Who of us that isn’t a millionaire doesn’t want to become one? Wealth means power, freedom and access. But millionaires — usually — don’t land their fortune overnight. The net worth builds over the years as you maintain healthy financial habits, such as banishing credit card debt and avid saving and investing. Just as there are sets of ways to become a millionaire, there are also everyday money traps that can, in the long run, prevent you from amassing wealth.
What are these everyday money traps? Let’s find out.
Not Setting Clear Financial Goals
Financial goals aren’t just helpful, they’re necessary if you desire millionaire status.
“Define what you want to accomplish, whether it’s homeownership, early retirement or starting a business,” said Kelly Ann Winget, founder and manager of Alternative Wealth Partners. “Specific goals provide direction and motivation, propelling you towards financial success.”
Procrastinating on Financial Planning
If you haven’t started financial planning, get on it. It’s never too early, but it could be too late.
“Begin financial planning as early as possible,” Winget said. “This knowledge will equip you to make informed decisions, negotiate fair wages, invest wisely and secure your financial well-being.”
Planning ahead is especially important for women, “considering longer life expectancies and the need for ample retirement savings,” Winget said.
Not Making Every Dollar Count
Can you get more bang for your buck by buying in bulk? Are you using cash-back browser extensions? Are you clipping coupons? Stay on top of all the ways you can stretch your dollars, nominal as it may seem in the scheme of things.
“Smart money choices add up over time,” Winget said. “Joining points and free membership clubs can also have significant benefits for one’s bank account. These reward programs and clubs are designed to offer discounts, rewards — even cash back.”
Not Boosting Your Financial Literacy
Lack of financial literacy, often rooted in childhood, will always come back to haunt you. Check out podcasts, books and other forms of media that can give you a lesson or two in personal finance.
“Educate yourself on personal finance, investment strategies and wealth-building principles,” Winget said. “Empowered with knowledge, you’ll make savvy financial decisions and adapt to changing economic conditions.”
Poor Tax Planning
In Winget’s opinion, this is actually the one thing that sets millionaires apart.
“Setting yourself up correctly in the eyes of the IRS can keep 15% to 30% more money in your pocket to save or invest,” Winget said.
Overinvesting in a Home
Often people want to own homes because they see them as great investment vehicles. You might want to tread carefully here, as there’s a bit of an argument against this conceit to be considered — especially if you’re keen on buying a large house or lot of land for residential purposes.
“Historically, residential real estate has been a relatively poor performing investment,” said Robert R. Johnson, PhD, CFA, CAIA, professor of finance at Heider College of Business, Creighton University. “Overextending and buying a large home is a losing strategy. Larger homes have greater initial costs and greater ongoing costs — maintenance, property taxes, etc. — than smaller, starter homes.”
If you’re choosing between a two-bedroom that meets your needs or a four-bedroom that meets your more extravagant wants, go with the smaller abode and invest your savings.
Saving but Not Investing
If you want to become a millionaire, you need to be both saving and investing money. It’s not an either/or situation.
“Achieving true financial security and wealth is done not by simply saving, but by both saving and investing,” Johnson said. “Because of compounding, time is the greatest advantage of investing. Too often people rationalize that they will begin saving when they make more money, only to realize that it is easy to simply let spending increase commensurate with salary.
“One needs to develop the discipline to save, and developing that habit early in life is extremely important. It is also important that people embrace investing and not simply saving. That is, the money you save needs to be invested in assets that will grow over time.”
Being Too Risk Averse With Investing
If you’re on the brink of retirement, it’s generally recommended that you take a non-aggressive approach in your investment portfolio, because time isn’t on your side. You can’t afford to take much risk. But if you have some time before retirement, you should be leaning aggressive in your investments. This could help you become a millionaire.
“Unfortunately, many people are overly conservative with their asset allocation, particularly in their retirement accounts,” Johnson said. “Now, taking more risk doesn’t mean ‘swinging for the fences.’ There are prudent ways to take risks and stupid ways. Investing in speculative assets is not prudent risk-taking.”
Not Staying Disciplined and Patient
As mentioned earlier, most millionaires don’t just become that way in an instant. It takes time, work ethic, personal finance chops and determination to go from a six-figure life to a seven-figure one. Be in it for the long haul.
“Building wealth is a gradual journey,” Winget said. “Embrace discipline and patience through market fluctuations and economic cycles. Consistent saving and investing, with automated contributions, can help propel you towards long-term financial success.”
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