7 Financial Habits to Become Financially Successful
Executive Summary
There is endless financial advice to buy or invest in something. But all of this advice avoids the fact that financial success is built from consistently making good decisions over time. To become financially successful the emphasis should be on the habits formed, not the products purchased. These 7 financial habits will help you manage your spending, increase your savings, lower your debt, and benefit from investing. When you focus on habits instead of outcomes, you have more control over your wealth building and you also improve your chances of success.
Buy Stock A! Sell Stock B! You need to buy this insurance product! Don’t buy coffee, make it at home instead! Rent is throwing your money away!
As a financial planner, I have seen and heard so many people talk about some product or investment as the superior option for people trying to become financially successful. The truth is that financial success is built with a combination of good decisions over time, not one single decision.
Financial success is different for each of us, but each of us has a vision for what that is. For some, it is the time in life when you can quit your job and travel the world. Others may think it is leaving a legacy with their career or family. Your idea of financial success is unique to you.
Financial success like professional success is not accomplished in a day. Success is the culmination of years of strategic decisions and some luck that produce the successful outcome. Instead of focusing on the outcome though, young lawyers would be better off creating a collection of good financial habits. When you combine many good habits, you begin to create a system designed to succeed. To build your toolbox of useful financial habits, you have to focus on the process of becoming financially successful over the results. So here are 7 financial habits that can give you a great chance of becoming financially successful.
1. Focus on Security Today Before Freedom Tomorrow
Even the best-laid plans will go wrong. It is a fact of life that the future is unpredictable. Young lawyers who focus solely on their future financial freedom sacrifice their current financial security.
You can spend years building up your net worth through investments and asset purchases, but without financial security to deal with unexpected financial problems, you will be forced to sell these wealth builders. Forced selling sets you back more than establishing security first.
So what is financial security? Financial security is established with a few items:
Emergency Fund of 3-6 months of savings
Proper insurance coverage, including health insurance, disability insurance, and possibly life insurance.
Proper withholdings on your salary and bonuses.
Young lawyers who take care of their taxes, insurance, and savings set themselves up to take necessary risks to build wealth because they have established a strong financial safety net.
2. Pay Yourself First
Life is expensive. To pay for everything in life, we exchange our time to earn a salary. Lawyers are highly skilled workers, but that doesn’t mean they have unlimited money. When your finances are constrained, it is important to prioritize how you spend your money.
The first priority is to pay yourself first. For most of my clients, I encourage them to save 15%-20% of their income with each paycheck. If you don’t have an adequate emergency fund, insurance coverage, or tax withholdings, you should direct most of your savings to these items.
Once you have financial security, then you can use each paycheck to invest in your future. This can mean saving to buy a home, retire early, college savings, or investing for a yet-to-be-identified purchase.
Automate this transfer to coincide with each paycheck. This transfer of paying yourself can go to any number of different accounts. By automating, you create an automatic habit of paying yourself first. This limits the chance that you break your own habit.
By automating this habit, your expenses will naturally change to match what is in your bank account. Paying yourself first allows you to build up your savings and net worth while also decreasing your monthly expenses. A win-win!
3. Use Debt Prudently
Debt is a part of nearly everyone’s financial life. The majority of lawyers need debt to earn their law degrees. Most Americans need to use a mortgage to buy their first home. Credit cards are a commonly used method to purchase items and can actually be more beneficial than a debit card or cash. Young lawyers should not fear debt. Instead, they should use it appropriately.
Law school loans are a great example of prudent debt. By graduating with a JD, you set yourself up to earn a much higher wage than nearly every other career choice. A young lawyer earning $200,000 out of law school can expect to earn more than $6 Million over a 30-year career. $200,000 of law school debt is well worth the significantly higher expected future earnings.
But all debt is not good debt. Excessive credit card debt, margin for stock purchases, and personal loans can all get out of control and wreck your financial life. When considering using debt, ask yourself two questions:
What will happen if I can’t afford to repay my debt?
