10 Healthy Money Habits to Build Wealth and Financial Security
Here are 10 tips to help you build healthy money habits. At the end of the blog, I share 5 actions you can take right now to set yourself up for financial success.
In my previous blog, I mentioned my newly launched YouTube channel. I have created a video of this blog for the readers who prefer to view this blog in, perhaps, a more “exciting” form. Access the video here.
Here goes:
1. Don’t use debt to fund your lifestyle
If you’re using debt to fund your lifestyle, you’re living outside your means. This can mean relying on your credit card to get through the month or paying for your holiday or wedding on your credit card or with a personal loan.
Credit card debt increases your cost of living significantly, up to 40% in some cases, depending on your credit card rate.
Trying to always catch up with debt repayments also prevents you from saving and investing. My suggestion is to close your credit cards if you’re too tempted to use them. Credit card companies make it incredibly attractive to use their cards, by offering rewards, loyalty, cashback, and travel points - but there is a reason they are trying to encourage you to spend on your credit card - they make so much money by charging ridiculous interest rates.
Personally, I used to have credit cards for loyalty points - it’s great if you can master this, but the admin and potential risk of being charged the ridiculous interest rate wasn’t worth it for me.
Always remember the number 1 rule of credit cards: It’s not your money, it comes at a significant cost.
2. Build up a cash buffer for emergencies (also called an emergency fund)
This is to cover, for example, unexpected (uninsured) medical bills, home and car repairs or maintenance, theft, or living costs when you lose your job. Let’s be honest - these things happen when you least expect it. The goal is that you shouldn’t go into debt in case of emergency because it could take you years to get out of and the incident/emergency could end up costing you more than double compared to if you had the cash saved up.
Here is a guideline on how much you need in your emergency fund:
Young, single professionals should aim to save up to 3 months of living costs whereas a sole breadwinner with more significant financial and family responsibility should save up to 6 months of living costs. Freelancers or business owners with fluctuating incomes should hold 6 - 12 months' living costs in case income dries up for a few months.
You should not hold too much cash either because you’ll miss out on potential investment growth. If you’re a conservative cash-keeper, read my blog “The Secrets of Building Wealth” to understand why holding too much cash is not smart in the long term.
Another approach some people follow is to put all their savings into investments. Depending on your risk appetite, this is a potential approach but it’s risky. The stock market’s volatility could mean if the market is 20% down when you need the money, you will be realizing losses in your investment account (a fancy way of saying you will be forced to sell the investment for less money than what you paid for them). This could be done if you have a big risk appetite and a “fall-back” like a partner or family that can help you out in an emergency - but be aware of the risks.
3. Hold your savings in a high-interest account
Most current accounts at a bank pay no interest. Currently, we’re in a high-interest rate environment, and depending on where you live, you can get decent interest on your cash balances. In the US and UK, high-yield accounts are paying more than 5% interest and in South Africa you could get more than 10% with some banks.
Don’t make the mistake of comparing different countries’ interest rates 1:1 because there is currency depreciation to consider, read my blog “Be Currency Smart” to understand this better. In Switzerland where I live, I can’t get more than 2% on current account balances so I keep as little cash as possible in my current account.
So, if you have an emergency fund saved up or you’ve saved for your wedding or a house deposit, move these funds into a high-interest account until you need them.
4. Create a monthly budget
52% of My Instagram followers said they only have a vague idea of their monthly inflows and outflows.
Setting up a budget to track my monthly spending and commit to a monthly investment goal had a significant impact on building up my investment portfolio and investing consistently.
If you haven’t set up a budget yet, here is a guideline you can use. Split your monthly income in 50 / 30 / 20.
Spend 50% on needs, 30% on wants and 20% on goals. Your investments towards your pension or retirement should be part of the 20%. Personally, I aim to invest 20% of my income on top of my pension contributions.
Once you’ve established your monthly investment amount, prioritize that as soon as you get paid! You should first invest and then spend what’s left. Don’t first spend and then invest what’s left because it’s very likely there will not be much left.
5. Be tax-smart about your investments
There are different options in different countries to invest in tax-efficient ways. Governments put schemes in place to encourage the population to invest for retirement. Depending on the country, it could either mean that your investment contributions are tax-deductible, or that your investments will not be subject to capital gains or dividends tax.
