Despite what social media or TV shows may depict, building wealth typically happens slowly as you stick to smart money habits month in and month out. GOBankingRates interviewed several financial experts to uncover the boring habits that can make you wealthy.
Set a Budget and Stick To It
Whether you use a budget app on your smartphone or the old-fashioned envelope method, make sure to plan how you’ll spend your monthly income.
“Set aside a set amount at the beginning of the month and live within that budget,” said Jay Zigmont, CFP and founder of Childfree Wealth. “Envelopes of cash may have been replaced by prepaid debit cards, but the basics are the same and still work.”
How much should you set aside for each line item? That depends on your specific living expenses. Just make sure to leave room for paying off debts and saving if possible.
Pay Off Your Debts One by One
Whittling down your debts can help free up extra cash to go toward saving. Zigmont recommends starting with the loans with the highest interest rates, which usually include consumer debt like credit cards.
“Paying off your debt gives you a tax-free, risk-free return of the interest,” he said. “With credit card interest rates over 20% in many cases, paying off a credit card provides a return that will exceed most investments.”
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Put Money in a High-Yield Savings Account
While paying off debt should be a high priority, don’t wait until you’re debt free to start saving money. Set aside some cash each month in a high-yield savings account until you have three to six months’ worth of living expenses for an emergency fund, advised Zigmont. Setting aside cash and refusing to touch it may not seem exciting, but it can provide much-needed financial support in a crisis.
Live Below Your Means
If you want to set aside money to pay off debt and save for emergencies, you’ll have to start spending less than you earn.
Living below your means requires discipline — saying no to nonessential expenses, keeping an eye out for discounts and shopping around for the best deals. It may take more of your time, but the savings add up in the long run and can help foster habits that lead to a wealthy lifestyle.
Set Up Automatic Savings Contributions
Automation is the most effective savings habit, said Cara Macksoud, a certified financial behavior specialist and CEO of Money Habitudes. It’s easy to forget to put money toward savings each month. But with automation, you don’t have to rely on your memory — your bank account can trigger the contribution for you. This strategy works best when you have a steady pay cycle to avoid any accidental overdraw fees.
Take Advantage of 401(k) and HSA Plans
Health savings accounts and 401(k) plans may seem boring, but they will do a lot to help you build wealth. Be sure to ask your employer if they offer these types of tax-advantaged investment plans and whether they also offer employer matching. Also, check how long you have to work at the company before becoming eligible and how long it takes to become fully vested. Being fully vested means you can keep 100% of your employer’s contributions to your investments.
Invest In Target-Based or Index Funds
“Most likely, you’ll want to invest in an overall market index fund or a target-based fund at the same dollar increment over and over again,” Macksoud said. “In this way, you’ll catch market sell-offs and you’ll buy at different prices so you dollar-cost average. … Don’t try to outsmart the market. Slow and steady wins the race.”
Dollar-cost averaging simply means regularly investing a fixed sum into the same fund over a long period of time. And since the investment funds Macksoud recommends tend to follow the market, they usually yield a healthy return in the long run.
Robert R. Johnson, CFA and professor finance of the Heider College of Business at Creighton University, agreed, saying: “Trying to pick winners, for most, is a loser’s game. Investing in low-fee, diversified equity index funds and continuing to invest consistently whether the market is up, down or sideways is a very prudent strategy.”
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