You’ve probably heard of the saying, ‘earn like the rich and spend like the poor.’ The rich remain rich by spending like the poor while the poor stay poor because they try to emulate lavish lifestyles. Money management is crucial for both low and high income earners. According to author Elizabeth Warren’s 50/20/30 budget rule, you should allocate 50% of your after-tax earnings to needs, 20% to wants, and 30% to savings. There are many reasons people donate time or money and chief among them is to make a difference in the lives of others. Whatever cause you choose to give to, make a commitment for the long-term.
Any amount of money will always be inadequate if you do not possess excellent money management skills. What are the poor money management behaviors that will ruin your chances to build wealth? Below we look at habits that you need to stop now before they destroy your financial future.
Spending more than you earn
Live within your means. Better yet, live below your means. When you live within your means, you spend less than or equal to what you earn. It's not rocket science people. Living below your means is the only way you will be able to build real wealth. Many people are living way beyond their means and are funding a lavish lifestyle at the expense of their financial futures. Are you buying unnecessary things that are way too expensive? Are you renting an apartment that consumes almost 50% of your income? Are you ever in debt because your money is ‘never enough?’ If these and other similar scenarios describe you, then you will continue to struggle with saving for retirement. There are lots of simple ways to cut spending. Try the 50/20/30 budget rule or come up with your own budget that works for you.
Failure to save for retirement and emergencies
If you are still in your early or mid-20’s, you may feel like retirement is a long way coming. Nothing is further from the truth. Years pass by fast, and the 60’s will catch up with you unprepared. Not having an adequate retirement savings means you may have to work longer than expected. Why not start saving earlier and retire sooner to pursue other interests? Most employers are required Having 3-6 months living expenses in an emergency funds should be a top priority as well. Failure to save for unpredictable times means you may have to finance your emergency with expensive credit.
Not having an investment plan
Congratulations! You've managed to consistently save 10-20% every month. The next step is to develop an investment plan. Inflation will consume most if not all of your earnings generated from your savings account but investments give you a greater long-term return on your money. A good basic investment plan will include the following components: dollar cost averaging, low cost index ETFs or index mutual funds, diversification among stocks, bonds, international stocks, short-term investments, and periodic portfolio re-balancing. There are numerous options for investing your savings, so it's always a good idea to discuss a plan that meets your particular needs.
Not having a plan to increase your income
You can learn new skills and competencies that make you more valuable to employers and increase your earning power. Alternatively, you can start a side-hustle based on a hobby or anything you are passionate about. Make sure you do adequate market research, have a solid business plan, and be well prepared financially so that your business has a high chance of success.
Regardless of whether you earn $10 or $100 a day, money management is key to your financial health . Developing good financial habits like saving, budgeting, and investing will help you achieve financial stability and financial freedom.