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.
The Bottom Line
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!
