How to Be Financially Free: 12 Money Habits for Building Wealth
Despite what you may have heard, money is necessary for long-term happiness and survival (if you live in a society where money is used and you don’t grow your own food).
This is obviously true because you need money to buy food, and without consistent access to food you will suffer greatly and die early. That would make being happy pretty tough.
So, money is at least as important as food, because you’ll need it to acquire food (and to get other things in life, like a place to live).
Anyone who says food isn’t important is insane. Therefore, anyone who says money isn’t important is also delusional—they’re not seeing the world clearly.
I want to help you learn how to better deal with money so you can earn it, save it, invest it, and use it more wisely to take better care of yourself, your loved ones, and to do good things in the world that are important to you.
In this post, I’m going to share some of the biggest lessons I’ve learned about money that I think will add value to your life.
1. Pay Attention to How You Spend Your Money
Do you pay attention to how you spend your money?
Most of us don’t.
Despite our best intentions, we often get swept away by our emotions and end up buying things that cost too much or that we don’t really want or need.
And then you end up regretting it and not having enough money to buy the things you really want and need.
Humans learn from making mistakes, so don’t beat yourself up if you’ve made some financial mistakes in the past. This is a normal part of the learning process. However, you don’t just have to learn from your own mistakes—you can learn from other peoples’ experiences, and you can even learn from your own imagination by simply thinking about these things ahead of time.
Money Saving Exercise
Here’s a great exercise that can help you make better decisions about how you spend your money and what you choose to buy.
Before you buy something, imagine that it cost twice as much, three times as much, and four times as much. Would you still be happy buying it at each of those prices?
This exercise works so well because of a simple economic principle: you have to get more value than you pay for something to be happy with the purchase. In other words, if you pay $10 for a meal, you better be getting at least $20 of value. If not, you’ll end up regretting it.
That’s why so millions of people are happy to pay $10 for a meal at Chipotle, but you probably wouldn’t be willing to pay $10 for a cold, burnt grilled cheese sandwich that tastes like cardboard—it just doesn’t add enough value to your life to make it worth the money (or your time).
By imagining the price increasing for the item you’re about to buy, you can start to triangulate the real value of what you’re about to buy.
In my own experience, I’ve found if I wouldn’t even consider buying something at twice the price, it’s probably not adding enough value to my life to be worth buying at the regular price.
The next time you’re about to buy something you don’t absolutely need, go through this little exercise and see how valuable it really is to you.
2. Aim for a Good Deal
If you’ve ever made a purchase and thought, “I just got a great deal!” that’s because you valued what you purchased far more than the money you spent for it. You won’t always be able to get a great deal when you buy something, but you should ALWAYS strive to get a good deal if at all possible.
If you think about it, it just makes sense to get yourself a good deal in life.
If you get a poor deal or mediocre deal, that means you’re deciding to partake in a transaction that is, at best, not making your life any better, and, at worst, making your life worse. Of course, none of us wants to make our life worse, so we should only participate in transactions that are, at least, a good deal for us.
Most people regularly accept bad deals in life because they don’t believe they deserve to get a good deal.
Some people see the world as a zero sum game where one person wins and the other person loses, and there’s no other option. They think, “If I get a good deal, that means the other person is getting a bad deal.” Nothing could be further from the truth.
The reason we live in the richest time in human history with less poverty than ever before is because humans are creating more win-win deals now than ever before. A win-win deal is where both parties walk away thinking, “That was a great deal!” Ideally, every transaction you engage in should be a win-win deal.
Of course, people make mistakes, and that won’t always be the case in hindsight, but it should certainly be your goal. If you set the intention to make every transaction you engage in a win-win, the vast majority of your transactions in life will end up as wins for everyone involved, which will make the world a better place one small transaction at a time.
3. Avoid Bad Deals
We make the vast majority of decisions based on emotions, not logic, and our emotions can deceive us into making bad deals that we later regret. This is why buyer’s remorse is a phenomenon that everyone is intimately familiar with, even if we’ve never heard of the term before.
In order to get more good deals in life, you need to learn to avoid bad deals.
You should always avoid bad deals.
Don’t do a bad deal because you think it will help someone else, or because you don’t think you deserve better, or because of some unexplained emotion or impulse.
