Do you know what does it take to be rich? Do you have a habit of saving money or do you spend everything you earn?
Financial planning, setting financial goals, finding the right insurance plans, investing…Do you know how to go about all that?
Actually, why didn’t the schools teach us all these?
Anyway. If you’ve read up on millionaires and their lifestyles, you will notice that many of them – barring being born with a Golden spoon in their mouths! – actually have cultivated great financial habits since they were younger.
Many of them started taking an interest in financial planning or searching up investment in their 20s or even earlier.
But most of us in our 20s are usually saddled up with student loan debt, aren’t in high-income jobs (yet!) and have no idea what to do with whatever money we’ve saved.
Lots of 20 somethings are also all like “I’ve just started tasting financial freedom, so, YOLO, I’ll spend my money on whatever I want”.
Which is great, I’m all about spending money on experiences. But the 20s is also a great time to lay the groundwork for good financial habits.
Stumped and not sure how to begin? Here are 5 tips to get you started.
Get in the habit of saving
When Thomas Corley studied millionaires, he found one of many things they had in common: they all saved lots of money, and they started pretty early in their lives.
In Thomas Stanley’s and William Danko’s Millionaire Next Door, some of the millionaires interviewed were extremely avid savers. This, combined with a very frugal lifestyle over a number of years meant that they accumulated alot of wealth.
In some people’s minds, saving isn’t “sexy”, at least not as sexy as investing is or earning lots of income is. But the reality is, you could lose your high-income job tomorrow, and all investments carry risks – especially the ones which give high returns over a short period of time.
Savings is probably the lowest risk method of accumulating wealth. You don’t have to deal with much uncertainty.
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Open a separate savings account
Many of us just have one bank account we spend and save from.
But, financial experts recommend keeping savings and spending accounts separate. Not only would you have a better idea of how much you’ve saved, you tend to save up faster.
Each month, just as your pay comes in, set aside a percentage of it and have that deposited automatically into your savings account. The rest will go into your spending account.
Doing this will make you more aware of your spending habits. Now you only have a fixed sum of money in the spending account to spend. Go over that limit and you would be dipping into your savings. It will make you think twice with your purchases.
I personally prefer to lock up my fixed monthly savings in a bank account which has less ATMs around the country. This gives me less of an urge to dip into my savings.
Set up an emergency fund
Experts recommend at least 8 to 12 months’ worth of living expenses.
So at least when the economy tanks, the shit hits the fan, you lose your job and all that gloomy stuff that comes with having absolutely nothing left – you’d still have a year’s worth of money to live off.
You are able to support yourself whilst you look for a job, search for new alternatives and so on.
Set financial milestones
Looking to purchase a house? Saving for retirement? Start thinking about how much you would need for these financial milestones and by what age you want to realise them.
Then start planning the amounts of money you’d need to have accumulated by then. And start building your wealth!
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Start reading up about dividends, stocks, ETFs, gold, blue chips, etc etc and see what type of portfolio (a mix of different types of investments) fits your financial needs and lifestyle.
It is recommended that investment portfolios take on different types – a certain percentage in stocks, a certain percentage in bonds, certain percentage in cash etc. This helps balance things out better.
Also – start early. You don’t need huge amounts of money to start!
Investing also largely depends on your risk appetite and amount of time you have to monitor your portfolio’s performance.
High-risk investments do tend to have higher payouts over time, but they do tend to be subject to greater volatility and may need a larger sum of investment upfront.
If you have no time nor are you feeling adventurous, start low-risk with ETFs or maybe even bonds. These are usually more stable (relatively) and aren’t too affected by great changes in the market.
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Want to start cultivating better financial habits? Check out the other parts in this series: