7 Habits of Financial Success

Wealthy habits

When I was coming of age, I remember noticing wealthy people. I simply noticed them and that they were wealthy, nothing specific other than that. They might have had a nice home, a boat, or held some influential position. They might have dressed differently or driven nicer cars. As an adult, I know these clues don’t necessarily mean someone is wealthy, but to my young mind they were symbols of financial success. They were easy to spot, so I noticed them.

The most interesting thing I noticed about these people is that they were typically happy and generous. They weren’t the miserable misers as portrayed in cartoons and movies; instead, I saw them as easygoing and happy to share their beneficial lives. A cynic might say money could make anyone happy and generous, but that’s not what I felt from these folks. I felt as though they were that way regardless of their fortunes. In fact, if they weren’t as well off, I’m certain they would still be as happy and generous with what they had.

Eventually I got to know some of these people. They were still as generous as I had thought but, as I understood them better, I began to notice the things that set them apart. Moreover, I noticed the things they had in common with each other. Yes, they might have had some advantages in their lives, but the unique traits they shared weren’t inherited. These habits weren’t necessarily skill-based, either. While many wealthy folks have some level of skill in their craft, these skills only help with elevated income, not necessarily wealth. Higher income helps with financial success, but keeping and growing wealth relies on behavior. It relies on habits.

I began to learn that, no matter your income or situation, increasing wealth is a symptom of these habits. Simple, repeatable, behavioral habits. Here are seven habits I notice most often today.

After these seven steps, make sure to check out my six steps to a prosperous life in “Principles of Prosperity,” available here for free download.

1. Spend less than you make. Make more than you spend.

If you’ve read any of my material, you would know I say this often. Admittedly, I try to slip this in anywhere I can. If I’m guilty of repeating one thing too much, it’s this. However, it is worth overstating.

Spending less than you make is the most important rule of financial success. It is a simple math equation. Money coming in minus money going out. The results of this added together over time. The results speak for themselves.

The most important thing to consider is that, whether you underspend or overspend, compounding interest will magnify the results. Spending less than you make? Compound interest will increase over time and create a massive wealth snowball. Spend more than you make? Interest and finance charges will pull you farther and farther behind. It is an exponential slope either way.

While pursuing this habit, don’t rule out seeking elevated levels of income as well. Most people know it’s a good idea to cut expenses and will do so in order to spend less than they make. Cutting expenses will only get you so far. Simply, there are limits to the things you can cut and still survive. On the other hand, there is no limit to the amount of income you can seek, theoretically. When considering this habit, don’t focus so hard on cutting costs that you forget to pursue increased income.

2. Diligent, purposeful saving.

Isn’t this the same as number 1? Yes, but here’s the rub.

When I talk about “spending less than you make,” I’m speaking over the long term. It is a habit that plays out over years or decades. It is the big picture creation of wealth fueled by a long-term effort. On the other hand, diligent, purposeful saving is the conscious act of saving in the short term for specific reasons.

Along the road of cutting expenses and increasing income, large or unexpected expenses can derailed our long-term efforts. While you might have been saving money over time, it might be locked away in retirement savings accounts or used to pay down your mortgage. You have benefited from the long-term effects of spending less, but are still woefully unprepared for a large expense.

Saving with a purpose can help prevent these situations. Once you ensure you’re spending less than you make, you need to decide where and why to save that money. Put money towards an emergency fund in a high-yield saving account. Begin putting money away in a money market to save up for a replacement car. Calculate the future cost of college and put regular amounts into a 529 plan for your children.

Saving with a purpose in mind will not only help prevent unexpected set-backs, but it will also inspire you to stay motivated in your efforts. After all, establishing a purposeful reason for your habits is crucial to sustaining your efforts over time.

3. Budgeting and tracking expenses.

If you want to be successful in steps one and two, then you will definitely need step three.

Budgeting and tracking expenses are the microscopes of personal finance. As we narrow down from “spending less than you make” and “diligent, purposeful saving”, forming a budget and tracking your purchases is next. It is the tedious task that is crucial to your success.

This step helps us in many ways. It helps us understand where our money is going and make better decisions going forward. It helps us be more decisive about our purchases rather than allowing for impulsive spending. It also helps put our small, daily decisions within the scope of our broad financial goals.

Let’s face it. This step isn’t fun. It’s humbling to see where your money is already going and difficult to make tough decisions about budgeting going forward. It’s also incredibly tedious and draining should you choose to do it yourself. If you’re someone who doesn’t enjoy spreadsheets or ledgers, there are many apps and websites that will link and track your spending for you. A budgeting website or app will usually filter your purchases for you, allow you to create a budget, and typically demands little time and effort. These apps are helpful and they make this important step much more palatable.