Anything unnecessary or unwanted is a bad deal. If you don’t want to go see that movie, don’t pay for it—you’re just throwing money away!
If you’re buying something you know you won’t be using or enjoying, don’t buy it.
If you really don’t need something, you probably shouldn’t be buying it.
If you really want that expensive new car because you think it will feel great to own it, take some time to honestly reflect on your financial situation and whether or not it’s worth the price you would have to pay to own it.
If you buy something when you’re caught up in strong emotions, you’ll likely regret it later. Take a week off to think about any major financial decision before you just plow ahead and go through with it on a whim. Trust me, you’ll thank yourself later when you avoid making a bad deal.
If you’re thinking about buying something so you’ll look good or impress other people, don’t buy it. It’s not worth it (unless you want to attract people who only like you because of what you own instead of who you are).
Treat yourself well—don’t ever trick yourself into a bad deal, and don’t try to rationalize expensive purchases you can’t afford. It’s never worth it.
You do deserve to get a good deal in life, but it’s up to you to make sure you get it.
4. Don’t Make Others Lose
Just as you should avoid bad deals for yourself, you should avoid bad deals for other people.
If you only think about yourself, it’s easy to let things slide and stand by as other people get bad deals in life. Maybe you sell something on Craigslist and let the buyer pay way too much for it (hey, as long as you win, that’s all that matters right?).
The problem with engaging in win-lose deals is that it doesn’t make the world any better, and it can often make the world even worse. Do you really want to be responsible for making the world a little bit worse?
If everyone engaged in win-lose deals exclusively, the world would get so much worse so quickly, it would be the biggest tragedy in the history of humanity. Poverty would reverse it’s death spiral and grow out of control. Wealth would be destroyed, companies would go bankrupt, people would lose their homes by the hundreds of millions… it would be a catastrophe far worse than the horrors of Nazi Germany, Maoist China, Stalinist Russia, and World War II combined.
It may sound like exaggeration, but it really isn’t. It’s almost impossible to notice the impact of a single win-lose transaction, but we know what happens when entire economies engage in win-lose transactions because we’ve seen what happened in the Soviet Union and other societies where win-lose transactions were pretty much the only ones available.
You might think you can get away with making someone else lose, but don’t think so fast. Everything you do has an impact, and if the impact you’re having makes the world a little worse off, you have to live with that, and it will come back to bite you as some point.
Always avoid making others lose because you’ll end up losing in the long run with that approach, and real financial success is all about the long run.
Always go for the best deal: one that creates a win-win situation.
5. Understand Your Values
Imagine you could buy a $10 million yacht for $5 million. Is that a good deal?
The answer is: it depends based on how much you value owning a yacht, or if you would try to sell it at a profit and use that money to buy something you value more.
Personally, I would never buy a $10 million yacht for $5 million unless I knew I could sell it at a profit that would be worth the time and risk. That’s because I don’t value yachts very highly. I wouldn’t even want a yacht for free (unless I could sell it at a profit). That’s because owning a yacht involves all kinds of time and financial investments in overhead, fees, insurance, fuel, maintenance, and more. I’d rather sit on the couch and watch Game of Thrones than deal with all that hassle to own a boat I would almost never use.
A yacht enthusiast, however, would undoubtedly take that free yacht any day of the week, and might even consider it to be the best deal of their entire lifetime. A good deal for them might be a very bad deal for me and vice versa.
Anytime someone says something is a good deal, what they’re really saying is that it’s a good deal for them. You have to decide if it would be a good deal for you.
We all have different values, and our values determine whether or not we consider a transaction to be a good deal, a great deal, or a bad deal.
That’s why you should spend some time thinking about what you value, and what you don’t value, so you can make better decisions about how to spend your money.
Many people go through life so blind to their own values that they end up spending all their money on stuff they don’t really want.
You see this when people buy expensive cars and homes with no savings left to pay for their children’s education or retirement. You see it when people spend their lives in jobs they hate just so they can own a bigger house than they could if they worked at a job they actually enjoyed.
There’s nothing wrong with making sacrifices in life in order to get what you want. Just make sure you’re making the right sacrifices—the ones that allow you to get what actually matters most to you
To do that, you have to understand your own values. What matters most to you? And what doesn’t matter as much?
6. Make Time Your Friend
The most basic financial rule is that you should always spend less money than you earn.
