5 Habits of Millionaires That Will Improve Your Finances

The other day, my son and niece were playing outside and came across a $1 million bill. They're both young enough to think that maybe, just maybe, it could be real.

As they were trying to determine whether they had struck it rich, my son took the bill, put it up to his nose, and gave it a good sniff. "Nope, it's fake. It doesn't smell like real money," he said.

We can all relate to being disappointed that we haven't earned our riches yet, but there are some practical habits of millionaires we can follow to improve our finances. Here are five of them.

1. They avoid debt

Having debt can be one of the biggest obstacles to building wealth. When you accumulate a lot of debt, you'll spend much of your income repaying it instead of investing it in assets.

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While not all debt is equal (the vast majority of homeowners have mortgage payments), one of the worst is high-interest debt held on credit cards. The average American has $7,951 in credit card debt and is paying an astonishingly high interest rate of 24.8%.

If you make monthly payments of $350, it will take you more than three years to pay off that balance, and you'll have paid $2,756 in interest. Avoiding debt is difficult, so start here if you need some help.

2. They invest their money

For most of my young adult life, I thought investing money was only for rich people. I didn't realize that I could take small amounts of money and invest it, eventually earning far more than my original amount.

Where some people get tripped up is when they think they can save their way to wealth. In reality, you have to take on some risk to let your money grow.

The good news is that investing your money is easier than ever these days. You can open a brokerage account and buy a fund that tracks the S&P 500 without needing any investing experience. With a historical rate of return of 10.2%, the stock market is a fantastic place for building wealth over time.

3. They avoid lifestyle creep

Billionaire investor Warren Buffett famously drives used cars. His current vehicle of choice is a 2014 Cadillac STS that he got a good deal on because it had hail damage. Now that's frugal.

Lifestyle creep, where you continue to expand your spending on goods as your income goes up, tempts us all. Cars, homes, clothes, and travel are easy to spend on as we make more money over time (and even if we don't).

I haven't been the perfect example of this, but I buy many things used, including my car, backyard grill, and even the Xbox I got my kids a few years ago. Taking this frugal approach helps lower my expenses and keeps my spending in check.

4. They find additional income streams

While you can build wealth by working a day job and setting aside money to invest, many millionaires speed up the process by creating additional income streams.

This may involve investing in a rental property, starting a side business, or using their skills to sell online courses. While there are many different avenues to choose from, the important part is remembering that finding even one way to make additional income can significantly improve your finances.

About 20% of American households earn some form of passive income, and of those who do, the average amount is $4,200 annually.

5. They have an emergency fund

While it may seem obvious that millionaires have money saved for a rainy day, you don't have to be rich to follow their advice.

If you can only set aside $25 per month, start there. Aim to save a starter sum of $1,000 in your emergency fund so that the next time your car breaks or you need to replace the water heater, you have a small cushion of cash to lean on.

With many savings accounts currently paying annual percentage yields (APYs) above 5.00%, you can easily earn a decent return on your emergency fund right now.

Celebrate the wins

Having goals to earn more money, build your investment portfolio, or live frugally are all great. Just remember that even small moves can add up quickly.

If you don't have an emergency fund, start there. Don't worry about investing your money until you have some cash set aside for a rainy day. Similarly, if you have debt to pay off, focus on that first and don't worry about trying to create additional income streams.

Start small and celebrate your financial wins. But feel free to keep an eye out for any $1 million bills you see on the ground.