What secrets about managing money do the rich know that the average person doesn’t? I spent five years trying to answer that question. I asked 233 millionaires 144 questions and discovered the rich have certain very specific money habits we all should adopt immediately. What are they?
Below are some spending strategies that helped the rich get rich:
1. Track Spending – Know where your money is going. Look at your bank statement and credit card statement every month. You’ll uncover certain expenses for things you are not even using, such as club memberships, subscriptions, automatic charges for services you’ve never used. Oftentimes these automated charges occur after you enroll in some “free” promotion, where the free part expires after a promotional period.
2. Periodically Audit Expenses – Many expenses can change over time. Insurance costs often change. They can go up or down over time. Make sure you are paying the lowest insurance rates for homeowners, auto and life insurance. Check your health insurance. You could be paying for dependents who left the nest, are on their own, and have coverage through their employer. Cable and Internet costs can increase without you being aware of it. Calling your cable or Internet provider to secure the lowest fees available should be an annual process. Periodically shop cell phone plans. Increased competition in the cell phone industry is driving down monthly rates. Make sure you are not paying more than you have to.
3. Purchase Good Quality Used Cars – New cars lose value as soon as they come off the lot. Buying good quality used cars allows you to take advantage of this loss in value anomaly prevalent in the auto industry. 44% of the rich in my study purchased good quality used cars. Typically these are cars coming off a lease. They may be two or three years old. At 125,000 miles most cars will require some annual repairs. Expect to incur about $1,500 a year in repair costs when you hold on to cars beyond this 125,000 mileage mark. That is still significantly less than you would spend on a loan or lease for a new car.
4. Use Coupons – Even the wealthy in my study engaged in this money savings habit. 30% of the rich used coupons to buy food. Why pay more than you have to on groceries or other expenses?
5. Shop at Goodwill Stores – Many goodwill stores carry high quality clothing. You may have to spend a few extra bucks on tailoring, but it is well worth the additional cost. Don’t let your ego get in the way.
6. Keep your housing costs below 30% of your monthly net pay. Contrary to what you’ve been led to believe, most of the rich do not live in mcmansions. Sixty-four percent of the rich in my study live in modest homes.
7. Bargain Shop – Far too many make spontaneous purchases, paying much more than they otherwise would. That’s a Poverty Habit. Shopping for bargains and taking advantage of sales events is a Rich Habit.
8. Stick to BYOBs – There are many restaurants that do not sell alcohol, beer or wine and allow you to bring your own spirit of choice into their restaurant. Restaurants markup liquor sales by as much as 100%.
9. Take Advantage of Credit Card Reward Dollars – Many credit cards have attached to them Rewards Programs. Typically, these Rewards Programs generate Reward Dollars that you can use at participating vendors. For example, the American Express Reward Program gives you about .88% back on every dollar you spend using an American Express credit card. One of the participating vendors with American Express is Barnes and Nobles. 50,000 American Express Rewards Dollars translates into $500 in Barnes and Noble gift cards. You can buy 25, $25 Barnes and Noble gift cards and give them out as gifts for birthdays, holidays, etc., and it will cost you nothing.
10. Interest-Free Financing – Sears, Home Depot, Lowes and many other retailers offer up to 24 months of interest free financing if you become a credit card customer. You must ensure that you pay off the interest free purchase within the free interest period and you must make your monthly payments on time. If you don’t you risk being back charged for ALL of the interest you were saving on the purchase.
Establish Savings Goals
The rich make a habit of allocating their savings into different buckets (categories). In order to do this, you need to establish an overall amount of savings you are willing to set aside each month. For example, if you decide to set aside 10% of your monthly income you might allocate it as follows:
• 5% (50% of overall savings) into your Retirement Bucket. This includes 401(k) plans, IRAs and other retirement plans or retirement-specific products (i.e. annuities).
• 2% (20% of overall savings) into your Specific Expense Bucket. This includes a separate checking account, savings account, money market account or education savings account (i.e. 529 Plan) for major future expenses such as education costs for you or a child, wedding costs, costs associated with the birth of a child, home down payment, etc.
• 1.5% (15% of overall savings) into your Unexpected Expense Bucket. This includes a separate checking account, savings account or money market account for expenses such as wedding gifts, medical costs, sudden loss of income (unemployment, medical issues or birth of a child), investment opportunities, etc.
• 1.5% (15% of overall savings) into your Cyclical Expense Bucket. This includes a separate checking account, savings account or money market account for birthday gifts, holiday expenses (Christmas, New Year’s), vacation costs, back to school costs, etc.
Automate the Savings Process
This is where the rubber meets the road – implementation. Automatically direct each of the above savings amounts into each bucket’s separate account via automatic withdrawal from your net pay or from your bank account. Automating your savings forces you to live below your means because you save first and spend what’s left.
Money management is a process. Accumulating wealth is a process. It’s all one big process, this thing we call financial success. But if you don’t have a process or adopt good money habits, like the rich in my study, you will never be able to save. It just won’t happen. When you develop good money habits you feel like you are finally in control of your life. It’s empowering and it will increase your wealth over time. Keep in mind that it took most of the wealthy in my study 32 years to become rich. Accumulating wealth takes time and discipline.