This rule is so fundamental because it’s based on simple math.
If you spend more than you earn, you now have less money at the end of each month. Every month that goes by, you’re doing worse and worse financially. Time becomes your enemy because you have poor financial habits. If you keep it up, 1 year, 5 years, 10 years from now, your life will be so much worse than it is now.
If you have poor financial habits, time is your enemy, and you will never win that fight. The more time that goes by, the worse your life will get.
If you have good financial habits, time becomes your friend. The more time that goes by, the better your life will get.
And time is a friend you definitely want on your side.
With good financial habits, every single month you’ll become a little bit richer, even if you’re only saving an extra $10 or $100 or $1,000. It doesn’t matter how much you save each month right now, what matters is which side of the equation are you on. Is time your friend or your enemy?
If you want to be successful financially, it’s really quite simple: make time your friend. To do that, simply spend less money than you earn each month.
If you fail to follow this simple rule, you will always struggle financially, and your struggles will get harder year after year after year.
You simply cannot win in life financially if time is your enemy.
7. Uncover Your Hidden Assumptions
Every time you buy something, you’re taking a risk and you’re making assumptions. You might not consciously think about your assumptions or the risks you’re taking, but that doesn’t mean they don’t exist.
Ignoring risks and assumptions is the #1 reason why people get into financial trouble.
There are lots of reasons why humans tend to ignore risks and become blind to our own assumptions (Charlie Munger put together a great list of the causes of human misjudgment).
It would take an enormous amount of research and study to understand these reasons, and we would still undoubtedly be wrong in many ways because human psychology is so complicated, and we’re constantly learning new things (and unlearning old things as new science proves older psychological studies wrong).
The good news is that you don’t have to understand every reason why your brain miscalculates or ignores risks in order to make better decisions (financially and otherwise).
You just have to learn to accept the truth, and then decide to behave in ways that will help you make better decisions in the future.
Here’s the truth:
- You often ignore the assumptions you’re making when you buy something or decide to do something
- You often ignore the risks involved in buying something or in doing something
Once you accept these truths, you’re now ready to come up with a plan to do something about it.
How to Identify Your Assumptions
We make assumptions every time we decide to do anything in life.
If our brains didn’t make those assumptions, we wouldn’t be able to act in the first place because we would be overwhelmed by the paradox of choice.
So assumptions are not bad—they’re a mandatory part of being human and making decisions. However, we need to understand our assumptions before making major decisions that will affect our lives for many years to come, like whether to buy that fancy house you’re excited about or not.
If you’re planning to buy a house with a mortgage, that means you’re committing to paying off that loan every month for the next 30 years (along with property taxes, insurance, and maintenance). That’s a big decision that will affect you for a very long time, so this is clearly a situation where you’ll want to invest at least a few minutes thinking about your assumptions, so that you don’t blindly charge right past your assumptions into a very bad deal for yourself.
A quick and easy way to do this is to grab a piece of paper and write down this question:
“What assumptions am I making about my life, this purchase, and my future?”
Then just write down the answers as they come.
For example, if you’re about to buy a home, you’re probably making at least some of these assumptions:
- your income will stay the same or increase
- you’ll keep your current job
- your expenses will stay the same or decrease
- your house will go up in value, or at least not decrease in value
But what if one of those assumptions is wrong?
Once you’ve identified your assumptions, you’ll be much better able to identify the risks you’ll be taking and come up with ways to mitigate them.
8. Getting to Know Risk
Risks and assumptions are closely linked. If you’ve paid attention to the assumptions you’ve been making before you buy something, you’ll also be able to identify the risks much more easily.
For example, if you assume that housing prices will always go up or that you’ll always have a job in your current city, you’ll be much more likely to buy that house. But with just a little bit of thinking, you’ll quickly be able to see that both of those assumptions cover up major risks: the risk of the house decreasing in value or having to move to another city because of a job change or transfer.
You can also easily see that these risks are potentially serious, because you can look back just a few years and see that many other people took those same risks and ended up regretting it. If you can learn from the mistakes of other people in these types of situations, you’ll be much less likely to make those same mistakes yourself, and that could save you from an enormous amount of financial loss and stress.
You shouldn’t avoid any transaction that has risks, because every decision in life comes with risk.