Will using debt in this situation greatly improve my life relative to the cost of the debt?
4. Spend Less Than You Make
Our expenses will match our available income. This is why nearly 50% of people earning over $100,000 still live paycheck to paycheck. When we see money in our bank accounts, it is easy to go spend that money.
Money is best used on bettering our lives. Spending money on experiences, products, and items that increase our well-being are worth the cost up to a certain point. Spending more than you make is a quick way to ruin yourself financially. On the other hand, never spending the money you make leads to a boring and unexciting life. There is a compromise between these two extremes. Spend money enjoying your current life while also saving and investing for your future.
Focus on your hierarchy of spending. Taxes and savings should be the first things you take care of. Then allocate money for all necessary expenses like housing, food, transportation, utilities, and debt payments. Finally, use the remaining funds to spend on your life since you have already taken care of the important expenses first. This balance can be hard to find, but once you have it, you’ll live a much better financial life.
5. Be Comfortable With Building Your Wealth Slowly
Getting rich quickly and becoming poor quickly are two sides of the same coin. To benefit from extreme gains in wealth, you need to accept extremely high risks. Extremely high risk does result in some people getting lucky, but it also means that most people will not.
Instead of getting rich quickly, people can take less risk and instead allow their investments to benefit from compound growth. Compound growth starts off small, but over time your net worth begins to increase exponentially.
Getting rich slowly does not mean you have to wait until you are 70 to retire. It just means you should be comfortable with not trying to get rich tomorrow through risky speculation.
Some ways that young lawyers can boost their compounding growth include:
Add to your investments regularly
Start sooner rather than later
Increase your investment contributions when you receive a raise
6. Don’t Interrupt Compounding Growth
Compounding growth is how you build wealth slowly. Interrupting compound growth even for a brief period can substantially limit the future value of your wealth.
Young lawyers who are able to navigate their financial lives without interrupting compound growth typically employ many of the habits above such as:
Maintain an adequate emergency fund
Have proper insurance
Spend less than they make
Example: A young lawyer plans to invest each year and is expected to see 7% growth for the next 40 years. After 3 years, they have to stop contributing to their investments due to increased lifestyle costs for the next 5 years. 40 years later, their investments are 30% less than they would have been without the interruption.
This example does not include withdrawing any money from the investment account. If the lawyer had also needed to sell 50% of their investments after the first 3 years, before investing again in 5 years, they would have 56% less future value than if they never interrupted compounding growth.
When people have to pause contributions to their savings/investments and possibly sell their investments to cover unexpected expenses, the negative outcomes destroy future wealth.
7. Reward Yourself Now and Later
Financial success is not something that you can only achieve later in life. Financial success is being able to live your ideal life today and in the future. That means you should not have to sacrifice today for tomorrow.
Reward yourself for implementing better financial habits. When you reach savings or net worth milestones, celebrate!
These rewards can include:
An expensive night out
A vacation
Buying something you have always wanted
Rewards reinforce good behavior so use them to incentivize yourself to stay disciplined.
Final Takeaways
Good financial habits create a framework for making better financial decisions. Habits are not focused on outcomes because we often cannot control outcomes. When we focus on what we can control (habits), the outcomes take care of themselves.
Choose any or all of the above financial habits and implement them into your life. Given enough time, you will begin to see the results from these habits.
Forming financial habits can involve breaking old habits and sticking with good habits. You don’t have to implement these habits on your own. Developing Financial has a process to identify bad habits, replace them with good habits, and then hold you accountable as you implement them into your life. The Developing Financial Process is custom-made to help young lawyers just like yourself. With the right habits, the results will follow. Schedule a free Meet & Confer today to learn more about the Developing Financial Process, how financial planning for young lawyers helps people achieve their financial goals, and the benefits of working 1:1 with a financial planner specializing in young lawyers.
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.