How the Wealthy Manage Their Finances

By Jane Young, CFP, EA

In my previous article, I addressed the daily habits of self-made millionaires. In addition to these personal habits, wealthy people practice and follow many common habits, rules, and techniques to effectively manage their money. Becoming and staying wealthy requires the right mindset and the willingness to devote time and energy to manage your finances. Below are some additional tips on how wealthy people manage their money.

Live Below Your Means – The single most important step you can take to achieve financial security is to spend less than you earn. Take the time to understand and manage your expenses and create a budget that supports your goals.

Manage Risk and Return – Understand your tolerance for risk and balance your desire for high returns with the need for safety. Create a diversified portfolio, with adequate short-term liquidity, that you can stick with during fluctuating markets. Rebalance your portfolio at least annually to stay on track to your plan.

Avoid High Interest Debt – Avoid taking on credit card and personal debt. If you have high interest debt create a plan to prioritize paying it off.

Avoid Lifestyle Creep – Avoid the temptation to increase your lifestyle every year as your income rises. Rather than buying a new car or bigger house, use a salary increase to pay down debt, invest in your retirement, or bolster your emergency fund.

Consider Tax Consequences – Invest in the most tax efficient type of investment accounts. Understand your cost basis, tax rate, and tax rules. Utilize tax efficient accounts including Roth IRAs, 401ks, Health Savings Accounts and 529 plans as appropriate. Sell assets with capital losses to offset gains when possible.

Avoid Complicated Investments – Do not invest in anything you do not fully understand. If you need a lawyer to understand the terms of an investment contract, you can be sure it is written in favor of the offering company.

Meet with Financial Advisors Regularly – Meet with your accountant, estate planning attorney, and financial planner on a regular basis to make better decisions and understand your financial situation.

Do Not Leave Money Sitting Idle – Keep your money working for you - do not leave large sums sitting in low interest savings or checking accounts. Establish automatic contributions to keep your money invested. Take advantage of higher earning Certificates of Deposits for your short-term money.

Increase Your Income – Engage in conversations and negotiations with your boss to determine what is required to get a raise or promotion. Continually enroll in seminars and classes to improve your skills.

Increase your Financial Knowledge – Never stop reading and learning to increase your financial literacy.

Do Not Time the Market – It is impossible to effectively time the market. Investment in the stock market is for the long term – in accordance with the old adage – wealth does not come from timing the market but from time in the market.