makes you think twice about certain expenses and draws you back to the question: does this actually add value to my life? Ultimately, this question should underline all your expenses and will be fundamental in changing spending habits.
Spending only what you have available after allocating cash towards financial goals (through automation) will FORCE you to spend within your limits. Again, the key is to spend only on things that add value to you, which inherently makes it easier to adjust to the potentially lower spending level because you’re essentially removing expenses that don’t add value anyways!
Over time, you’ll be able to re-introduce credit cards so that you’re able to reap the perks associated with them. Ensuring that they’re paid off on a monthly basis and that you’re still spending only what’s available is key. If you fall back into old habits, just repeat the prior steps.
The Bottom Line
Ultimately, I believe using these strategies in tandem with an initial budgeting exercise can lead to long-term, sustainable, healthy financial habits. Once habits are established, they’re much easier to maintain. It’s less work, stress, and time consumed than traditional budgeting. Focusing your energy on changing or developing healthy financial habits instead of painstakingly reviewing itemized expenses each month is simply a better way to budget, manage cash flow, and make progress towards financial goals!
Avoiding “bad debt,” consistently reviewing cash flow, confidently negotiating compensation, and understanding and managing risk, are all millionaire money habits we’ve encountered and helped implement at Millennial Wealth. If you’re looking for assistance with developing millionaire money habits, schedule a free consultation today!
