Many people want to improve their financial situation but are unsure of where to start. As with any other skill, it is a good idea to look to the experts for advice. If you are ready for a change, start with these eight spending and savings habits of millionaires.
1. Start Saving ASAP
The single most important thing you can do to increase your net worth is to start saving, and the earlier, the better. In his book ‘Money: Master the Game,’ Tony Robbins, whose net worth is approximately $500 million, discusses the importance of savings and compound interest, which, simply stated, is the interest you will earn on interest. The earlier you begin saving, the more you will earn in compound interest.
For example, let’s say a 25-year-old makes $50,000 each year and decides to save 10% of his gross income. That means, each year he will put $5,000 into a saving account. If the individual puts his money in a basic savings account that earns just 1.35% APY, they will have $271,447.10 when he retires at 65.
Now let’s pretend the individual above has a sister who does not start saving until 45. If she saves the same amount ($5,000 per year), she will have only $120,465.01 at retirement. To have a similar savings at age 65 ($279,960.62), she would have to save $12,000 each year (or 24% of their gross income).
The Securities & Exchange Commission (SEC) offers an online calculator to help determine how much you need to save each month to reach your own savings goals.
2. Automate Your Savings
Robbins also says make saving as simple as possible, and the best way to do this is to automate your savings. If you do not see the money in your checking account, you will not be tempted to spend it. There are a number of ways to do this, including having a percentage of your check automatically deposited into a retirement or savings account, or setting up an automatic transfer between your checking and savings.
3. Create (and Stick to) a Budget
If you are having a tough time saving money, perhaps you do not have a realistic budget. To get started, track all of your income and and expenses for a full month. It is especially important to keep track of how much you are actually spending. After you have a realistic picture of where your money is going, you can cut unnecessary costs and begin saving. Ideally, you will put at least 20% of your net income towards savings.
If you are having a difficult time creating a budget, there are a number of apps and online tools to help, including YNAB and Clarity Money.
4. Living Frugally
While it may seem tempting to reward yourself with expensive gadgets or new clothes, if you want to behave like a millionaire, you will begin living more frugally. Wealthy people buy quality items and services at a discount.
Living frugally also means living below your means. Famously, Warren Buffet, whose net worth is nearly $80 billion, lives in the same house he purchased in 1958 for $31,500. He has avoided “lifestyle creep”—when you increase your standard of living as your income increases, which is a bad but common habit.
5. Minimize Your Expenses
Along with living frugally, you also want to keep your expenses as low as possible. Ideally, your income should be split up as below:
- No more than 25% on rent or mortgage
- 15% on food
- 10% on entertainment, including restaurants, movies, etc.
- 5% on auto loans
- 5% on vacations
Where should the other 40% go? Into your savings and retirement accounts.
6. Avoid Credit Card Debt
No matter your interest rate, you will want to avoid carrying a balance on your credit card, as this will kill your ability to save money. If you have an interest rate of 10% and a balance of $10,000, you are paying $1,000 in interest every year that could be going into a savings account and making you money via compound interest.
If you are already in credit card debt, put together an action plan to get out as soon as possible. One fast way to become debt-free is to start making micropayments.
7. Pick Your Friends Wisely
As with all habits, you will have an easier time keeping good ones if you spend time with like-minded people. Want to workout more? Find a fit friend. The same goes for saving and smarter spending. You want to surround yourself with people who are conscientious about their money.
If you are not yet married, you will want to find someone who is good with money, and if you are already married, make sure you and your spouse are setting the same financial goals.
8. Set Goals
Finally, as with any habit, you want to set clearly defined and actionable goals. Have a specific number in mind for retirement? Use the SEC’s calculator to figure out how much you will need to save each year and then automatically have that amount transferred from your check to your retirement account each month. Want to get out of debt? Put together a realistic budget and create action steps for making it happen. If you see your goals in black-and-white, it will be easier to take the steps necessary to make them happen.