Last week, we discussed the worst financial mistakes you can make; what about the best financial decisions you can make? In addition to learning from the failure of others, you should try to gain as much knowledge as you can from successful individuals, too. As our Money Guy Wealth Survey shows, wealthy individuals normally share certain characteristics and have similar habits. What are some of the best financial decisions you can make?
1. Making your finances a priority early in life
It goes without saying that making money a priority early in life will put you on a great track for financial success, but not everyone starts early. Our 2020 Money Guy Wealth Survey found that 37% of our clients made personal finance a priority between the ages of 18 and 24, 40% between 25 and 34, and 23% waited until they were 35 or older to make personal finance a priority. Even if you are late to the game, there’s still time to make your finances a greater priority in your life.
2. Saving and investing
You may think that the most common path to wealth is inheriting a large sum of money; you aren’t alone. 74% of millennials believe most millionaires inherit their wealth, and 52% of Baby Boomers believe the same, according to Everyday Millionaires by Chris Hogan. We found in our Money Guy Wealth Survey, though, that only 11% of millionaires inherited over $100,000, and 77% inherited nothing at all. Time and time again, studies have found that most millionaires build their wealth instead of inherit it.
So how do they do it? You may be thinking that most millionaires are high-level business executives, entrepreneurs, or uber-talented individuals like Justin Timberlake. That’s not the case, either: our wealth survey found that 65% of millionaires build their wealth by saving and investing. 14% of our clients surveyed took the entrepreneur path, 14% were senior executives, and 7% consider themselves virtuosos. This is very exciting! It’s not easy to start your own business, and you can’t choose to be as talented as Justin Timberlake, but you can choose to save and invest every month. Building wealth happens through disciplined, consistent saving and investing, not by luck or by chance.
3. Having emergencies covered
Having your deductibles covered, and having an emergency fund, are often overlooked keys to financial success. Emergency funds aren’t exciting like investing and watching your money grow is, but they can be just as important to your financial success. If you don’t have your emergencies covered, you may have to go into high-interest credit card debt to pay for an unexpected car repair or doctor’s bill. Having your deductibles properly covered, and eventually an adequate emergency fund, can help keep your financial life out of the ditch.
Our Money Guy Wealth Survey found that 81% of those surveyed had an emergency fund of at least 3 months. Make sure your finances don’t get unexpectedly derailed by properly saving for unexpected events.
4. Driving cars until the wheels fall off
Despite what you may think, millionaires prefer reliable transportation to flashy new cars. Wealthy Americans get their money’s worth out of their vehicles; our wealth survey found that 44% drove their cars for 6-10 years, and 48%, almost half, drove their cars for 10 years or longer! Only 8% said they kept cars for about 3-5 years, and no one said they kept their cars for less than 3 years.
Just because you can afford something doesn’t mean you should buy it. Cars last for a long time, and it may not make financial sense to buy a new car every few years. Our data shows that millionaires normally drive their cars for a long time, many 10 years or more.
5. Using credit responsibly
Credit is a powerful tool, and it can be either helpful or harmful. Almost all of those who participated in our wealth survey, 97%, use credit cards. Some have carried a balance in the past: 42%. Credit cards are often obtained at a young age, maybe in college or right after high school, when you may be more susceptible to making impulse purchases or not paying them off every month. Not everyone is perfect, and you may have made the mistake of letting a credit card accumulate interest in the past. It is in your best interest to do what you can to stay out of credit card debt. Interest rates are punitive, and once you’re in debt it can be difficult to claw your way back out.
While credit cards probably have the highest interest rates out of the debt you’ll encounter on a regular basis, all forms of debt can be harmful if used incorrectly. Auto loans may seem safe because interest rates are typically low, but cars are quickly depreciating assets, so you will want to follow the 20/3/8 rule: put 20% down, pay off the loan within 3 years (1 for a luxury vehicle), and keep your monthly payment to 8% of your gross income or less.
Student loan debt seems great since it’s an investment in yourself, but student loans can potentially set back your financial future by decades. If you do have to take out student loans to graduate college, keep your loans below the amount of your expected first year’s salary. Mortgage debt is different from other types of debt because houses typically appreciate over the long-term, but even housing debt can cause turmoil in your financial life. Aim to keep your total monthly housing expenses at or below 25% of your monthly gross income.
6. Maintaining an optimistic outlook on life
Most millionaires are pretty optimistic. Our wealth survey found that 81% consider themselves to be optimists and only 19% consider themselves to be pessimists. This makes sense; we know that the most common path to wealth is through saving and investing, and if you have an extremely pessimistic view of the future it may be difficult to invest. Long-term investing is based on the belief that over the long-term, technology and innovation will continue to increase, and therefore economic growth will continue.
On our latest show, we talk about some of the best and worst financial decisions we’ve ever made, and how you can learn from our mistakes and successes. Watch it now on YouTube below.