Key To Financial Success

One key to success that I have always followed and found most effective in my life is to look for someone who is successful, learn what they do, and put into practice what I have learned from them. For example, if I want to learn how to manage my finances effectively, I should study the habits of wealthy individuals regarding their financial practices. As we approach the end of the year, it’s a great time to consider some strategies that financially independent people use to maximize their year and better prepare for the next one.

1. The Wealthy Have a Financial Plan for the Coming Year. You cannot make the most of your money if you do not know how much you need. While many people find budgeting unappealing—almost as enjoyable as getting a root canal—setting aside a couple of days to review your spending habits this year and plan for next year can significantly enhance your financial well-being. Begin by examining all of your expenditures for the year. The easiest way to get a full picture is to review all of your bank and credit card statements. It’s easy to overlook small purchases that can accumulate and impact your overall cost of living. Once you’ve reviewed your expenses, categorize them into necessary and unnecessary expenses. Necessary expenses include housing, groceries, utilities, phone bills, vehicles, and insurance—basically anything essential for caring for yourself and your family. Unnecessary expenses are those items you can live without, such as recreational activities, dining out, streaming services, jewelry, and other luxury items. After categorizing your expenses, set a savings goal for the upcoming year, aiming to increase your savings compared to the previous year. With these considerations in mind, create a budget that prioritizes savings and essential expenses. Once you determine how much these will cost each month, you’ll know how much you can afford to spend on non-essential items.
2. The Wealthy Use This Time to Plan Their Taxes. Tax planning is more than just tax preparation. While tax preparation involves finding ways to save money on this year’s taxes, tax planning takes strategic steps to minimize future taxes. High-income earners often maximize contributions to tax-deferred accounts such as traditional IRAs and 401(k)s, which can effectively lower taxes now and potentially save on taxes later. If you earn income that places you in a lower tax bracket, this can save you money now. Conversely, if you expect to be in a lower tax bracket during retirement, you’ll be able to withdraw those savings while paying lower taxes on that income later. However, if you are currently in a lower income tax bracket, you might want to prioritize after-tax retirement accounts, such as Roth IRAs. Given the historical context of tax rates, you might find that we are currently enjoying lower tax rates compared to the past, making tax deferral less appealing for some. This suggests that using Roth accounts could be more beneficial. Many employer-sponsored retirement plans offer the option to choose Roth accounts instead of traditional accounts, even for matching contributions. Additionally, the wealthy often utilize other tax-advantaged vehicles, such as Health Savings Accounts (HSAs), which offer a triple tax advantage: contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free.
3. The Wealthy Build a Team and Educate Themselves. Assembling a team of financial professionals who collaborate for your financial benefit increases your chances of optimizing your money. A financial advisor, accountant, and insurance agent each bring different skills to the table. Unfortunately, many people do not have these professionals working together. In contrast, the wealthy ensure their financial team coordinates effectively. For instance, the tax planning strategies mentioned earlier should involve all three types of professionals working in concert. At the same time, strive to educate yourself about finances. It is widely know that millionaires and billionaires are avid readers, with some reports indicating that they read on average 2-4 books per month. The quickest way to build and maintain wealth is to constantly educate yourself. This enables you to understand your advisors’ recommendations and ensure they act in your best interests rather than their own.
4. Wealthy Individuals Use Debt for Growth, Not Consumption. If you are carrying high-interest debt, it’s crucial to prioritize paying it down. While many of us enjoy using year-end bonuses for holiday celebrations or vacations, it’s essential to commit to reducing unproductive debt as soon as possible. This commitment can help you achieve significant financial goals such as funding your children’s education, becoming debt-free, and securing your retirement. Instead of spending extra money on non-essential items, consider using it to pay down high-interest debt.

By utilizing the end of the year to create a budget that fosters the growth of your savings and investment accounts, developing a solid tax plan, committing to financial education, and eliminating unnecessary debt, you are on your way to becoming one of the wealthy individuals you admire.