by Kailey Hagen | Updated Aug. 10, 2021 - First published on May 14, 2019
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So you want to be rich? Start by breaking these bad money habits today.Image source: Getty Images.
Building wealth requires a foundation of good financial habits, like saving regularly and adhering to a budget. Bad financial habits, on the other hand, can prevent you from ever getting ahead. If your ultimate goal is to become wealthy, here are four financial habits you need to break immediately.
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All debt is costly, because you must pay back the amount you borrowed with interest, but credit card debt is among the worst types of debt because the interest rates are so high. If you owe $5,000 on a card with a 20% APR and can only afford to pay $100 per month, it will take you over nine years to pay it back, and you'll end up paying more in interest than the principal you borrowed. And that's assuming you don't charge anything more to the card in the meantime.
Once you get deep into credit card debt, it's hard to get out again, so you're better off avoiding it altogether. Never charge more to your credit cards than you know you can pay back in full at the end of the month. If you're already in debt, create a plan to pay it down. Figure out how much of your monthly income you can spare for debt repayment and pay down your debts one card at a time. Don't forget to make at least the minimum payments on all of them, though, to avoid late fees and penalty APRs.
The average American spends over $3,000 per year on dining out, according to the Bureau of Labor Statistics. And that's just restaurant meals and takeout. People regularly make other unnecessary purchases, including drinks at the bar, unused subscriptions, high-end clothing, and more.
It's nice to treat yourself occasionally, but if you don't think about how your fun spending affects your long-term financial goals, you can seriously set yourself back. You can limit your discretionary spending by budgeting a fixed amount for dining out, entertainment, and other wants. This should never take up more than 30% of your monthly income. The lower you can keep this amount, the faster you'll be able to achieve bigger financial goals, like buying a home or saving for retirement.
It's common for people to spend most of their paychecks and then put whatever money they have left into savings, but if you truly want to grow your net worth, saving needs to be your first priority after ensuring your basic living expenses are covered.
There's no hard-and-fast rule about how much you should save each month. It depends on what your financial goals are, how much money you'll need, and how much time you have until you need to draw upon that money. Create a plan for each of your financial goals, listing how much you need and how many months you have to save for it. Then divide the total cost by the number of months to figure out how much you need to save each month. If you intend to invest some of your money, then you shouldn't need to save as much to reach your target, because your investments should gain value over time. In that case, use a retirement calculator or a similar tool to help you determine how much to save each month to hit your goal.
If you can't currently save as much as you'd like to, just save as much as you can and increase your savings rate every time you get a raise. Put any extra money, like a yearly bonus or tax refund, in your savings as well.
A savings account is a great place to keep your money if you expect to need it within the next few years. But if you're saving money for a longer-term goal, like retirement, you're better off investing it. The average savings account only has an interest rate of 0.09% APY. This is the rate your money grows at while it's in the account. Inflation, on the other hand, has historically grown at a rate of 3% per year. So money kept in savings over the long term will actually lose value as inflation drives up the cost of living.
You can beat inflation by investing your money. Stocks have historically returned an average of 10% per year, and even bonds have historically yielded between 5% and 6% annually. That doesn't mean money you invest will automatically grow at this rate, because investment performance can fluctuate. But the odds are good that you'll grow your money over time if you diversify your investments and don't panic-sell due to short-term swings in the value of your investments. If you aren't sure how to invest money on your own, seek help from a financial advisor or use a robo-advisor that can help you assess your risk tolerance and choose the right investments for you.
If you truly want to become wealthy, you have to take charge of your finances and understand how every decision you make affects you in the short and long term. By avoiding the four mistakes listed above, you can begin to grow your net worth and realize your financial dreams.
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. The Ascent's picks of the best online savings accounts can earn you more than 8x the national average savings account rate.
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