What does true financial freedom mean to you? For some, it may be having enough passive income to cover all your expenses without working. For others, it could mean being able to retire early and travel the world. Whatever your definition, there’s no doubt that attaining financial freedom is a common goal.
The good news is that by studying the habits of the wealthy, you can start implementing proven strategies to build lasting wealth. Adopting these seven key habits can put you on the path to achieving your desired financial freedom.
1. Live Below Your Means
One of wealth-building’s most fundamental tenets is spending less than you earn. This is the foundation upon which all other wealth accumulation is built. Living below your means frees up more money to save and invest for the future.
The wealthy understand the importance of embracing frugality and avoiding lifestyle inflation as their income rises. Billionaire Warren Buffett still lives in a modest home in Omaha, Nebraska, which he originally bought back in 1958 for $31,500. Despite being the CEO of Facebook, Mark Zuckerberg is known for driving a practical Volkswagen hatchback. Like these famous examples, resisting the temptation to expand your lifestyle with each pay raise is crucial for building long-term wealth.
2. Pay Yourself First
Another key habit of the rich is always paying themselves first. This means automating your savings and investments before spending money on anything else each month. This forces you to live on less while prioritizing your financial goals.
Most experts recommend saving 10-20% of your gross income. By having this money directly deposited into your savings and investment accounts each pay period, you’ll quickly adjust to living on the remaining 80-90%. Best of all, paying yourself first takes advantage of the incredible power of compounding returns over many years.
3. Invest Early and Consistently
Speaking of compounding returns, another critical wealth-building habit is investing as early as possible. The younger you begin setting aside money to invest, the more time it has to grow and compound.
But beyond starting early, the wealthy also invest with consistency over time. You can take advantage of dollar-cost averaging by making regular monthly contributions to your investment accounts. This means your money buys more shares when prices are low and fewer when they are high, which can reduce your risk over time. Historically, the S&P 500 index of stocks has returned roughly 10% per year on average over the long run.
4. Diversify Your Investments
Another hallmark of the rich’s investing is that they diversify their portfolios across multiple asset classes and sectors. The adage about not putting all your eggs in one basket applies to building wealth.
The wealthy understand the importance of allocating their money between stocks, bonds, real estate, businesses, and commodities. They know that each performs differently depending on economic conditions. Diversifying helps reduce risk and smooth out returns over time while still allowing you to participate in the upside of different markets.
5. Continuously Educate Yourself
Lifelong learning and self-improvement are common traits among the wealthy. Those committed to building wealth are typically voracious readers, regularly attend seminars, and seek mentors to learn from.
To model this habit, commit to continually educating yourself about personal finance topics like saving, budgeting, investing, economics, and entrepreneurship. Staying informed gives you a critical edge in growing your wealth over the long term. As the world rapidly changes, a dedication to continued learning allows you to see emerging opportunities and risks ahead of the masses.
6. Have Multiple Income Streams
Another pattern of the wealthy is that they tend to generate income from multiple sources. Research has shown that the average millionaire has seven different streams of income.
While it’s essential to focus on your primary career, look for ways to supplement that with side hustles, consulting gigs, rental properties, dividend stocks, or small business ventures. Having money coming in from diversified sources creates more financial stability and security. It also allows you to accelerate your wealth-building efforts as you can save and invest more of your total income.
7. Give Back Generously
While it may seem counterintuitive when trying to build wealth, the rich are often also the most generous. Many of the wealthiest individuals and families are known for their prolific philanthropy.
In addition to the immense good it does in the world, giving also infuses more meaning, purpose, and perspective into the wealth-building journey. While not the primary motivation, charitable giving can also provide valuable tax deductions that help reduce one’s overall tax burden. Committing to tithing a portion of one’s income (commonly 10%) is a habit that’s just as beneficial to the giver as the receiver.
Case Study: How Mitch Leveraged the Habits of the Rich
Mitch had always been interested in personal finance, but as a busy professional in his mid-30s, he realized his money habits needed an overhaul to reach his dream of financial freedom. He decided to study the practices of the wealthy to see what he could learn and apply them to his situation.
From his research, Mitch committed to focusing on two habits to start: paying himself first and diversifying his portfolio. He set up automatic transfers from his paycheck into a high-yield savings account and a low-cost S&P 500 index fund. He also started doing freelance consulting on the side to generate extra money, boosting his savings rate to 25% of his income.
As he began seeing his net worth steadily rise, Mitch was motivated to layer on more of the habits he’d learned. He started waking up early to read for an hour daily, focusing on investing and entrepreneurship. A year later, he acquired his first rental property, which generated passive income. Within 5 years of consistently applying these wealth-building habits, Mitch had grown his net worth to over $500,000 and was well on his way to financial freedom.
Key Takeaways
- Spend less than you earn to lay the foundation for wealth-building.
- Automate your savings and investments by paying yourself first each month.
- Start investing as early and consistently as possible to benefit from compounding returns.
- Diversify your investments across different asset classes to reduce risk.
- Commit to lifelong learning and self-education, especially about financial topics.
- Cultivate multiple streams of income to accelerate wealth accumulation.
- Set aside a portion of your income for charitable giving to make an impact and receive tax benefits.
- Small money habits maintained consistently over time lead to the most outstanding results.
- Surround yourself with like-minded people who are also pursuing financial freedom.
- Find an accountability partner or coach to keep you motivated and on track.
Conclusion
Building true wealth is a marathon, not a sprint. Seeing the biggest payoff requires diligence, self-discipline, and delayed gratification. However, as Mitch’s story illustrates, these seven habits of the wealthy can remarkably transform your finances over time when you apply them systematically.
The beauty is that these are all learnable practices anyone can start implementing regardless of age or current financial situation. By spending less than you earn, paying yourself first, investing wisely, diversifying, continuing to learn, creating multiple income streams, and giving generously, you’ll be well on your way to achieving true financial freedom and life on your terms. Pick one or two habits to focus on first, gradually adding more over time. Small changes maintained consistently over many years are the key to lasting wealth and abundance.