Want to be a millionaire? Saving up a million dollars is a goal well within reach for many Americans, according to Thomas J. Stanley and William D. Danko, wealth researchers and authors of "The Millionaire Next Door."
Surprisingly, those with a high income or sizable inheritance aren't necessarily more likely to build wealth than those with mediocre incomes and no wealthy ancestors. If that's true, then what exactly is the key to financial success?
The answer is, quite simply, behavior. First-generation self-made millionaires have created regular, consistent habits that build wealth.
Is it possible to learn these wealth and savings habits and then emulate them?
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Thanks to Stanley and Danko's research on the wealthy, coupled with the insights of Charles Duhigg, the author of "The Power of Habit: Why We Do What We Do in Life and Business," it just may be.
Habits of the rich
Overwhelmingly, millionaires save a lot -- an average of 20% of their income -- and spend as little as they can. The trick, of course, is that spending less leaves more to be saved. Millionaires also tend to have these habits:
Creating (and sticking to) a budget. They know how much their family spends per year for food, clothing and housing, among other major expenses. They spend substantially more hours per month reviewing their budget than do non-millionaires.
Having financial goals. Wealthy people spend twice as many hours planning their future wealth strategy -- how much of their future income they will save and invest and for what purpose -- as do the non-wealthy.
Maintaining consistent lifestyles. They stay in the same home (no trading up) and remain married to their original spouse.
Minimizing major expenses. They often live in a modest home, drive a less-fashionable car and buy clothing off the rack at discount retailers like Kohl's and JC Penney.Create a new habit
Now that we know how the self-made millionaires have done it, how can we emulate their behaviors?
Building a new habit is not always easy, as anyone who has tried to start a new exercise routine can attest. "If we can understand how habits work, however, they become much easier to control," says Duhigg in his book.
How can we create a new habit? According to Duhigg, every successful habit includes four integral parts:
A cue or trigger. A trigger can be a particular time when the habit will occur, a place, or even an emotion. What cue can you use to trigger a monthly review of your budget or larger financial plan? A cellphone alert? Payday? Maybe you can piggyback it on your already-planned bi-weekly visit to your favorite coffee shop.
A reward. Potential rewards include tangible items like a coffee shop biscotti or other small treat or a psychological boost like the feeling of accomplishment from seeing your saving account grow and your debt level shrink. The key to success is to pick a reward you'll look forward to.
The routine. This is where it all gets put together. The cue and reward are performed at a regular interval like once a month in the following cycle: Cue (phone alert) -- > Routine (budget review) -- > Reward (biscotti).
The craving. After several cycles, a craving for the reward may develop and the habit can become automatic. When your cue is triggered, you can associate your budget review with a reward.
You might even start to look forward to the routine. If this doesn't happen, Duhigg suggests you didn't pick a compelling enough reward. Select a new one and try again.
Thanks to the insights of Stanley, Danko and Duhigg, you now know the steps to create and control keystone habits that can lead to financial success. All you need now is to put them into action.
5 Habits Of Highly Effective Savers By Megg Mueller Published on Mon Mar 25, 2013
Saving money for a specific near-term goal, say a dream vacation or a home, can be easy. You know what you want, you know about how much you need, and you know when you need it.
Becoming a lifelong saver, however, requires a bit more discipline and a commitment to changing spending habits.
According to the Consumer Federation of America, just half of Americans think they have good saving habits and are prepared for the future. Saving for tomorrow is a necessary evil some seem to have difficulty embracing, so instead of making a short-term goal, ask yourself how do really effective everyday savers do it? Below are five habits super savers adopt:
1. Know how much money you have
It sounds simple, but are you keeping track of each penny? Many rely upon online banking to do the work, but consider the importance of balancing your checkbook: You may catch checking account errors the bank might not, you can note fees erroneously charged to you, and you can have an immediate balance that accounts for all expenditures and deposits in real time.
