It’s not hard to outdo most Americans when it comes to money. Below are four easy ways to be richer than most.
In the country of the blind, the one-eyed man (or woman) is king. Most Americans don’t save money for the future, they rack up piles of credit card debt, they don’t keep an emergency fund in case of financial hardship and they don’t use a budget. See below for four easy money habits that can help anyone outdo most Americans.
1. Save Any Money at All
A 2014 study by Interest.com, part of Bankrate.com, found that the nationwide median household savings in 18 major metropolitan areas is $0. The study looked at data from the U.S. Bureau of Labor Statistics.
The study also found that in 17 of the 18 cities analyzed, families that earned the median household income should be able to save a decent amount of money if they limited their expenses to the median cost of living.
For example, in Washington, D.C., median household income is $85,769. Even with that city’s relatively high cost of living, a family with typical income and spending would be able to save $19,967 annually. Invested for 40 years at 8% interest, that would translate to a hefty $5.6 million dollars in the retirement fund.
The study concluded that the idea that Americans simply can’t afford to save may be at least part myth. The researchers say the data suggests Americans are simply stretching their standard of living to fit their income, with no wiggle room left over for monthly savings contributions.
The study’s conclusion lends weight to the idea that treating saving like a bill is a great way to boost the amount American’s can sock away.
2. Have Less Than $15,000 in Credit Card Debt
The typical American family with any credit card debt at all has $15,609 in credit card debt. Broadening the criteria to all American households, the median credit card debt drops to $7,281.
Since the typical credit card interest rate is 14.9%, that means most American families pay at least $1,084 in interest charges every year. Investing both the annual credit card debt and the annual interest charges at 8% instead would give most families a nice fat $2.3 million dollar pension fund by retirement age.
The median credit card debt in the U.S. is down from $19,000 in 2009, but not because Americans have been paying down their debt. Instead, the figure dropped because credit card companies wrote off credit card accounts that had been delinquent many years. Credit card companies also tightened their criteria for granting credit, denying cards and accounts to millions of credit card applicants based on insufficient creditworthiness.
Related: 8 Smart Money Tips to Get Richer Now
3. Have an Emergency Fund
According to a study by Bankrate.com, less than four in ten Americans has an emergency fund to deal with unexpected expenses.
Emergency funds are a must-have money tool for anyone who wants to get ahead financially.
An emergency fund of three to six months of expenses on hand in ready cash can help in case of an unexpected job loss. Emergency funds can also help with major medical expenses, emergency pet care, home repairs, funeral costs and taxes. But how does an emergency fund help someone get richer?
Someone without any savings who runs into an unexpected expense can take a major hit to their finances when they’re forced to borrow money to pay off the expense. For example, imagine someone gets in a car accident and racks up $30,000 in medical costs that aren’t covered by their insurance policy. Not a fanciful scenario. That $30,000 on a credit card would cost $6,870 in annual interest in the first year with a fairly typical 22.9% rate. Chances are that since our imaginary accident victim couldn’t put together an emergency fund, then he or she also won’t be able to pay down the $30,000 debt. Unpaid, that debt would grow to over $1.8 million in 20 years.
Even someone who does have savings should have an emergency fund. Money in a traditional 401k or IRA that gets used for emergency expenses faces a 10% penalty for early withdrawal, and that adds up over a lifetime of small emergencies.
4. Have and Use a Budget
Budgeting is crucial to anyone who wants to be richer because it helps in every area of personal finance. A budget can help a consumer set up and fill an emergency fund. It can knock down credit card debt and create a way to save money for retirement, home buying or college.
According to the National Bureau of Economic Research, those who budget tend to be about 20% richer than those who don’t. How many Americans currently follow a budget? Only about one in three.
In Most Big Cities, It’s Easier to Save Than We Think – Interest.com
American Household Credit Card Debt Statistics: 2015 – NerdWallet.com
Budgets Can Crumble in Times of Trouble – Bankrate.com
Wealth Accumulation and the Propensity to Plan – National Bureau of Economic Research