Money habits are practices that support effective money management. The difference between financial success and failure can be determined by developing sound financial habits.
You may increase your chances of becoming wealthy by adopting these five money habits.
1. Ownership of a Business:
Salaried employees are rarely found in Forbes’ annual list of the world’s richest billionaires. In the 2023 Forbes billionaire rankings, tech leaders like Sundar Pichai and Satya Nadella rank far below top entrepreneurs such as Bernard Arnault (founder of LVMH), Elon Musk (founder of SpaceX/Tesla), Jeff Bezos (founder of Amazon), Larry Ellison (co-founder of Oracle), and Warren Buffett (founder of Berkshire Hathaway).
This highlights that entrepreneurs who successfully run businesses and reinvest profits into growth tend to build far more wealth than employees.
While many avoid stocks due to fears of market volatility, adopting a business-owner mindset can lead to investing success. Viewing stock purchases as an ownership stake in a company encourages you to focus on long-term growth and hold investments through market fluctuations. If you’re not confident in picking individual stocks, mutual funds offer a reliable alternative, with professional management selecting the right businesses for you.
2. Frugality is not a sin:
People who are extremely wealthy frequently appear to be frugal. A vintage pickup truck was the common mode of transportation for Sam Walton, the founder of Walmart. We also know that Warren Buffett continues to reside in the first home he bought in 1958.
Many billionaires don’t wear items of clothing or accessories that identify them as extremely wealthy. Being frugal is a crucial trait for generating and maintaining wealth so that it compounds over time. The quickest way to get poorer is to spend money to show off your wealth.
You must develop two habits if you were not raised with a frugal attitude. Adapting to delayed pleasure is one of them. Ask yourself how much you can wait to buy anything when you feel the desire to, especially if it’s a costly purchase. Putting saving above spending is the second habit.
As soon as money enters your account in the form of income or salary, allocate a certain percentage of them to investments, and only spend the remainder. You can put money away before you spend thanks to a variety of investing methods, including mutual fund Systematic investing Plans (SIP).
You can also automate your investment or saving, so that once the income or salary hots your account, a certain portion of it, say 10% or 20% will be automatically transferred to another account for your investments.
3. Do not complicate your Money Habits:
A lot of people continue to put off investing because their overthinking paralyzes them. They wait for the ideal moment to invest while continuing exploring their possibilities. However, even volatile investments yield high returns if you start investing early and give it enough time. Many people overlook everything else and concentrate only on profits when assessing investments. However, the number of years, or “N,” rather than the rate of return, or “R,” is the crucial variable in the compound interest calculation we learned in school.
It is simpler to reach an eight-figure net worth if you begin investing in your twenties as rather than in your thirties. If you start at age 25, you may invest Rs. 5,322 each month in an index fund through a systematic investment plan (SIP) at a 12% compound annual growth rate (CAGR) and reach a corpus of Rs. 1 crore by the time you are 50. However, the monthly investment required nearly doubles to Rs. 10,109 if you postpone your start by only five years and start investing at the age of 30.
It is considerably more crucial to start early and let compounding work for a longer period of time than it is to pick the best product available or time your investment perfectly. So, stop overthinking when it comes to investing and adopt a simple approach, and invest consistently for a long period of time.
4. Avoid Debt:
Compound interest was dubbed as the eighth wonder of the world by Albert Einstein. If compounding increases your money when you invest, it also decimates or erodes it when you borrow. Most people who take out personal loans, car loans, or credit card loans to buy things don’t realize how much money they’re paying the bank in the form of interest payments.
The EMI of Rs. 20,517 may appear acceptable when you purchase a car for Rs. 10 lakh on a loan with an interest rate of 8.5%. However, you would have paid the bank Rs. 12.3 lakh after five years. You spent 23% percent more than you would have if you had saved money for the car.
Now, as we say we need to avoid debt, taking a loan to purchase a house may seem logical for many, as these are not like those personal loans or credit card loans. I also agree with that point to some extent, but we need to keep in our mind that the home loan EMI should not be more than 28% of your net income. This is the thumb rule that gives you a lot of cushion for other activities with your salary, such as investing, household expenses, etc.
5. Let your money Compound:
Some people invest on a regular basis and are thrifty, yet they constantly make alterations to their investment portfolio. In their quest for greater profits, they obsessively monitor markets and regularly switch assets or investment products. Such conduct is a major barrier to the building of wealth.
When your portfolio is often churned, capital gains tax and transaction expenses reduce your overall returns. Worst of all, churn disrupts compounding, which is an investor’s best friend. Once you have made wise investment choices and they are yielding sufficient returns, you should learn to leave your portfolio undisturbed until you want the money.
Check out my other article on compounding and its positive impact on your savings and investments.
Final word
In conclusion, developing strong money habits is key to building long-term wealth and financial success. By embracing entrepreneurial thinking, practicing frugality, avoiding debt, and letting your money compound, you can create a foundation for financial freedom.
Remember, it’s not about making quick gains but consistently applying sound money habits over time. Start today by incorporating these habits into your daily life and watch how they transform your financial future. The right money habits can lead you to greater wealth and secure financial independence.
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