The reality is many people have money habits that keep them poor and prevent them from becoming millionaires. This is the topic we will discuss so that you can prevent yourself from falling into these traps and give you a competitive edge in your FIRE journey!
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Contents
What are money habits and why are they important
1. Not saving enough of your income
In your journey to becoming a millionaire and achieving financial independence, saving is one of the key levers to fast tracking your progress. A bad habit I often see is people not saving enough of their income on a monthly basis and putting that money to good use. While I will always advocate for striving to earn more as opposed to cutting your budget to the bare bones, to some extent there is no substitute for saving. Rather than comparing yourself to others I find a % based allocation is the best way to look at it. Start by taking an honest look at your average monthly income and expenses to get a feel for what % of your income you are saving. Identify opportunities for savings and see what impact this would have on that % and finally commit to achieving your % monthly. As you earn more, you should endeavour to maintain this % and avoid lifestyle inflation.
2. Not investing soon enough and not investing consistently
Something I am guilty of alongside many others is not investing soon enough and intentionally. A big mistake I often see beginner investors make outside of their recommitted 401k contributions is get scared and delay their investing journey. This is due to the volatility of the stock market and fear you will lose all of your money. There is also typically a fear associated with not understanding the stock market, how to invest, and what to invest in to position you for success in the future. All of these concerns, fears and lack of knowledge contribute to a desire not to invest and the consequence is ultimately that people don’t invest early enough, losing valuable time that their money could have been growing with compound interest substantially! Linked with the issue of not investing soon enough is not investing consistently. I see this most commonly when people see the market go down, perhaps during a market correction, panics and sell all of their investments. This is one of the worst things you can do in most instances because you are effectively securing your losses instead of seeing it as an opportunity to buy your chosen investments on sale! Finally, due to the loss aversion effect, I often see individuals delay for a period of years the time they invest again due to the psychological scar of having ‘lost’ money. However, had they kept their money in the market and kept consistently investing they wouldn’t be in that position. As Warren Buffet once said, the number one rule to investing is don’t lose money and if you don’t sell you won’t lose money.
3. Not believing in yourself and holding a scarcity vs abundance mindset
This one is crucial. So many people underestimate the importance of mindset in becoming a millionaire. There is a lot of depth to this topic and in this post I will keep it simple. In short, many people hold a scarcity mindset and limiting beliefs about themselves. One example of this is a fundamental belief that they are ‘not good enough’ or ‘don’t deserve’ to become a millionaire. Limiting beliefs and a scarcity mindset can manifest themselves in many forms and are often deeply routed owing to our home environment, childhood and overarching relationship with money. By holding a scarcity mindset you are effectively in your mind and thoughts making it more difficult for you to become a millionaire and achieve substantial work. You need to instead transition to a mindset of abundance believe that you can, and will achieve substantial worth, that you deserve this and are worthy. By making this mindset shift, you will start to attract significant wealth into your life because your thoughts influence your actions whether you realize it or not.
4. Taking on bad debt as opposed to good debt
Not all debt was created equal! A bad habit I see often is people not understanding what debt is helpful and can support you in your wealth building journey vs hinder and even ruin their wealth building journey. To reverse this habit, education is needed and knowledge of how and when to use debt in the different scenarios you may face. By way of example, credit card debt paid on time is good debt because it can help you build your credit score. Credit card debt where you are paying interest is almost always terrible debt by virtue of the APR being so high. Taking another example, mortgage debt is often good (depending on the interest rate) because unlike credit card debt it is an asset that will hopefully grow over time and facilitates you in your wealth journey. This does not mean I am advocating to buy any house at any interest, merely that debt in the form of a mortgage can be a great use of debt. On the theme of real estate, an investment property financed through debt can also be a great use of debt. For example, if you are able to rent your property out using mortgage debt for more money than your total outgoings including mortgage interest expense, this can be wealth creating. In this example, you are using debt from the bank to actually create wealth for yourself, quite the opposite scenario to paying e.g. 27% APR on a credit card.
5. Lifestyle inflation
Often when people earn more money, it is only natural that they choose to spend it on more things and upgrade their lifestyles. A classic case is moving into a more expensive home or even buying a bigger home, leasing, or buying a more expensive car. In these examples, the biggest issue is that not only are you reducing your savings to put towards your investments, but you are also creating bigger liabilities for yourself. I often see individuals need to maintain certain levels of jobs just to maintain an inflated lifestyle they have created. The irony of lifestyle inflation is that your wealth does not increase any more than when you were earning a lower amount. With that said, by all means upgrade your lifestyle in ways that will truly impact your happiness and self but avoid spending money on material things that won’t help you.
6. Creating an emergency fund
A bad habit that needs to be mentioned is not creating an emergency fund. The reason this is such a bad habit is because by not having an emergency fund established with a minimum of 3 months of core expenses, you leave yourself vulnerable to financial shocks e.g. job loss or unexpected bills. This is a huge issue because firstly, it doesn’t given you the psychological security of knowing you have money to fall back on in a time of need. Secondly when you’re under financial strain you are more likely to make poor financial decisions sometimes even out of need which put you backwards in your wealth journey.
7. Not being clear on your goals
Last but not least, a bad money habit preventing you from being a millionaire is not being clear on your wealth goals. When we don’t have clear goals that are SMART (specific, measurable, achievable, realistic and time based) we are in danger of losing focus and taking decisions that are not in line with our broader money goals. I can’t emphasize the importance of having your goals clearly outlined so that you can take small but actionable steps towards your financial goals. This will make all the difference over the long run.
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