You should take advantage of these tax-efficient investment options to save tax and maximize your investments’ growth. Examples of these “schemes” include:
Roth IRA (USA)
Lifetime or Stocks and Shares ISA (UK)
Pillar 3a pension (CH)
Tax-Free Savings Account (RSA)
These are intended to be long-term investments and some accounts have early withdrawal penalties or restrictions on early withdrawal, so make sure you’re aware of these conditions before investing.
6. Low-cost investments, do it today!
Investment and advisor fees can have a very big impact on your investment’s performance over your lifetime. Vanguard and iShares have some of the lowest-cost ETFs in the world, and you can get access to them through most broker platforms. The fees charged by these large providers on their biggest ETFs can be as low as 0,03%. If your fund is charging a 1% fee, that’s more than 30 times the price!
7. Max out your employer’s retirement or pension contributions
Typically there are tax advantages associated with these plans, but the real advantage is that most employer plans will match your contributions. Therefore by maximizing your contributions, even if this reduces your net pay, you get extra contributions from your employer which could have a big impact on your retirement payout.
For example, at my first job in London at one of the Big 4 Accounting firms, my employer matched 1,5x my pension contributions up to a maximum of 12%.
On a £50’000 gross annual salary, by maximizing my contribution I get an extra £6’000 from my employer. Yes it’s contributed to my pension account, but that’s an extra 12% added to my net worth every year that will grow and compound over time.
8. How to prioritise cashflows
If you have $1’000 (or £1’000 or R20’000) of cash available, you need to be smart about how you allocate that. Think where you can get the “best return” on it. A benchmark you could use is the S&P500 which returned 10% in USD terms (or 16% in ZAR terms) as an annualized average over a 20-year period1.
If you have any high-cost debt, higher than 10% (or 16% in South Africa) your priority should be paying that off first, before you start investing. Because it’s not worthwhile trying to gain 10% on a $1’000 investment when your credit card debt is costing you 20%.
So the priority on cashflow allocation should be:
Pay of high-interest debt
Build sufficient emergency fund savings
Start investing
9. Lifestyle assets versus investment assets
Lifestyle assets are cars, jewelry, holiday homes, or other luxury items (watches, boats etc). I would include your primary residence here - but that’s an opinion I need more time explaining. Lifestyle assets are assets that hold their value but don’t have long-term compounding growth potential or assets that don’t pay consistent income (in the form of rent, interest or dividends).
Investment assets include your stock portfolio, bonds you are invested in, investment properties or other income-generating assets.
If the value of your lifestyle assets exceeds your investment assets you need to rethink and rebalance your assets. Refer to my blogs “Secrets to build wealth” and “The time value of money” to learn more.
10. Always negotiate your salary
Salary increases build on each other. It’s not unusual for job offers to give you a 20% raise on your current package.
Employer pension contributions and bonuses are also based on your salary.
Your saving and investment rate is based on your salary, higher salary = more money to investment
Therefore it’s so important to get your base salary as high as possible. Always negotiate this, even if it’s only 5% - 10% higher than the offer. That’s an extra 5% you’ll add to your pension and investments that will grow over time!
In conclusion, here are 5 actions you can take today to help you build wealth:
If you have any high-interest debt, look into bundling your debt together and refinancing it with a different provider at a lower interest rate. Focus on paying this off as a priority to free up cash flow for investing. You could also follow this strategy with mortgages and shop around to see if other banks are willing to offer you a better rate on your mortgage.
Max out employer pension/retirement contributions. Log into your HR system or search in your emails to make sure you are maximizing your pension/retirement contributions.
Set an investment goal and invest as soon as you get paid.
Check your investment and retirement investment accounts to make sure you’re not paying unnecessarily high fees.
Move savings pots or emergency funds to high-yield or high-interest account.
1
S&P500 return sources:
https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-return/
https://tradethatswing.com/average-historical-stock-market-returns-for-sp-500-5-year-up-to-150-year-averages/#:~:text=Stock%20Market%20Average%20Yearly%20Return%20for%20the%20Last%2050%20Years,the%20end%20of%20February%202024.