Originally Published in the North Bay Business Journal
With the end of the year fast approaching, and New Year’s resolutions just around the corner, it seems like a good time to consider our financial health. With that in mind, I thought I’d share a few of the habits I’ve seen in some of our most successful clients. Though our clients are quite diverse and have come by their wealth in numerous ways, working with them as their financial planner and wealth manager, I’ve also noticed some similarities in how they handle their wealth.
Habit No. 1: Have a spending plan
Do you know how much your family spends each year for food, clothing shelter, vacations, etc.? Most wealthy individuals have a spending and a savings plan. Of those who don’t, they are very conservative in their handling of income and save a good portion of their income before they allow themselves to spend any of it. If you don’t have a spending plan that you look at regularly, it can be easy to lose sight of your financial goals and not exercise sufficient discipline in your spending.
Habit No. 2: Save and invest
In general, the wealthy recognize that income doesn’t equal wealth. High income households do tend to have more wealth than lower- and middle-income households, however, the size of a paycheck explains only approximately 30 percent of the variation of wealth among households. What really matters is how much of the income is saved and invested. On average, wealthy people invest nearly 20 percent of their earned income.
Habit No. 3: Set goals
Many wealthy people are planners, and understand the value in laying out a path for their financial futures. Whether it is them, individually, or their trusted financial adviser, in general the wealthy spend significantly more time each month studying and planning their investment decisions, managing current investments and reviewing their budgets than high-income non-millionaires. Many times they rely on their financial advisers to help them meet their goals and stay on track.
Habit No. 4: Love the home you’re in
Your choice of home — and how often you buy a new one — will significantly determine your ability to accumulate wealth. Half of all U.S. millionaires have lived in the same house for more than 20 years. Ninety percent of wealthy families live in homes valued below $1 million. Author Thomas Stanley writes in Stop Acting Rich: “Nothing has a greater impact on your wealth and your consumption than your choices of house and neighborhood. If you live in a high-price home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised.”
Habit No. 5: Live beneath your means
This seems so obvious it shouldn’t need stating. But, it’s at the foundation of building wealth. For example, the majority of wealthy individuals own their cars, rather than lease. Approximately a quarter have a current-year model, but another quarter drive a car that is four years old or older. More than a third tend to buy used vehicles.
Happier and richer
Numerous studies have shown that financially independent people are happier than those in their same income or age range who are not financially secure. It makes sense. There’s peace of mind that comes from living below your means and having a nest egg and a solid investment portfolio.
