The Money Habits of the 1% You Should Be Following

"Learn from the best" is smart advice for just about any endeavor. If you want to get better at playing golf, it makes sense to watch the pros in action. And if you want to improve your finances, it helps to know how the richest 1% manage their money.

Even though this group is extremely wealthy, their most important money habits are things that anyone can do. Here's a look at those money habits of the 1%, based on reports, surveys, and information from financial planners.

They don't overspend on vehicles

The stereotype of the rich driving around in the latest Ferraris and Maseratis doesn't always match the reality. Faron Daugs, a Certified Financial Planner®, told CNBC that his self-made millionaire clients typically buy cars outright. They also keep their cars for a long time.

Now, cars are expensive, so buying in cash isn't always feasible. What's important is that you calculate how much car you can afford. A good rule of thumb is to not spend more than 10% to 15% of your take-home pay on a car payment.

Overspending on cars is one of the biggest money mistakes. It leaves you with less money to save and invest. And once you take on an expensive car payment, it's hard to get out of it.

They invest in the stock market

The 1% know that saving money isn't enough. With inflation, your savings will gradually lose value. To build wealth, you need to put your money into assets that increase in value.

That's why the wealthiest Americans invest in stocks. When the Federal Reserve surveyed Americans about their assets, it found that stocks make up a larger portion of assets for those with higher net worths. Wealthy Americans also tend to put their money in investment funds, such as mutual funds.

The stock market's average return is about 10% per year. It can fluctuate from year to year, but it has historically been a smart choice for long-term investors. An easy way to invest in the stock market is with an index fund. Funds that track the U.S. stock market or the S&P 500 are both popular options.

They keep plenty of money in their emergency funds

You're going to have unexpected expenses from time to time. It could be a car accident, medical issue, job loss -- or all of the above. It's best if you don't need to go into debt for emergencies, because that costs you money in interest.

The usual recommendation is to have an emergency fund with enough money to pay for three to six months of living expenses. Daugs found that his clients save even more, typically enough for six to nine months.

If you don't have an emergency fund already, make that one of your goals, and save money toward it every month. It takes time to build one, but it also gives you peace of mind to know that you're ready for anything.

They take advantage of tax savings opportunities

Another stereotype about the 1% is that they don't pay their fair share of taxes. That's undoubtedly true with some. But many more simply take advantage of legal tax avoidance strategies. There are plenty of methods that the other 99% can use, too.

For example, almost anyone can contribute to tax-advantaged retirement plans. With these plans, you're normally not allowed to make withdrawals until age 59 1/2, at least without an early withdrawal penalty. In return, you save on taxes. Here are a few options:

• Contribute to a 401(k) plan at work. If your employer offers a 401(k), you can have contributions taken out of your paycheck. This lowers your taxable income by the amount you contribute. For 2024, the contribution limit is $23,000. If you're 50 or older, you can make an additional $7,500 in catch-up contributions.
• Contribute to an individual retirement account (IRA) through a stock broker. This is an account you open on your own, and your contributions lower your taxable income. For 2024, the contribution limit is $7,000. Those 50 and older can make an additional $1,000 in catch-up contributions.
• Contribute to a Roth 401(k) or Roth IRA. With Roth plans, contributions don't lower your taxable income. However, when you make withdrawals in retirement, you don't need to pay income taxes on them. Withdrawals from traditional 401(k)s and IRAs are taxed as ordinary income.

They avoid bad debt

The wealthy aren't averse to debt. Some will take on debt to buy a home or expand a business. But they typically don't get into bad debt.

What's the difference between good debt and bad debt? Good debt has a reasonable interest rate (normally no higher than 6% to 8%, and ideally even lower) and has long-term benefits. For example, a mortgage is generally considered good debt. Mortgages normally have low interest rates, and they allow you to buy a home, which could potentially increase in value.

Bad debt is the opposite: It has high interest rates and no long-term benefits. Credit card debt is the most common example. It costs over 20% per year, on average. And this type of debt is unlikely to have any long-term value for you.

All those money habits of the 1% can have a positive impact on your finances. If you follow them diligently, you'll be in better control of your money and prepared for the future.