When I was 30 years old, I had just lost my job, was nearly $200,000 in debt, and knew nothing about saving money and building wealth.
Over the next several years, I built an 8-figure e-commerce business, became a millionaire, and developed a list of habits that helped me turn around my financial life.
In this article, I will discuss seven habits that keep people poor. Then I’ll show you how to overcome these bad habits so you can take control of your financial life and start building wealth.
Watch the video version of this article or scroll to continue reading.
One of the best ways to build wealth is to acquire valuable skills that people are willing to pay for. In doing so, you’re increasing your ability to earn money.
For example, people will pay for your marketing expertise if you’re good at marketing. Likewise, if you learn to code, you can create software people will purchase.
Unfortunately, many people go through life without investing in themselves. They may get through high school or earn an undergraduate degree but stop learning when they graduate. When this happens, their earning potential starts to decline.
To give you a personal example, I graduated as a mechanical engineer at 24, and my first job paid $46,000 per year. I knew that if I wanted to build wealth, I needed to make more than $46,000. I also knew that my earning potential as an engineer was fairly limited. Therefore, I had to acquire additional skills to increase my earning potential.
So shortly after graduating, I started investing in myself.
I spent my nights and weekends teaching myself how to become an entrepreneur. I learned how to build websites, source products from overseas, and market and sell.
The best thing about these types of skills is that once you acquire them, nobody can take them away from you, and as a result, they increase your earning potential for the rest of your life.
In my case, I used my entrepreneurial skills to build an 8-figure e-commerce brand and 10x my salary.
Now, you don’t have to become an entrepreneur; that’s just the path I chose. However, there is a long list of skills that you can acquire to become more valuable to an employer, such as learning how to negotiate, becoming a more persuasive writer, or becoming an expert in a particular software program.
So, at the end of the day, the positive habit here is simple: Never stop investing in yourself.
Once you start making money, you’ll want to get a clear picture of your finances. Let me share a story that will help illustrate this point.
Health and fitness have always been important to me. Since I started going to the gym at 16, I have tried to eat healthy.
A few years ago, I decided to hire a cycling coach. When he asked me about my diet, I assured him I was a healthy eater. But he still challenged me to track what I was eating.
What I discovered after tracking my diet was surprising. Even though I was eating healthy foods, my macros were unbalanced. I was eating far too many carbohydrates and not nearly enough protein.
Ultimately this experience taught me an important lesson. That is, believing you’re good at something and actually being good at it are not the same. Often, the best way to determine if you’re actually good at something is to track what you’re doing. That’s because the numbers don’t lie.
Thankfully, you can apply this same lesson to your finances. Tracking your finances is an excellent first step because it provides a clear picture of your financial situation.
So whether you believe you’re good with your money or not, I challenge you to track your finances to see if you’re actually good with your money. In doing so, you might uncover some bad habits, like paying for services you no longer use or overpaying for things in general.
To help you with this step, I’ve created a free financial planner. This planner helps you record your income and expenses and then gives you a financial score, indicating how well you’re actually doing with your money. The planner can also help you create an emergency fund, manage your debt, and save for retirement. So be sure to check it out.
Many people have developed the belief that debt is part of life, so they lose complete control of their spending.
Unfortunately, many people use credit cards to pay for things they don’t need, like fancy clothes, gifts, and expensive meals.
The big problem with this is that credit cards have extremely high-interest rates. Credit card companies typically charge more than 20% interest, and the worst cards have interest rates over 30%. Therefore, if you’re not careful, you could end up paying hundreds or even thousands of dollars in interest before you pay off your debts.
Paying credit card interest is a complete waste of money. It’s pure profit for credit card companies and money you could have used for saving and investing.
You can overcome this bad habit by learning how to control your spending.
To control my spending, I created a rule for myself. If I can’t afford to pay for something in cash, I don’t buy it with a credit card. This rule ensures I can pay off my credit card balance at the end of every month and avoid high-interest rates.
I know there will be exceptions to this rule. For example, if you have an emergency medical bill or can’t afford food for the month, a credit card can help you bridge the gap.
But generally, you’ll only want to use a credit card when you can pay for what you’re buying in cash.
After getting their paycheck, many people pay their bills and spend most of what they have left on shopping and entertainment. Then, at the end of the month, they might save or invest what little money they have left, if they have any left at all.
If you live life this way, you are paying yourself last. This habit is risky because there’s a good chance you’ll go months or even years without saving or investing any money.
A better habit to adopt is paying yourself first, an idea from the book The Richest Man In Babylon. In the book, author George Clason suggests saving or investing a percentage of every paycheck before spending money on bills, shopping, or entertainment.
If you live paycheck to paycheck, you might think you can’t afford to do this. But more often than not, people surprise themselves. For example, if you set aside 10% or 20% of your paycheck, there’s a good chance you’ll figure out how to get by with 10% or 20% less.
Of course, you might have to give up some luxuries, but that’s a habit worth forming. Because paying other people first makes them rich, but paying yourself first will make you rich.
An emergency fund is a savings account with enough money to cover 3-9 months of living expenses. You only use this money to pay the bills if you lose your job or for unexpected emergencies like medical expenses, car repairs, or home repairs.
Emergency funds are important because they prevent you from going into debt when things don’t go as planned. For example, if you break your leg, you can cover those expenses with your emergency fund instead of maxing out your credit card.
You fund your emergency account by paying yourself first. Ideally, you’ll use at least 20% of each paycheck to fund your emergency account until you have enough money to cover 3-9 months of living expenses.
Einstein once said that compound interest is the 8th wonder of the world. But the key to reaping the rewards of compound interest is investing early.
Here’s an example. If you opened an investment account at 20 with $1,000 and then invested $83/month until you were 70, you’d have $465,000, assuming a 7.2% growth rate.
However, if you waited until 30 to open the account, you’d only have $225,000 by the time you reached 70, which is less than half.
Finally, if you waited until 40 to start investing, you’d reach 70 with only $105,000.
The main point here is simple. The earlier you can get your money working for you, the better.
Therefore, once you fund your emergency account with 3-9 months of living expenses, you’ll want to use the 20% you pay yourself monthly to invest.
I understand that getting started with investing can be daunting, but do yourself a favor and figure out how to invest sooner rather than later. Because the longer you wait, the more you lose out on potential gains.
I’ve provided some general investing guidelines in my free financial planner to get you started. But generally, you’ll want to diversify your investments, manage your risk, and avoid leaving excess cash in a savings account.
Poor people get into the habit of buying liabilities, which cost them money and take away from their net worth. In general, liabilities are things that lose value over time, like a car or a boat.
In contrast, rich people get into the habit of buying assets, which are things that pay them and add to their net worth. Examples of assets include investments like index funds, businesses, and rental properties.
If you spend your money on things that lose value over time, you’re severely impacting your ability to build wealth. So if you have this bad habit, you’ll want to develop a better habit of buying assets.
Assets are powerful because once the payments from your assets cover your living expenses, you’re financially free. For example, if it costs you $5,000 per month to support your family, but you have three rental properties that pay you $6,000 per month, then you no longer have to work.
Here’s a summary of this article.
To build wealth:
Reduce financial stress, reach financial freedom, and achieve financial goals like buying a home, paying off debt, and investing for retirement.
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