Do you want to learn how to become rich and stay rich? Here’s a list of some of the biggest financial mistakes people make, leaving them poorer, less prepared for retirement or for unforeseen circumstances. If you want to be wealthy, and ready for any curve balls life throws at you, follow these principles.
1. Have a financial plan
I see a lot of people living paycheck to paycheck. They are not clear about their financial goals because they have a job and have some cash inflow on a regular basis. But what do you think will happen when they retire or worse, get fired? What if they have to undergo a medical procedure that will keep them out of the workforce? This is exactly why you need to have a financial plan and stick to it. Learn how to write your investment policy statement here.
2. Save for retirement
Many people are unprepared for retirement. This is the next biggest financial mistake. Because they haven’t saved enough, they have to continue to work till they are 80. Your job is not forever. Social security only goes so far. Start saving early for retirement. Between 30 and 40 years of age, plan to double your retirement assets. Here’s a free retirement calculator for you. Project how much you are going to need in retirement and start investing today. If you invest consistently, no one can stop you from becoming rich.
3. Don’t live on debt
There is an increasing tendency among people to buy things on debt. If you use a credit card, make sure you pay the balance off in full on or before the due date. Credit cards can charge a high interest rate and you will be paying a lot more for your purchases than the original price of the purchase.
I would, personally, not recommend buying a depreciating asset on debt, unless of course, the debt is interest-free. Think of this scenario – you buy a car on a debt of $35,000. Now, a car is a depreciating asset. Its value in 3 months will be lower than $35,000. Say tomorrow, you are unable to pay off this debt; you will have to sell the car at its market value and pay the difference, out of pocket, between the loan amount and the market value.
I would say that if you have a lot of money and are able to invest it at an interest rate higher than the interest rate on your loan, then by all means, buy the asset on debt. But if you are someone living paycheck to paycheck, don’t fall into the debt trap.
4. Be socially indifferent
Are you one of those people that succumb to peer pressure? Have you found yourself taking an expensive vacation to Europe after seeing your friend post her pictures from Italy on Facebook? Or buying the latest iPhone after seeing your friend buy one. Today’s social media environment gives everyone a direct peek into the private lives of your acquaintances living hundreds of miles away. You constantly compare yourself with others. The media also helps companies market their products directly to you. If you keep spending your money on everything you come across on social media, you are going to end up broke. This is where you need to practice being socially indifferent. I am not saying be anti-social. Just don’t try to keep up with everyone in your social circle. You don’t have to get a pool just because the Joneses next-door got one.
5. Buy a house if you can afford it
There is a general trend among Millennials to spend on experiences instead of spending on assets. Eventually, when they start a family, they buy a house. But think about the years of money wasted on rent instead of building equity in a house. There are pros to not buying if you aren’t sure where you are going to live or if you want to work in multiple places before settling down. However, if you are already in a geographical area of your liking, why wait if you can afford to buy. If you are considering buying a home, check out our detailed home-buying checklist here.
6. Don’t buy a home you cannot afford
Many people don’t realize the monthly expenses involved with home ownership. When they buy a house, they only think of the mortgage payment. However, there is a lot more to owning. You have homeowners’ insurance, property taxes, water and sewer bills, electricity, heating, gas, trash removal, landscaping services, etc. There are also unexpected expenses related to fixing and maintaining the property. Just because you are approved for a high mortgage, doesn’t mean that you can afford it. Ultimately, you want to live a less stressful life. Buy a home you can afford.
7. Budget your expenses
Budgeting your expenses allow you to be financially disciplined. Keeping a track of your expenses helps you understand where your money is going each month and cut down unnecessary expenses. Buying a $4 coffee at Starbucks will very soon amount to $120 each month. Keeping a budget will help you prioritize your expenses and help you become rich.
8. Don’t become a victim of discounts
Amazon Day or holiday sales at the mall lure shoppers in to buy things they don’t need at a discount. Direct marketing through Facebook and Google helps companies show you products you are likely to buy. Limit your purchases to things you need. Always ask yourself this question – would I buy this item if it weren’t on sale? If the answer is in the affirmative, go ahead and make the purchase.
9. Understand the power of compounding
This is one mistake I made early on in my career. I elected not to invest in my employer’s 401(k) plan. Had I started early, I would have a lot more in retirement savings than I have today. However, it’s never too late. People push off starting to invest because they don’t know where to start. Start early. If you haven’t started yet, start today. Read about how to start investing here. In the least, contribute to your 401(k) through your employer. Your money will grow tax free.
