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10 Money Habits of Self-Made Millionaires

By November 19, 2020 No Comments

Each one of us starts out with a unique set of advantages and disadvantages, but self-made millionaires are people who reach high levels of wealth without the help of a large inheritance or trust fund. Self-made individuals start from scratch and build their wealth over time, beginning first by mastering basic money skills like budgeting and moving on to saving and investing after that.

As the financial planners who work with self-made millionaires know, the money habits of the newly rich are practices that just about anyone can learn from, no matter what your financial situation when you first start out.

To get some insight into how self-made millionaires manage their money, CNBC Select asked Faron Daugs, certified financial planner, founder and CEO at Harrison Wallace Financial Group, about the financial habits his wealthiest clients all share that could apply to the average person.

For the purpose of this article, Daugs focused on only his wealthiest self-made millionaire clients who have not inherited wealth or trust funds. According to Daugs, these clients have an average net worth around $6 to $8 million and range in age from 40 to 55 years old.

“These are individuals and couples that started with little,” Daugs tells CNBC Select. “Some worked right out of high school to start their careers and worked their way up, and some graduated college with $50 in their checking account.”

No matter how Daugs’ clients started, they all use the below 10 habits to help them grow and maintain their wealth. These practices take time and discipline, so Daugs’ suggests getting started with one or two now and incorporating the others as your money skills improve.

Here are the 10 habits that Daugs’ wealthiest self-made millionaire clients have incorporated into their financial life that you can, too.

1. They avoid debt

2. They buy their cars, and plan to keep them long-term

For the most part, cars depreciate in value the second you drive one off the lot.

Daugs says his self-made millionaire clients typically buy, instead of lease, any new car with plans to hold onto it for a while. By keeping their cars long-term, they can use the time between car purchases to save up cash that would otherwise go towards a monthly payment.

“If you need to finance the car, pay it off as soon as you can and plan to keep the car long after that loan is paid off,” Daugs says.

Read more: Why this personal finance blogger regrets using a credit card to make the down payment on her first car

3. They have emergency funds

Having a solid reserve of cash that you can tap into in an emergency goes a long way. If you have an unexpected expense, such as an urgent car repair or medical bills, a rainy-day fund that is immediately available for withdrawals can help you afford it. This way, you don’t need to charge the expense onto a high-interest credit card or take out a personal loan.

Most of Daugs’ clients have six to nine months of their monthly expenses set aside (financial experts generally suggest three to six months’ worth of your living expenses as a baseline), but you should do what works for your cash flow. And, know that any amount will help. “This is one of the first steps someone should do in building a solid financial foundation,” Daugs says.

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4. They invest

Once building up an emergency fund, Daugs says his clients have organized investment plans, whether its in stocks, bonds or exchange-traded funds (ETFs).

He suggests setting up a monthly or bi-monthly automatic transfer of cash from your checking account into an investment account. This way, you can forget about having to remember to manually invest and you can then learn to live on the funds you have available.

“Most of my clients do not miss having that money in their ‘cash flow’ and then they can use those invested savings for future car purchases, vacations or other short- or long-term goals, without incurring additional debt,” Daugs says.

As a general rule of thumb, you should save at least roughly 20% of your income each month, and Daugs agrees. This 20% goes toward your savings plans, emergency fund, retirement and investments. How much you take out of your paycheck to invest depends heavily on your income and investment goals, but getting used to living without that 20% is a good start for both your savings and you investments.

Use this 3-question checklist to help you determine when you’re ready to invest your money

Before you invest, make sure you know how much risk you can take on and the time frame for when you’ll need the money. If you are in your 20s or 30s saving up for retirement, you can generally take on a little more risk in exchange for aggressive yields because you won’t need your money for several decades if you plan to retire in your early 60s. For those in their 40s or 50s, their investment time frame for retiring is much shorter. Therefore, they are generally more reluctant to take on risk so to better protect their money.

5. They take advantage of everything their employer has to offer

6. They don’t try to keep up with the Joneses

Keeping up with “the Joneses” is a typical way people dig themselves into debt. But living beyond your means time and time again eventually catches up to you.

When building wealth, like with Daugs’ clients, “fight the need to have the latest and greatest gadgets,” he says. “So much money is wasted on constant ‘upgrades’ these days and can cost you both money and lost opportunity.”

It’s only human to want to compare your life to others, but take another look at your lifestyle and budget, focusing on what’s most important for your own personal goals. These are your needs and wants that truly matter to your bottom line and happiness.

Here’s how to create a budget in 5 steps

7. They utilize tax deductions

8. They look for other income streams

9. They start saving for their kids’ college early on

College savings plans, like a 529 plan, help Daugs’ clients kick-start their children’s future education early so they have less of a financial burden years later.

But the long-term benefits don’t stop just there. These plans also allow tax-free withdrawals when you take out money to pay for college.

“By getting started early, you can save a significant amount of money in future cash flow and tax savings,” Daugs says. “It does not take a lot to get started, but the power of compound returns can be so beneficial to you if you have time.”

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10. They seek advice

Lastly, Daugs’ clients make a habit of being well-informed about their money. They have a basic understanding of their earnings, what they own and how much their investments cost.

For many people, saving and investing money can certainly be intimidating and confusing. Luckily, there are plenty of free online resources to help guide you. Between finance apps like Mint and YouTube channels like “Rule One Investing,” you can access this educational content on the go or from the comfort of your own home.

And if you are seeking someone to speak to one-on-one, such as a financial advisor, make a point to ask about the fees they charge. They should be able to be transparent about what their services cost, as well as clear on explaining your money and investments to you. “Your advisor should be both a partner and educator for you,” Daugs says.

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Bottom line

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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