Want to increase wealth over the long term? Cultivate these 8 simple habits

In the late 1960s, psychologist Walter Mischel conducted the Stanford Marshmallow Experiment and found that children who were able to resist eating the marshmallow in front of them, delaying “immediate gratification”, often achieved better results in their later lives.

What inspiration does this experiment bring to people? Sacrificing short-term pleasures can lead to greater rewards in the future. This principle also applies to personal finance: the small decisions made daily in spending, saving, and investing can accumulate into substantial long-term wealth.

According to Bankrate, one of the most fundamental habits for wealth accumulation is creating a budget and tracking every penny spent. This is not just about tracking expenses but actively deciding how to use funds to achieve specific goals. A reliable budget can help you identify spending leaks, reduce waste, and save more money for savings or investments.

– Set clear financial goals: Whether you aim to buy a house, pay off debts, or save more for retirement, writing down these goals will help you understand why you are working towards them.

– Track expenses: Record every expenditure for at least a month. Compare it to your income to see where your money is really going.

– Allocate income: After understanding your spending patterns, allocate specific amounts to necessities (housing, groceries, utilities), debt repayment, and savings/investments.

According to Kubera, one of the most powerful habits for wealth accumulation is paying yourself a salary as if you were running a business. This means treating your personal finances like a business, allocating a portion of your income to yourself before paying others.

Prioritize saving and investing for your future first and rely on the remaining money to live on. This way, you won’t end up spending all your money on bills, debts, and other expenses, leaving you with nothing in the end.

To pay yourself a salary as if you were running a business, you first need to determine how much salary you want to give yourself and for what purposes. For example, you may want to allocate 10% of your income to your retirement, 5% to an emergency fund, and 5% to other financial goals. You can adjust these proportions based on your income, expenses, and objectives.

Next, you need to establish a system where money is automatically transferred from your checking account to a savings, retirement, or investment account upon receiving your salary. This way, you won’t have to rely on willpower or memory to pay yourself. You can use apps, online tools, or direct deposit to set this up.

The importance of an emergency fund is self-evident, as discussed in several articles in the personal finance column of Da Ji Yuan. Experts generally recommend saving enough to cover three to six months’ worth of living expenses for immediate use in case of emergencies.

If saving up three to six months’ worth of expenses feels daunting, start small and let it accumulate over time.

Store your emergency fund in a safe and easily accessible place, such as a high-yield savings account, a money market deposit account, or a Certificate of Deposit (CD). After tapping into the fund, replenish it as soon as possible.

Debt is often seen as a negative that hinders wealth accumulation. However, debt can also be a useful tool to help you achieve financial goals through leverage.

The key is to understand the difference between “good debt” and “bad debt” and to use debt wisely and responsibly.

Good debt refers to debt with a positive return on investment, meaning it can help increase your income, wealth, or net assets in the long run. For example, if obtaining a degree can help you secure a high-paying job and advance your career, then student loans taken out for education can be considered good debt. Similarly, if a house appreciates over time and provides you with a place to live, then a mortgage can also be seen as good debt.

Bad debt refers to debt with a negative return on investment. For example, using a credit card to buy things you don’t need or can’t afford, accruing high-interest rates and fees that exceed your repayment capacity, is considered bad debt.

– Only borrow debt that you can afford to repay;

– Compare different loan options and choose the one with the lowest interest rates and fees;

– Pay off debt as soon as possible, prioritizing high-interest debts;

– Avoid defaulting or making late payments, as this could affect your credit score and incur penalties;

– Use debt for productive purposes, such as investing in education, business, or assets, rather than for frivolous and unnecessary consumption.

While saving is important, investing is the true path to growing your funds. Due to the power of compound interest, even small investments can multiply over time. Nevertheless, choosing the right investment strategy can be overwhelming. Focus on long-term, diversified investment approaches based on your risk tolerance and financial goals.

– 401(k) and Individual Retirement Accounts (IRA): Tax-advantaged retirement accounts that offer compound returns.

– Index funds or Exchange-Traded Funds (ETFs): Providing diversified investment options, often with lower fees than actively managed mutual funds.

– Brokerage accounts: Offering flexibility to invest in stocks, Real Estate Investment Trusts (REITs), bonds, and more.

Long-term investments can mitigate market volatility and the impact of short-term economic fluctuations. If you are new to investing, start by learning the basics or consult a financial advisor for tailored guidance.

An important financial habit is to avoid “lifestyle creep”. Lifestyle creep refers to the gradual increase in a person’s expenses as their income rises.

If your expense growth matches your income growth, this means your savings and investment amounts remain constant.

Receiving a raise or bonus, or getting extra cash from tax refunds or birthday gifts, it’s perfectly fine to treat yourself a little. However, while increasing income, maintaining or reducing fixed expenses and using the extra money for saving and investing is one of the simplest ways to help grow your wealth.

One way to avoid lifestyle creep is by automating savings and investments, automatically transferring a set percentage of income into retirement accounts, emergency funds, or other investment tools. This way, you won’t be tempted to spend that money you don’t see.

Another method is to set a spending limit for yourself, sticking to it regardless of income. For example, you can decide to allocate 50% of income for basic needs, 30% for wants, and 20% for savings and investments. This is known as the 50/30/20 rule, helping you balance spending and saving.

Moderate consumption is not about depriving yourself of enjoyment but about aligning your shopping with your values and goals. By evaluating whether a purchase truly enhances your life, you can avoid waste and channel more money into wealth creation.

– Set a cooling-off period: Wait at least 24 hours before making large purchases to avoid impulse buys.

– Track discretionary spending: Use spending tracking tools or budgeting apps to ensure expenditures align with your financial goals.

– Adopt a values-based budget: Prioritize spending on things that truly matter, such as life experiences, education, or health, rather than blind consumption.

This approach helps allocate more resources to investment and savings, fostering good financial habits.

Another habit for wealth accumulation is to seek diverse income sources rather than relying on a single income. Having multiple income sources can help boost cash flow, reduce reliance on primary income, and protect you from financial shocks and market fluctuations.

One way to find diverse income sources is to expand your investment portfolio to include alternative assets and passive income sources like rental properties, peer-to-peer lending, crowdfunding, royalties, and more. These assets can provide you with a steady income without requiring too much involvement.

Another method to diversify income sources is to monetize your skills, knowledge, or hobbies, creating active income sources such as selling products or services, freelancing in a side hustle, consulting, teaching, writing, and more. These income streams allow you to leverage your talents and passions, earning part-time or even full-time income.