Everyone has bad habits… especially when it comes to money.
I’ve seen them in myself, my family, and my friends… and you probably have too.
The four bad habits I’m sharing today might not put you in the poorhouse, but they’ll make your financial life a lot more challenging and uncertain than it needs to be.
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So if you want to protect – and grow – your money in the years to come, avoid these four habits…
1. You have an unhealthy relationship with money
Some people view money like they would that bowl of curry noodles or laksa (or, say, Ben & Jerry’s ice cream) while they’re on a diet… kind of forbidden, gluttonous, but so nice, though in a feel-bad-about-yourself-later kind of way.
They think that money is dirty, and even a just a little bit is bad. Or that liking money, or the things you can buy with it, mean that you’re selfish and greedy.
If any of this rings a bell with you, bad news: You’re probably never going to be rich. If on some level you don’t like money, you’ll probably never have a lot of it. If you think money — and being rich — is “bad”, it means that you don’t really want it. There’s a voice in your head — maybe you can hear it, maybe you can’t — that’s going to stand in your way.
If that’s you and it’s just the way you feel, that’s fine – as long as you also realise that you’ll never have much money.
But if you think you’d like money, the first step is to make sure that your brain isn’t working against you. You need to stop and think about your real attitude. And either embrace it… or start with a clean slate that says, “money is good”.
I can certainly tell you that Warren Buffett and Li Ka-shing (as well as other high-net-worth individuals) don’t avert their eyes in shame when they look in the mirror… and if you do, you’ll have a difficult time joining their ranks. (For more wealth-building tips from the rich, go here.)
2. You think that money is an end in itself
Chances are that you’ll stay poor if the number in your bank or brokerage account defines you.
A far smarter (and more productive) strategy is to re-orient your thinking so you view money as a means to an end.
What’s that end? Options. If you have money, the range of opportunities available to you – what you can do with your time – expands dramatically.
Conversely, no money equals fewer options. If you’re struggling to make ends meet, your menu of opportunities is limited because you’re focused on making rent or the car payment tomorrow. You can’t choose what to do, because your amount of money constrains you.
3. You don’t diversify
If you keep all of your eggs in one basket, you’re setting yourself up for big losses – and possible disaster.
The idea behind diversification is simple. It means putting your eggs in different baskets. That is, spreading your risk across different types of assets, so that a decline in value in any one holding isn’t so bad – because there will likely be other holdings that rise to help balance out the losses.
But diversification goes beyond just holding a number of different assets… what about your “personal equity”? Is it diversified?
Equity is what’s left after you add up the value of everything you own, like stocks and stamp collections and your flat. Then you subtract what you owe (on your mortgage, to the taxman or to your ex-spouse, for example). What’s left is your net worth, or your equity.
So when I say “personal equity”, I’m talking about a much more broad definition of your assets. It includes everything from financial, personal, and professional experience to prospects and earnings power. Personal equity measures how you’re going to build your equity in the future.
It’s about where you’ll be earning your living and adding to your savings in coming years. Where is your paycheck coming from? What other sources of income do you have? Where is your professional network – and how strong is it? How transferable are your skills? How many languages do you speak – and how easily could you work in a different country?
Most people work in the same country where they have almost all of their assets. And even if you do hold some foreign shares or own real estate in another country… when you factor in where and how you’ll be earning money in the future, you’re probably a lot less diversified than you think.
4. You don’t invest in real estate
As my colleague Peter Churchouse says… pretty much all human activity uses land.
It is hard to think of many economic, business or social endeavours that do not use land in some way.
The hotel that you stayed at on your last vacation uses land (not to mention the airport or train station you used to get there). Pretty much any business needs land… from that tiny tech startup in the garage to the sprawling empires of multinationals.
Given how essential real estate is to everything, you’d think that its importance would be reflected in the average stock investment portfolio. But it’s not. At around US$2 trillion of total market capitalisation, it is small potatoes when set against the energy sector, technology, consumer stocks or banking stocks.
But don’t make the mistake of not having any real estate in your portfolio. Remember, owning your house isn’t the same thing as investing in traded real estate securities. You’ll be missing out on the potential for big gains. It’s also a simple way to diversify.
These are just four habits that will make you poor. There are also the obvious ones… you spend more than you earn… you ignore the cosmic power of compounding… or you speculate more than you invest.
As I said, on their own, these habits might not put you in the poorhouse. But they will make your life more difficult. So if you want to be successful in the years to come, avoid doing these things.