2. Choose the right savings vehicle
The highest interest rate is appealing, but smart savers have their money in account types that makes the most sense for their lives. Traditional savings accounts, money market accounts and CDs all offer a return on your investment, but at different rates, and with different penalties for accessing your money.
Make sure you allocate your savings appropriately so that you gain the highest return on funds you are least likely to need in the short-run while preserving access to other cash to handle unexpected bills.
3. Don't spend emotionally
Good decisions rarely happen when you're upset, but some long-lasting bad ones can come if you spend while emotional. The phrase "retail therapy" was coined to indicate a spending spree intended to result in a better mood. However, that better mood might soon come crashing down as the bills arrive. Find other ways to lift your spirits, like walking the dog or spending time with friends.
4. Keep your eye on the prize
One of the biggest hurdles for new life-long savers is the commitment. An article in Psychology Today reveals it can take as long as 66 days for a new behavior, like bringing your own lunch instead of buying a meal, to become a habit.
So how do you stick with it? Written notes of inspiration displayed where you do your spending (at night on the computer, for example) can help, as can enlisting friends and family to help keep you on track. Think of saving like a new eating discipline and employ the same motivational efforts.
5. Watch for opportunities everyday
No need to be cheap, but ways to eat healthy on a budget or cut back on your phone bill can present themselves at any time, if you're looking for them. Keep an eye out for discounts, promotions and lower-cost alternatives, such as generic medicines.
Is anyone perfect? No, even Super Savers slip once in a while when faced with a "got to have it now" purchase. But with time, effort and support, your new savings habit can become second nature.
5 Habits That Drain Checking Accounts By Richard Barrington Published on Thu Dec 13, 2012
Do you ever feel that your money seems to just slip away, as if there were a leak somewhere in your finances? If so, you may have to look no further than your checking account. Common bad habits can drain money from your checking funds in subtle ways -- unless you identify and address them.
When it comes to money, a checking account is where the action is. Most Americans use direct deposit, so every week millions of checks automatically flow into checking accounts.
Then, an even greater number of transactions disburse that money via checks, electronic payments and fees. When it comes to how money flows out of your checking account, are you sure it is all going where you intend?
Here are five bad habits that can cause money to leak from your checking account:
Sloppy record keeping. In some ways, checking accounts can seem to operate almost on autopilot these days. Money comes in automatically by direct deposit, and is dispersed automatically according to your electronic bill paying instructions. However, that doesn't meant that you no longer should balance your account.
You need to keep an eye on whether the right amounts are going to the right places, whether any unauthorized or suspicious transactions have occurred, whether there is enough money to cover upcoming payments and whether there are new or increased fees appearing.
Using overdraft protection as a backstop. An August 2012 survey by MoneyRates.com found that the median overdraft fee is nearly $30. Fees like this can quickly exceed the amount of the actual overdraft.
Relying on overdraft protection is a very expensive habit. If you opt out of overdraft protection, you may find that you can not only save those high fees, but it could also force you to develop better record-keeping habits.
Paying a monthly fee. Free checking isn't dead, it's just more scarce than it used to be. If you are paying a monthly maintenance fee on your checking account, it's worth shopping for a new one to see if you can do better.
Using out-of-network ATMs. If you routinely use ATMs that are outside of your own bank's network, then you may be draining your checking account a dollar or two at a time.
Plan your trips to the ATM more carefully so that you can use your own bank's machines. If your bank does not have convenient ATM locations, then consider changing banks.
For many people, ATMs have become a far more important point of contact with the bank than a local branch, so ATM locations should be a prominent consideration when choosing a bank.
Saving only "leftovers." Too many people accumulate savings based purely on what's left over after they are done spending. Try this approach instead: Have your pay deposited into a savings account rather than checking, and transfer only a set monthly allowance from savings to checking to cover your spending needs.
This way, saving comes first. You may find this forces you to stick to a better-defined monthly budget.
Saving money is often about taking a number of small steps rather than any one big decision. Sometimes, it can be as simple as plugging a few leaks in your checking account.