3 Money Habits For Keeping Your Wealth
Our money habits are shaped by our relationship with money as we grow up. Changing these habits takes time and effort, but it is possible.
For most people, money habits stem from what we learned from our parents. This is often our first lesson in handling finances. Just like adopting a family religion, we tend to follow our parents’ financial footsteps.
This explains why the rich get richer and the poor get poorer. If you grow up experiencing your parents’ financial situation, you’re statistically more likely to follow their path. Wealthier families often teach their children about finances early, having conversations that differ vastly from those struggling to make ends meet.
However, the good news is that one person in the family can break the cycle. It’s worth noting that the rich don’t always stay rich. It’s a known fact that the third generation in wealthy families often struggles to maintain that wealth. Born into affluence, they may lack the work ethic and financial responsibility needed to preserve it.
Conversely, those from less wealthy backgrounds can break the cycle through hard work and determination. When you desire something enough and find a way to achieve it, you can change your financial destiny.
So what are 3 habits that can beat the third generation curse and also take you on the first step to becoming wealthy?
Money Habits No.1 – Frugality
Frugality is a crucial money habit for preserving wealth, but it’s often misunderstood as being cheap or stingy.
People misinterpret frugality when someone takes it to the extreme, sacrificing their quality of life or missing out on opportunities just to save a little extra.
In reality, a frugal person prioritizes spending money on what truly adds value to their life, avoiding expenditures that hold little importance.
The key point is that frugal individuals will spend on material possessions if they genuinely enjoy them, but only with money they already have.
They focus on needs over wants, aiming to minimize consumer debt. Their spending is deliberate and decisive, rather than impulsive in nature.
As social creatures, we often feel the need to impress others, which can lead to increased spending as our income rises—bigger houses, fancier cars, and more vacations to elevate our social standing. This mindset is the opposite of frugality.
To maintain wealth, it’s essential to resist the urge to impress others. This ability is a superpower in cultivating strong money habits and securing long-term financial health.
Money Habits No.2 – The Debt Trap
The late Charlie Munger once quipped that there are three ways a smart person can go broke: “liquor, ladies, and leverage.” He included the first two for the sake of alliteration, but the real culprit is leverage.
Don’t get me wrong—debt, when used wisely, can be a smart decision. However, it’s a double-edged sword: it can amplify returns during good times but be devastating during bad times.
A prudent money habit is to buy things you can afford to purchase outright in cash. But life isn’t that simple, and most of us will need to take on some form of debt. The most common debt is a mortgage, which makes sense since few people can buy a home outright.
When a bank offers a loan, most people borrow the maximum amount they can. This becomes problematic with rising interest rates. Many new homeowners bought their homes when interest rates were low, borrowing to their limit.
When rates suddenly rose, their monthly repayments surged dramatically. For instance, an interest rate increase from 2% to 4% is not just a 2% hike; it is a 100% increase which doubles the debt service levels.
Considering the size of home loans, even small percentage increases translate into substantial amounts. The same applies to credit card debts and personal loans. Before financing your lifestyle with borrowed money, remember that your expenses are someone else’s income.
Avoiding unnecessary debt is a crucial money habit to practice.
Money Habits No.3 – Invest
Just as debt is your liability and someone else’s asset, a crucial money habit for preserving wealth is to invest.
George S. Clason’s book, The Richest Man in Babylon, illustrates this point through engaging parables. The key takeaway from his book is simple: part of all you earn is yours to keep, and what you keep should be used to make you more money.
At the end of the pandemic in 2022, Australians had a savings rate of 20%. However, by 2024, this rate had plummeted to 1.1%, making Australia one of the countries with the lowest savings rates globally, averaging just 3%. In contrast, Singapore has a savings rate of 48.6%, China 44.3%, and Norway 39.2%.
To invest, you need to save. The goal is to increase your savings over time, creating a buffer for unexpected expenses. You can then deploy this money into high-yield savings accounts, shares, property, crypto, or other asset classes of your choice
The idea is for your investments to generate more money, potentially supplementing your working income in the future. Developing strong money habits, like investing, can significantly impact your financial stability and growth.
Therefore the final money habit that is crucial to keeping your wealth is to be able to save and then invest.
Key Takeaways
- Frugality is often misunderstood as stinginess. It is about prioritizing meaningful spending, avoiding unnecessary debt, and resisting the urge to impress others to maintain wealth and cultivate strong money habits.
- Avoiding unnecessary debt is crucial. Leverage can amplify gains but devastate during downturns. Prudent money habits include buying what you can afford in cash and understanding the risks of rising interest rates.
- A crucial money habit for preserving wealth is to save and invest, and then using those earnings to generate more money.
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