10. Diversify your investments
Investing in the hottest stock or asset class can make you broke. People rarely realize this until it’s too late. By the time you hear of the next hot investment or trend, it’s already in a financial bubble or, at the least, ridiculously overpriced. It’s prudent to diversify. Learn about the benefits of diversification here and become rich. Invest in indexed funds or ETFs with low expense ratio. Automate your investment so you don’t have to worry about it. Research has shown that asset allocation, and not stock selection, drives investment results.
11. Buy sufficient medical insurance
Medical bills can kill your financial dreams. Especially in America, where healthcare costs rise each year, not having medical insurance will weigh on your finances. It’s all peachy keen when everyone is healthy and happy. However, one medical incident has the potential to drain your finances. An average daily cost for hospital stay is about $4,000. Make sure to buy sufficient medical insurance for your family.
12. Invest in your health
This is one of the most ignored aspects for most people. People don’t equate physical wellbeing with financial wellbeing. Health is perhaps one of the most important investments you will every make. While you work hard for your money, don’t forget that you need a healthy body to be able to enjoy the money you make. If travel is one of your retirement goals and you plan to retire by 60, you need to make sure that your body is healthy to be able to travel and enjoy retired life. Eat healthy, exercise regularly and make healthy choices. You need to have a rich body to enjoy your riches.
13. Educate yourself in investments and stop relying on others’ advice
A lot of people rely on friends or family to give them investment advice. But have you ever questioned your “advisor” whether they have enough information or whether they have acquired enough knowledge or training to make better decisions. Don’t fall prey to groupthink. Read more – books, articles, journals, anything you can get your hands on; listen to podcasts, attend seminars. Educate yourself on investing. You, and you alone are in charge of your wealth. No one can help you become rich if you don’t educate yourself.
14. Build an emergency fund
Many people save and invest what remains after spending. The wise thing to do is to spend what remains after saving. Work hard to build an emergency fund. It will save you the embarrassment of asking friends or family for a loan or applying for a loan from the bank at a high interest rate.
15. Don’t cosign a loan
This can be a very sensitive topic in a family. Say, your relative/friend approaches you and asks you to cosign a loan for a new business they want to start. You, being the good guy/gal, want to help them and happily oblige. Now when it comes to repaying the bank, even if one payment is late, guess whose credit score will be affected? That’s right – YOURS. Monthly reminder calls to this friend will soon start being perceived as a nuisance, affecting your relationship. Think about a worse scenario – the business goes bust and your friend has no money for the repayment. Now you don’t want to hurt your credit history, so you spread yourself thin, making these payments begrudgingly. This is in addition to other obligations you already have. Your relationship with this person goes south. There are no benefits to cosigning. If want to help someone with money, it’s easier to just loan them the money, but loan it with zero expectation of ever receiving it back. And only loan it if you love them enough to forgive them if they don’t pay you back.
16. Don’t raise materialistic kids
Children bring a lot of joy. So I am not going into the debate of whether to have children. Raising kids costs a lot of money. In addition, there is so much material garbage being marketed at kids. Many parents are unable to spend time with their children. They compensate for this by buying them material things. These children might grow up to become unappreciative adults. It’s important to teach children about the value of things instead of price. This helps them become financially responsible individuals and on a path to becoming rich.
17. Invest in yourself
Believe it or not, there is some amount of age-based discrimination in the workplace. Don’t fall prey to it. Invest in yourself. Always learn new skills. Keep yourself updated with the latest trends in your industry and keep yourself valuable to your employer. Get that education that is highly valued and you will become rich sooner than you expect. You can cut down expenses only so much. That means if you want to become more wealthy, you will need to earn more. There is no cap on your earnings. Always seek out better opportunities and make yourself marketable.
18. Enjoy your money
People often keep chasing after money to become rich their entire lives. They set a target to have a certain number of zeros behind that 1 in their accounts. They so want to retire by the time they are 50 or 60 that they postpone living until then. I remember a person who waited to travel until retirement. A few months after she retired, her partner passed away. She always regretted not traveling together earlier. Don’t postpone living to chase after your financial goals. Enjoy life once in a while. Take your family out to that fancy place for the holidays. Take modest vacations. An occasional enjoyment is not going to set you back financially by a lot.