While the mentality and habits of the wealthy have been widely studied, comparatively little has been written about how the rest of us can incorporate this wisdom into our own lives. How we think about money — and more importantly, how we act with our money — dictates a large part of our financial outcomes. While much of the psychological orientation of the wealthy is derived from the stability and satisfaction created from their wealth, other characteristics of wealth can be applied by almost anyone seeking to improve their finances.
The time-tested 'dos' of wealth creation
Live well beneath your means. A recent study from the American Payroll Association shows the 74% of Americans would experience financial difficulty if their paycheck were delayed by just a week. One of the truest paths to amassing wealth involves spending less than you make, and using the surplus to invest in something that will make you more. Doing the opposite — living paycheck to paycheck, or worse, spending more than you make— will prevent you from ever growing your wealth. Consider ways to automate your savings, ensuring you pay yourself first from each paycheck, and avoid the cycle of paycheck dependency.
Make wise purchases. When you do make large purchases, such as a house, a car, or anything else with a big price tag, think like the wealthy, and choose something that's likeliest to hold its value or even appreciate. Buy gently used cars that have already taken most of their depreciation, or if you're really into vehicles, a collectible that may even appreciate someday. Ditto for your housing. Learn to buy homes that will grow with the market, and to make renovations that add to is overall value and not just your personal preferences.
Make important financial decisions when you're free from stress and worry. Studies demonstrate that fear and stress can negatively impact our ability to make good financial decisions. When we're overcome with worry — especially financial worries — we can act precipitously, not considering the overall impact of our decisions. Another issue? If you're already under financial strain, you're likelier to make choices that lead to even more financial problems in the long-run. You might be more likely to forego appropriate insurance or 401(k) contributions to save money in the short-term. In the long-term, however, these choices can have an even more ruinous financial impact.
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Protect your finances at any cost. As your earnings potential and net worth increases, so should your insurance. Do cover yourself with disability insurance, high-quality health, home, and car insurance, and an umbrella policy for anything else. This also includes having ample emergency savings, so that you can weather any financial storm, as well as back-up sources of income to alleviate any variations in earnings.
And the time-tested don'ts
Don't rush to invest in something you don't understand. A wealthy person either gets to know their investment target well, or hires a professional who can help them choose wisely. This wisdom comes from legendary investor, Warren Buffett, himself, who says, "Never invest in a business you cannot understand." The beauty of this axiom is its simplicity: If you can't understand a business or investment, it'll be difficult for you to assess its successes or challenges, and how you should manage it within your overall portfolio and financial plan. Though exotic investments such as derivatives, alternative currencies, or forex may be making your neighbor rich, consider whether you know enough about these to make seasoned choices.
If you have money, donate and lend prudently. Lending to friends and family is fraught with entanglements, so don't make a habit of it without clear IOUs and repayment expectations. And don't donate to charities or organizations whose practices you haven't fully vetted. The wealthy think of their money's potential for growth, and safeguard it from lending losses, or philanthropic donations that are unlikely to make an impact. If you want to donate, use tools such as CharityNavigator to help you make informed decisions about the quality and impact of your chosen charity.
Finally, don't forget to plan for your legacy. Whether you choose to leave your money to family or a favorite organization, ensure your money has a purpose. This means setting up safe trusts so that children don't spend the money frivolously, or setting specific terms for the use of your hard-acquired capital. They say money begets more money, and yours should, too.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
