Unless you have received a large inheritance, trust fund, or won the lottery, you need to build your wealth from scratch. This is not an easy task with stagnating wages, increasing debt, and the rising cost of living, but it is possible if you develop the following habits.
Track Your Spending
A budgeting app like Mint can help you keep track of your spending and stay within your budget.
If you’re spending hundreds of dollars a month on ordering food and streaming services, you may be wasting your money. Try cancelling the streaming services you don’t use to save some money.
Live Within Your Means
By keeping your standard of living manageable, you will always have extra money to put towards your financial goals or in case of an emergency. As your career advances and you earn more, resist the urge to spend more and instead focus on paying off debt or saving more money.
Build a Solid Cash Reserve
Setting aside money to cover unexpected expenses provides peace of mind and protects against accumulating debt.
In an ideal world, you should have enough money saved up to cover three to six months’ worth of your living expenses. However, even a small amount of money set aside is better than nothing. For example, if you have $300 in a rainy-day fund, you would only need to put $100 on your credit card.
Use Debt Strategically
Financial experts generally advise against taking on any debt, but there are some exceptions to this rule. For example, if you want to buy a car or a house, you will need to have good credit. Therefore, applying for and using credit in a responsible way can help you to achieve this goal.
Debt can be used strategically to further your education, acquire property, or start and/or grow your business. An example of not using debt strategically would be maxing out your credit card on VIP tickets to a music festival when you can’t pay off the balance.
Don’t Borrow to Finance a Lifestyle
Use borrowed money when your potential return is greater than the cost of borrowing. This could mean investing in yourself, such as through education, starting a business, or buying a house. These types of investments may provide the leverage you need to achieve your financial goals more quickly.
If you use credit to buy things that you can’t afford, you will not become wealthy. In addition, the extra interest you have to pay when you borrow money will make the cost of the items even higher.
Set Short-Term Goals
The future is unpredictable and can change drastically in a person’s lifetime. This can make planning for the future feel overwhelming.
Set a series of small, short-term goals that are both measurable and precise rather than setting long-term goals. This will increase the chance of achieving the goals. The process of writing down the goals can also help achieve them.
Achieving short-term goals will help you reach longer-term goals.
Get More Bang For Your Buck
The outcome of this decision may vary depending on your personal experiences, but in general, this strategy simply involves finding good deals on items you need. For example, if you need a pair of flip-flops for the summer, you might think you could save money by buying a cheap pair from the dollar store, instead of spending $50 on a nicer pair.
I’m not trying to say that dollar stores are bad. However, those cheap flip-flops you buy there might not last through the summer. If you have to keep replacing them, it will probably cost you more than if you just bought a more expensive pair of flip-flops that would last much longer.
Become Financially Literate
Although making money is essential, it is not enough. To be successful financially, you must also save and invest your money wisely. Financial management and investing are lifelong processes that require dedication and effort. Learning about personal finance and investing will pay off in the long run. Therefore, it is crucial to make informed decisions about your finances and investments in order to reach your financial goals.
If you want to become more financially stable and master money, then you need to continuously educate yourself.
There is no one right way to become financially literate. You can learn by reading financial books, following authority figures online, or taking online courses. Another option is to ask your financial advisor for advice.
Save What You Can for Retirement
When you’re in your 20s, you probably don’t think much about retirement since it feels like it’s so far away. But if you start saving now, even a small amount can make a big difference in the future because it has time to compound. The longer you wait to start saving, the harder it becomes.
If you want to save for retirement, consider setting up automatic monthly contributions to a retirement plan, such as an employer-sponsored 401(k) or an IRA. You can increase your contributions over time as your income rises or when you achieve more of your short-term goals.
The most important thing when it comes to saving money is to develop the habit of paying yourself first. This way, you won’t have to worry about how much you’re contributing.
An alternative to retirement accounts are stocks, bonds, and exchange-traded funds (ETFs). Robo-advisors can do the research for you if you’re interested in this route. If you’re married, you should look into a joint brokerage account. And, if you have kids, 529 plans and UGMA/UTMA accounts are options to explore. These can be good vehicles for teaching children about money and investing.
The most important thing to remember is to have a diversified investment portfolio in order to both reduce risk and increase your investment potential.
Leverage your employer benefits.
If you are not self-employed, you should check your employer’s benefits plan carefully. You may be able to get free money, and your employer may offer benefits that go beyond retirement plans.
Here’s what you should be looking for;
- Retirement match
- Life or disability insurance
- Health Savings Account (HSA)
- Employee Stock Purchase Plans (ESPP)
- Legal services
Don’t Leave Money on the Table
If you work for a company that offers a 401(k), make sure to contribute at least up to the maximum of what your employer will match, otherwise you are leaving money on the table. In addition, because 401(k) contributions are tax-deferred, you can deduct your contributions in the year you make them, which lowers your taxable income for the year.
If your company does not offer a 401(k), you can still save on taxes by contributing to a traditional IRA. Your contributions to a traditional IRA may be tax deductible.
Take Calculated Risks
Risk-taking behavior during young adulthood can pay off later in life. People might make mistakes, but they have more time to recover when they are young.
Examples of calculated risks include:
- Moving to a new city with more job opportunities
- Going back to school for additional training
- Taking a new job at a different company for less pay but more upside potential
- Investing in high risk/high return stocks
People who have fewer responsibilities can more easily take risks. This is because they likely do not yet have things like mortgages or savings for their children’s education.
Seek Out Other Income Streams
Having several different income streams can provide greater financial security, as well as opportunities to save or pay down debt. If one income source is lost, others can provide a safety net. The extra cash flow from multiple sources can also be used to improve your financial situation.
When I think of a side hustle, I immediately think of freelancing or picking up a second job when I have the availability. This might work temporarily, like if I want to earn some quick cash for a vacation. But, this can get exhausting.
Passive income is the answer. You’ll have to do some work up front, but eventually you’ll make money without putting in a lot of effort. Some ideas include renting out a spare bedroom, selling an information product, or launching an eCommerce site.
Invest in Yourself
Viewing yourself as a financial asset is a smart way to think about your future. By investing in yourself and continually upgrading your skills and knowledge, you will be in a better position to make smart career choices that will pay off in the future.
Investing in yourself can help make you a more attractive and higher-paid part of the workforce. This investment often starts with going to college or a trade school, but it should continue over the course of your lifetime. Keeping your skills up to date and learning new ones that are in high demand can help you earn more money and have more job opportunities.
Make Your Health a Priority
In her Due post, Kate Underwood argues that it is nearly impossible to separate finances and health. She points out that health care costs money and that being healthy makes it easier to make money. She acknowledges that it can be difficult to find time to focus on health, but argues that there are many financial reasons to do so.
When you’re healthy, you miss less work, which is especially important for freelancers who get paid by the day. If you’re looking to advance in your career, being healthy can help you achieve that by not missing work and impressing your employer.
To summarize, taking care of your health today can have positive impacts on your health and wallet in the future. Make sure to get enough sleep, eat nutritiously, and exercise regularly to improve your long-term health.
Find the Right Balance
It’s important to find a balance between what you spend today and what you’ll spend in the future. For example, you might set a goal to save up for a trip to a place you’ve always wanted to go, instead of using a credit card to finance it. Finding the right balance is a key step in achieving financial security.
