Most people spend their entire lives just scraping by and living paycheck to paycheck. Every day is a struggle and they never get to sit back and enjoy the fruits of their labor. All the money they bring in quickly goes right back out the door and they never get around to accumulating any real wealth.
It’s a shame because the key to building wealth is so simple. Forget all about stocks, bonds, real estate, Roth IRAs, etc. None of that will do you any good if you don’t spend less than you earn. I’m going to say that again because it is so important.
The key to building wealth is to spend less than you earn.
Your ability to spend less than you earn is perhaps the strongest indicator of your potential to build wealth…even more than your salary. Let’s take a closer look at two fictional people with very different salaries so you can get a better understanding of what I mean.
Jim is a successful professional in a large US corporation where he makes $125,000 a year. His wife Maria is a public school teacher and she brings in another $35,000 a year. You would think their combined income would allow them to invest a good amount of money every year, but in fact they invest almost nothing.
After stretching themselves thin to purchase a home in a very expensive neighborhood, a large chunk of their income goes toward the mortgage and property taxes.
To make matters worse, most of their neighbors earn much more than they do, and they have developed a habit of overspending so they can keep up with the Joneses and appear to be better off than they really are. They have no kids but they spend a fortune eating out and going on expensive vacations.
They spend without thinking and it shows. Between credit card debt, student loans, and two ridiculously large car payments they are actually spending more money than they earn. That’s a recipe for disaster.
One of Jim’s subordinates is named Dave. He only makes about $60,000 a year and his wife Megan doesn’t work at all. She quit her job to stay home and raise their two young children.
Dave and Megan’s income is a full $100,000 less than that of Jim and Maria. But that doesn’t mean they have nothing to invest.
Dave believes in paying yourself first and he has a portion of every paycheck automatically invested in a mutual fund.
He and Megan live in a modest home in and they are more concerned with accumulating wealth than showing off. Their cars are paid off and they pay their credit cards in full every month. They always have money left over after paying their bills so their net worth continues to increase month after month.
On the surface you would assume that Jim and Maria are doing pretty well financially. But as long as they continue to spend more than they earn they are moving in the wrong direction. Meanwhile Dave and Megan have much less to work with, but they are steadily building wealth simply by spending less than they earn.
If you’re currently spending more than you earn…
You’re asking for trouble. Rather than building wealth you’re digging yourself deeper and deeper into debt, and the time to make changes is now.
If you want to turn your financial situation around, you have two choices.
Cut Expenses. Take a good hard look at your monthly expenses and I guarantee you will find a few areas where you can trim spending. Cancel recurring charges that you aren’t using. Call your cable company and ask them to give you a discount for being a loyal customer. Start brown-bagging instead of buying lunch every day.
The only problem with cutting expenses is that there’s a limit to how much you can cut before you make yourself miserable. That’s why I prefer to focus on the second method which is…
Increase Income. It never ceases to amaze me how many people will complain about a lack of money and yet do nothing about it. There are a million ways to supplement your income.
- Get a second job.
- Sell stuff online
- Start a side business.
- Get a side gig (babysit, walk dogs, start a blog, etc.)
Yes, all of these methods will require time and that means you will have less time to watch television or fool around on Facebook. But if you are serious about getting out of debt and building wealth, you need to be prepared to make small sacrifices in the short term. But don’t worry, because those small sacrifices you make now will let you retire in style and enjoy the good life while your neighbors are still working themselves to the bone.