Simply being aware of the risks you’re taking will allow you to come up with contingency plans and to reduce the chances of losing more than you can afford to lose.
You can’t prepare for the risks you’re blind to, so the first step in mitigating risk is to simply look for the risks so you can then plan for them accordingly.
9. Manage Your Lifestyle
If your income suddenly goes up, don’t just increase your spending to match your new income, because you never know if it will last forever. Sometimes people get lucky and their income increases a lot in a short period of time. Sometimes people get unlucky and their income goes down, or they lose it altogether.
When you get lucky and your income increases, keep your lifestyle the same as it was before, or raise it only slightly so you can save the majority of your income increase. Give yourself a little treat if you think it’s best for you, but you should absolutely not spend it all (unless you want to end up regretting it later).
Make sure you save and invest that extra cash so you’ll be able to build some wealth, or at least weather the storms that life brings all of us at some point.
Chances are you won’t be lucky financially forever, so if good fortune does come your way, keep her on your side by saving and investing your windfall earnings.
10. Monthly Financial Review
Every successful, profitable business has regular financial meetings, if not monthly, then weekly or even daily.
The more profitable the business, the more organized the financial meetings become.
It’s time to start managing your own finances like a business. Schedule your own 1-hour monthly financial review meeting in your calendar.
At least once every single month, you should review all of your finances at this meeting—your income, expenses, savings, investments, and financial plans for the future.
Here’s a list of questions you should answer every single month. Even if you’re single and live alone, schedule a monthly meeting and go through all these questions by yourself, or with a friend, mentor, or financial advisor.
- How much did you earn this month?
- Is there anything you could do to earn more?
- How much did you spend?
- Is there anything you spent money on that you now regret?
- How could you save more money in the future and reduce your expenses in a way that would add more value to your life?
- Are you paying for any ongoing subscriptions or items with monthly fees? If so, can you reduce or eliminate them?
- How much did you save and invest this month?
- How are your current investments doing?
- Based on your current situation, how well will you be doing financially over the next 1, 5, 10, and 50 years?
Most people fail financially because they stop paying attention to how much they’re earning, spending, saving, and investing.
Scheduling a monthly financial meeting forces you to pay attention so you don’t fall into bad habits that sabotage your financial success. Without a regularly scheduled meeting to review your most important financial information, it’s easy to overlook small problems until they become big problems.
Don’t be that person who says, “I don’t know where it all went.” Schedule a regular financial meeting in your calendar to stay on top of your finances.
If you’re not regularly reviewing your finances in detail, you’re going to regret it later on.
11. Consider the Next Best Alternative
With any spending decision, realize that the next best alternative is always to simply save and invest your money. If you save and invest enough money, you’ll become financially free, or even incredibly rich.
The worst possible thing that can happen if you save money is you’ll have that money to spend or invest later on if you choose to. You literally cannot lose by saving money.
Of course, you could invest your savings in something foolish and lose it all, but the mistake there would not be in saving money—the mistake would be making a bad investment (also called speculating or gambling).
It’s never a mistake to save money unless doing so causes you harm (like trying to save money by eating cheap junk food that later on causes you to get sick and spend more money on medical bills).
12. Create Your Own Personal Financial Statement
Just as successful businesses all have their own financial statements, you should have your own personal financial statement that immediately shows you where you stand financially.
Your personal financial statement should immediately allow you to answer these questions:
- What’s my monthly income?
- What are my monthly expenses?
- What’s my net worth?
- How is my net worth predicted to grow every year in the future?
If you’re like most people, you can’t answer all these questions right away. That’s why you need to create and update your personal financial statement every month.
Personal Financial Statement Template
We created a free personal financial statement template you can use to help when you track and review your finances every month.
Filling out the information in this financial spreadsheet will help you get a much clearer picture of your current financial situation, and it’ll help you plan for your financial future and retirement (if you’re into that kind of thing).
Here’s what’s included in this financial spreadsheet:
- Monthly income
- Monthly expenses
- Assets
- Liabilities
- Projected savings and investment returns
If you fill out this spreadsheet every month, you’ll have a clear picture of where you stand financially, and where you’re going. And if you’re not happy with where you’re going, you’ll now have the clarity and motivation you need to make some important decisions to get you going in the right direction again.
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