Wealth-Building Habits to Start the New Year Strong
Help Secure Your Financial Future and Find Peace of Mind
Building wealth is a goal for many – and one that you may be considering as the New Year dawns. In the vast majority of cases, it doesn’t happen overnight. You might think that you need an above-average income or a significant inheritance to build wealth, but in reality, the process starts with small but meaningful wealth-building habits. It takes discipline and patience to build your wealth, but the sooner you start, the sooner you can reap the benefits. With the wealth-building habits discussed below, you can find yourself on the way to greater possible financial freedom.
Start With Your Financial Plan
Implementing wealth-building habits on their own can be helpful. However, to get the most out of these actions, it’s important to view wealth-building habits in the broader context of your financial plan.
What if you don’t have a financial plan? Creating one is a critical step. Before you start setting financial goals, you need to gain a solid understanding of your current financial standing. Start by determining your net worth. It’s an easy calculation — you simply add up the value of your assets and subtract your liabilities. Your assets include your home, your vehicle(s), your savings, and any investments you may have. Your liabilities, on the other hand, include your mortgage and any other debt you have.
Once you know your financial standing, you can begin setting goals and deciding which wealth-building habits might help you reach them. Most experts suggest setting both short-term and long-term financial goals. As you start to reach your short-term goals, you can get a sense of accomplishment and motivation to reach the goals that are further away.
Bear in mind that your financial situation may change, even if you don’t expect it to. One of the most important wealth-building habits is regularly assessing your financial plan and making changes as life evolves. When your plan can grow with you, you can have a clearer path to your financial goals.
You’ve probably heard this advice before: pay yourself first. This means that every month, you should set aside a portion of your income for savings. Treat it like any other bill. Most experts suggest saving between 10% and 20% of what you make each month.
This amount is an ideal, not an absolute. Depending on your circumstances, you may or may not be able to save this much each month. Getting into the habit of paying yourself this way is more important than the actual amount of money you’ll be able to put away.
Even if your current income is lower than you’d like, wealth-building habits are an investment in your future. If you can get in the habit of saving a small amount of money each month on a low income, it can be easier to set aside more if your income increases.
Understand Good Debt vs. Bad Debt
Is it good to be in debt? Most people would say no. However, there are some forms of debt that are considered to be “good.” “Good debt” is debt that may benefit your financial health in the long term, such as:
- Student loans
- Expenses associated with your small business
Even though you pay some degree of interest on these types of debts, the benefits can generally outweigh the downsides. For instance, a mortgage is often considered to be good debt because it helps you build equity in an appreciating asset. Student loans enable you to receive an education that may further your earning potential, so they are typically considered to be good debt as well.
“Bad debt” doesn’t improve your financial health in the long run. Credit cards and auto loans are two of the most common examples. An auto loan helps you build equity in a vehicle, but cars depreciate so rapidly that investing in one isn’t necessarily good for your financial health.
Developing an understanding of good and bad debt — and prioritizing paying off bad debt — is one potential way to develop wealth-building habits. Many people are afraid of debt, but you can be better off if you have even a basic understanding of how to manage it.
Consider Risk vs. Reward
One of the benefits of saving money can be the ability to accrue interest over time. Savings accounts might seem like a safe, easy way to achieve respectable returns, but before you open one, take a close look at interest rates.
Most savings accounts have low-interest rates; the national average is 0.56%. This means that if you kept $10,000 in a savings account for a year, you may only see a return of $56.
Fortunately, many banks offer savings accounts with above-average rates. It might take time to compare them, but it’s worth it if you find an account with a relatively high return.
Investing a portion of your savings — in addition to keeping a portion in a savings account —can be a way to make your money work for you. There are no guarantees when it comes to the stock market, but even low-risk investments typically yield better returns than most savings accounts.
The key is often to balance the safety of having your money in a savings account with the risk and reward potential of investing. Generally, you don’t want to put all your eggs in one basket; most people don’t opt to keep all of their money in savings accounts or put all of it into investments.
If you’d like to explore investing but aren’t sure how a financial advisor might be able to help you devise an investment strategy that meets your needs.
Start Implementing Your Wealth-Building Habits Today
When it comes to saving money and building wealth, every little bit counts. Even if you don’t have a significant amount of extra income to set aside, the wealth-building habits you start today can serve you well in the future.
If you don’t yet have a financial advisor, this year may be the time to explore this option. If you’d like to learn more about the services we offer at Paces Ferry Wealth Management, please get in touch with us today. We look forward to helping you strengthen your financial plan for the New Year and beyond!