Editor's note: This article originally ran on SavingsAccounts.com. It has been reprinted here with permission.
Amassing a million dollars within one lifetime is a goal well within reach for many Americans, according to Thomas J. Stanley and William D. Danko, wealth researchers and authors of "The Millionaire Next Door."
Surprisingly, those with a high income or sizable inheritance aren't necessarily more likely to build wealth than those with mediocre incomes and no wealthy ancestors. If that's true, then what exactly is the key to financial success?
The answer is, quite simply, behavior. First-generation self-made millionaires have created regular, consistent habits that build wealth.
Is it possible to learn these wealth and savings habits and then emulate them? Thanks to Stanley and Danko's research on the wealthy, coupled with the insights of Charles Duhigg, author of "The Power of Habit: Why We Do What We Do in Life and Business," it just may be.
Habits of the rich
Overwhelmingly, millionaires save a lot -- an average of 20 percent of their income -- and spend as little as they can. The trick, of course, is that spending less leaves more to be saved. Millionaires also tend to follow these habits:
- Creating (and sticking to) a budget. They know how much their family spends per year for food, clothing and housing, among other major expenses. They spend substantially more hours per month reviewing their budget than do non-millionaires.
- Creating financial goals. Wealthy people spend twice as many hours planning their future wealth strategy -- how much of their future income they will save and invest and for what purpose -- as do the non-wealthy.
- Maintaining consistent lifestyles. They stay in the same home (no trading up) and remain married to their original spouse.
- Minimizing major expenses. They often live in a modest home, drive a less fashionable car and buy clothing off the rack at discount retailers like Kohl's and JC Penney.
Create a new habit
Now that we know how the self-mades have done it, how can we emulate their behaviors? Building a new habit is not always easy, as anyone who has tried to start a new exercise routine can attest. "If we can understand how habits work, however, they become much easier to control," says Duhigg in his book.
So, how can we create a new habit? According to Duhigg, every successful habit includes four integral parts:
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- A cue or trigger. A trigger can be a particular time when the habit will occur, a place, or even an emotion. What cue can you use to trigger a monthly review of your budget or larger financial plan? A cell phone alert? Pay day? Maybe you can piggyback it on your already-planned bi-weekly visit to your favorite coffee shop.
- A reward. Potential rewards include tangible items like a coffee shop biscotti or other small treat or a psychological boost like the feeling of accomplishment from seeing your saving account grow and your debt level shrink. The key to success is to pick a reward you'll look forward to.
- The routine. This is where it all gets put together. The cue and reward are performed at a regular interval like once a month in the following cycle: Cue (phone alert) -- > Routine (budget review) -- > Reward (biscotti).
- The craving. After several cycles, a craving for the reward may develop and the habit can become automatic. When your cue is triggered, you can associate your budget review with a reward. You might even start to look forward to the routine. If this doesn't happen, Duhigg suggests you didn't pick a compelling enough reward. Select a new one and try again.
Thanks to the insights of Stanley, Danko and Duhigg, you now know the steps to create and control keystone habits that can lead to financial success. All you need now is to put them into action.