4. Invest wisely and hold.

If you consume financial media, you’re familiar with the daily shifts in business data, cycles, opinions, and market movements. This information is usually provided by institutional insiders and industry experts. They inspire us to move and react to market forces in an attempt to beat the market. Further, they imply that investing requires our constant attention and action if we don’t want to be left behind.

While financial media can be engaging, it’s important to know that it is primarily meant to be entertaining. Think of it more like 24-hour news or the weather channel. While it may provide some useful info, this programming aims to hold your attention, not make you rich.

Wealthy people aren’t concerned with cyclical market movements, short-term setbacks, or even recessions. They buy good investments that make sense with their long-term goals and hold on to them. The lore of wealth is littered with success stories built on buy-and-hold strategies. Most notable among them is Warren Buffett, who is famous for investing in good companies and holding them for the long term.

Making investment decisions based on short-term markets can be foolish. It’s like ripping up your lawn and planting a different seed in reaction to a week-long drought. Buy good investments, hold them for the long term, and ignore the noise.

5. Set financial goals.

When it comes to saving and investing, it’s helpful to know what you’re doing it for. This step is like our second step, “diligent and purposeful saving.” It gives us direction and meaning to our important decisions.

It might seem obvious, but putting purpose behind saving and investing greatly enhances your chances of success. The truth is, putting money away every month with no goal in mind can get tedious and boring, especially as other uses for your money gain your attention. For example, if you want to make a big purchase, it can be hard to weigh that against saving the money for no specific goal. On the other hand, saving and investing for a specific goal can paint a clearer picture. For instance, comparing the purchase of a camper today vs a nice retirement home in the future can help you make an informed decision. Weighing a camper purchase against “some amount of money in the future” isn’t a fair fight.

Side note: when forming long-term goals, don’t worry if they seem out of reach. Forming big, wild long-term goals will cause one of two things to happen (and they’re both good). Creating big dreams can inspire you to work harder/save more for your dream (and you might get there). On the other hand, should you fall short of your big goal, you’ll probably be well on your way towards a more reasonable financial outcome anyway.

Finally, forming and pursuing financial goals can prevent us from underspending and missing out of quality of life today. Believe it or not, many folks end up over-saving for an undefined future, only to end up wildly prepared for a future mired in missed opportunities. Forming clear goals for their future wealth, even if it passes to heirs, puts purpose behind their abundant saving. It can also help free up spending for experiences while they are young enough to enjoy them.

6. Give to charity.

That’s right. In your pursuit of financial success, give your money away.

There is no easier way of realizing the value of money than to work hard for it and put it to a worthwhile purpose. So far, I’ve discussed a few ways we can create more purpose for our spending and saving. Saving diligently and setting financial goals are two ways to do so. Both actions identify a very real purpose and outcome for our savings. In doing so, both habits inspire us to maintain healthy habits over time.

But, while these habits inspire sustained success, they fall short when it comes to understanding the true value of money. Money is a wonderful tool with almost magical properties. It can be exchanged for anything, it can grow exponentially, and it allows for the fluid and universal exchange of commerce for everyone in the world. More importantly, it has the ability to beget both corruption and prosperity. As P. T. Barnum wisely stated, “Money is a terrible master but a wonderful servant.”

Giving to a worthwhile charity is the ultimate act regarding the true value and purpose of money. Along our journey to wealth, giving to others reminds us of the virtuous power of money. It also reminds us that money is a tool to be used wisely. Finally, and most importantly, it connects us to others, expanding our sense of purpose in the world. Simply, giving to others keeps us grounded and appreciative of what we have.

7. Want what you already have (avoid comparison).

In his book, “From Strength to Strength,” Arthur C. Brooks said, “Your satisfaction is what you have, divided by what you want.” Read that again.

This concept highlighted by Brooks is an important and universal truth. Satisfaction (or loosely, happiness) is the side effect of filling the cup of expectation. We see the results of this all around us. Miserable folks with everything they could ever want and happy, carefree people with meager means. The difference in these types of people, regardless if they are wealthy or not, resides in their expectations. Happier people, no matter their financial means, are more appreciative of what they have. They value the things and experiences they have, few or many. Simply, smaller cup = fuller life.

Many decades before Brooks, Teddy Roosevelt said, “Comparison is the thief of joy.” Separated by nearly 100 years, these quotes could not have more in common. It’s easy to let our environment craft our expectations. We see other people and what they own, the experiences they are having, and the lives they lead. Even more poisonous, we see fabricated lifestyles on TV, movies, and social media. Our perception of our environment is the basis for our own expectations. It’s human nature.

Avoiding comparison and valuing what we have is difficult. It takes mindful practice and constant reminders of what matters most. Fortunately, the steps I’ve outlined above can help. Setting goals, saving with a purpose, cutting expenses, and finally giving to charity can help temper the allure of want and comparison. Admittedly, this step gets easier with age. Not easy, just easier. Just like all the other steps in this list, this habit takes patience and effort.