This article was last updated on December 30, 2015
Why is it that people who have essentially the same earnings during their working lives retire with very different wealth accumulations? The answers lie, of course, in how they managed their earnings during those work years. Some developed the habits that would make their retirement years outstanding; others lived with habits that did just the opposite. If you are still in your working years, you can change those bad habits now and get yourself on the right path. Here’s 5 of them.
5 Habits Preventing You from Accumulating Wealth
1. The Richest Man in Babylon
In 1926, George Clayson published a book by this title. It was a fable of sorts. Two men in ancient Babylon, one a musician and one a chariot makers were absolute geniuses in their crafts. Yet, as they reached their elder years, they both realized that they were poor and would have to keep on working until they died. By contrast, their other childhood friend, Arkad, had accumulated a fortune and would be able to stop working and live in wealth for the rest of his days. The two poor friends went to see Arkad and asked him for his secrets. There were no secrets he replied. There were just some habits that he had developed early in his working life that allowed him to become so wealthy. Here are the bad habits that must be corrected.
2. Not Paying Yourself First
The first rule of Arkad is perhaps the most important. No matter what your income, no matter what bills you may have to pay, you must, above all else, pay yourself off of the top. This means that 10% of your take home pay goes into savings. Arkad didn’t have automatic withdrawal in those days – he had to rely on his self-control. Today, this is easier. You can have that 10% taken out before you ever see your check, and put it in a 401K or a Roth IRA. If you make this a habit from the very first job of your work life, you will not miss this money.
3. Not Living Below Your Means
This is a big secret held by many wealthy people. There is a book titled, The Millionaire Next Door, written by Thomas Stanley. He speaks to the fact that in many very moderate neighborhoods across this country lie millionaires who are not known to be so. This is because, as they got those raises and promotions or job changes that brought big salary hikes, they did not change their lifestyles. They remained in their modest homes with their modest cars; they did not buy boats and vacations homes. They enjoyed some modest improvements in lifestyle but saved and invested most of their increases.
Warren Buffet still lives in the home in Omaha Nebraska that he bought years and years ago. There seems to be some need in our culture to “show” that we are “making it” by moving into that larger home and buying that expensive car. When you get that big raise or promotion, decide that half of it will be invested, along with the initial 10% that you are already saving.
4. Not Making Your Money Work for You
Putting savings into a regular savings account or a money market account does not allow it to grow. Putting it into investment funds gives you a better return over time, even though the stock and bond markets may have their ups and downs. Every bit of money that you have in savings ought to be earning a decent rate of interest. And if you re-invest that interest, there is the effect of compounding. 401 K’s, IRA’s, and mutual funds keep your money growing and, at the same time, make it much more difficult to get at that money, if you have a self-control issue.
5. Not Tracking Your Income, Expenses, Assets and Debts
Tracking your “wealth” involves two types of activities – developing a budget and maintaining a balance sheet of assets and debts.
The Budget: if you do not know where your money is going on a daily/weekly/monthly basis, you will never get control of it. Begin by tracking every expenditure for an entire month – even that fast food breakfast burrito you buy once in a while. Once that is done, divide your spending into categories – necessities (mortgage, car payment, utility bills, food, etc.), near necessities (new clothes, new household items), and everything else (entertainment, jewelry, impulse purchases, etc.). If you are living within your means (spending less than you are taking in) and you are saving, then you need not change anything right now. If you are spending more than you are taking in, then you most likely have growing credit card debt – a big “no-no.” Cut those credit cards up and cut those unnecessary expenses.
Assets/Debt: You can’t wipe out your debt today; likewise you will probably not acquire a huge new asset today, but over time, you need to continually keep track of what you have and what you owe. What is the actual value of your house right now? Your investments and savings? What is your cumulative debt right now? Your mortgage, your car loan, you credit card debt? The goal is that your assets should be 3X your debt during your earning years and 5-6X your debt as you near retirement. If you are not on that path right now, then you need to do so.
Bad Debt: Bad debt is credit card debt; and it is also car loan debt. These are “bad” debts because you have little to show for them when the debt is paid off. Using a credit card for vacations and Christmas gifts is just a bad idea. You may have some nice memories and photos from all of your travels, but you had better be motivated at work after a vacation so that you can pay for it quickly; and you may see smiles on the faces of your relatives as they open their gifts, but that “magic” fades quickly while the debt lingers for years. Credit cards are for emergencies, not that new pair of shoes you just had to have; cars are to get you from one place to another not to impress your neighbors and relatives.
Not Planning Ahead for Emergencies
One major emergency can wipe you out if you have not planned for it – a huge medical expense, a flood for which you are not insured, the unexpected loss of a job, the death of an income-earning spouse or partner. There are two things you do to protect yourself:
- Insure everything. Insure your life; insure your home; buy supplemental health insurance; buy disability insurance; and buy long-term care insurance when you are young, so the premiums are as low as possible.
- Accumulate an emergency fund that has 6 months of expenses in it. Having all of your financial obligations met for 6 months when you face an emergency gives you that time to deal with the crisis, to find a new job, to make lifestyle adjustments, and to get that income stream up and running again.
If you really want to stop feeling poor and to stop losing sleep over your money woes, get these 5 bad habits corrected right now or as soon as possible. There is a great sense of calm and security when you are in control of your money.
Photo credit: Jeff Belmonte via flickr