Becoming rich is a dream for most people, but with careful planning and dedication, you can make this dream your reality. There is no single formula to get you there, but there are a few behaviors you must avoid if you ever hope to see a six-, seven-, or eight-figure net worth.
Here are five of the most common mistakes that work directly against your goal of becoming wealthy.
1. Failing to stick to a budget
You may not want to hear it, but even millionaires and billionaires need budgets, or they wouldn't stay rich for long. People tend to think of budgets as constraining, but the wise among us see them as tools that can help us achieve our financial goals more quickly. It's OK to budget some money for short-term wants, but your focus after paying for your basic necessities should be on saving for your long-term goals first.
Retirement should be high on your priority list, but you may have other goals, like buying a new car or a home, that you also want to budget for. Decide how much you'd like to allot to each goal per month, but note that the more goals you're dividing your cash among, the longer it will take you to reach each of them.
2. Carrying too much debt
Some debt, like a mortgage, is fine if you can easily afford it. But other debts, like credit card debt, have no upside. High-interest debt costs you tons of money, causes you stress, and threatens your financial security. Make efforts to pay down any high-interest debt you have now so you can start saving that money each month rather than giving it to someone else.
Consider a balance transfer card to temporarily halt the growth of your credit card debt, or take out a personal loan to cover the balance so you can make a regular monthly payment. Place tax refunds and year-end bonuses toward your debt to help you pay it off more quickly. And of course, once you're out of debt, don't take on any more, or you'll end up back in the same position as before.
3. Not investing
Investing is one of the best ways to grow your wealth and one of the only ways to ensure the growth of your money beats the rate of inflation. It's not the best option for your emergency fund or short-term savings you plan to use within the next five years or so, but you should definitely invest your long-term savings if you want to become wealthy.
Your retirement account is a good place to begin investing. You may contribute up to $19,500 to a 401(k) in 2020 or $26,000 if you're 50 or older. You can also contribute up to $6,000 to an IRA or $7,000 if you're 50 or older. These accounts offer special tax breaks that help you hold on to more of your savings for retirement, but they also carry penalties if you withdraw the money before age 59 1/2, though there are exceptions.
A taxable brokerage account is a better fit if you want to be able to access your money whenever you choose. These accounts don't offer the same tax breaks as retirement accounts, but if you hold the assets for longer than one year, your earnings become subject to long-term capital gains tax rather than income tax. Long-term capital gains tax rates are lower than income tax rates for the same level of income, so this also helps you keep more of your investment earnings.
4. Investing too conservatively
You should transition to more conservative investments as you age because you'll have less time to make your money back following a loss before you need to draw upon those funds. But younger investors should invest more heavily in stocks. Stocks are more volatile than bonds, which scares some risk-averse investors, but they can also generate much greater returns. This is the art of asset allocation.
All investments carry some risk, but rather than sticking solely to conservative investments, try diversifying your portfolio instead. Spread your money among many assets and sectors so that a single poorly performing asset won't devastate your portfolio. Move your money to more stable assets, like bonds, as you age, but don't exit stocks completely. A good rule of thumb for the percentage of your portfolio that should be in stocks is 110 or 120 minus your age.
5. Growing complacent in your professional life
Even if you invest regularly, you'll probably still need a day job, at least for a while. You can grow your wealth more quickly if you take steps to better your position rather than remaining where you're comfortable. Don't be afraid to ask for raises when you feel you deserve them and keep your eye out for other companies in your industry that pay better. You should also attend networking events and professional development courses to help increase your contacts and improve your skills. This could help you get a better job in the future.
Starting a side hustle is another option. You could pursue this new gig as a side project or plan to scale it into a full-time business. This gives you the freedom to do what you love and set your own hours. Just don't forget to set aside some money each month for taxes, or you could run afoul of the IRS.
You'll find your own path to wealth if you're motivated. You might not know what that path is now, but shedding the five bad habits above is a good place to start.