Do you feel exhausted living paycheck to paycheck and never seem to get ahead?
Or, perhaps you’re stuck in a vicious cycle of debt that feels completely draining and it’s causing financial stress?
Maybe, you’re one of the lucky ones who’s doing okay. You even save money regularly. But deep down you know that you could be acting more mindfully, saving even more money and growing your nest egg?
Whatever your reasons and wherever you’re holding, today I’m going to take your hand and give you 4 keys to save more money and build wealth.
4 Keys to Save More Money and Build Wealth
According to this survey, more than a third of Americans have no savings at all and 69% have less than $1,000. I understand that people feel overwhelmed by all the things they need to do to stay on top of their finances. It seems complicated and our lives are busy. So money management gets pushed to the bottom of the priority list.
But here’s the thing – if you keep doing what you’ve always done, you’ll keep getting the results that you’ve always been getting. Which might mean you’re not going to build wealth.
Assuming you’re ready for a different outcome, let’s break down the process of sound money management into four easy steps.
4 keys to save more money and build wealth
These keys are the only things you need to focus on:
- What you make
- How much you keep
- How much you invest
- The stories you’re telling yourself
The rest is commentary.
Key #1 How much money you make
Let me start by dispelling a myth: making more money will not make you rich.
Sure, making more money can help you save your money and grow your wealth. But it’s not a silver bullet.
If you increase your spending to meet (or beat) a higher income you won’t improve your financial situation.
However, if you’re mindful of your spending, I absolutely believe that making more money can transform your financial situation – both today and in the future.
Let me challenge you to think outside the box about creative, honest ways to make more money.
Ways to make more money
There are many ways to increase your income. Here are a few:
- Do great work for your current employer and ask for a raise.
- Negotiate a new employment contract that includes better benefits like more vacation days and a better retirement plan.
- Work overtime.
- Learn a new skill and take a higher level job within your company.
- Job search and find a new job with a higher salary and better benefits.
- Work a side hustle in the evening and on the weekends.
- Brainstorm 50 ways to make fast cash and see what creative ideas your mind uncovers.
When you let your thoughts run wild, you’ll be amazed at the results.
Key #2 How much you keep
There are people earning $30,000 a year who save money consistently and there are folks earning $300,000 who are drowning in credit card debt.
It’s not how much you make. It’s how much you keep that transforms your financial future.
Here are five ways to increase how much you keep.
Pay Yourself First
The best way to keep more of your money is to pay yourself first – before any of your bills get paid. It’s like skimming the cream off the top of the milk. Think of it as the best, fattest and tastiest part of your income! You’re giving yourself that gift. I’ll take that in my coffee any day.
Every time you get paid, whether it’s $1,000 a month or $10,000 set aside some money. Ideally, you want to save 20% of your income (even more than that if your goal is to retire early). But if you can’t do that now because you’re drowning in debt or you haven’t yet trimmed your expenses, start where you are.
Saving 1% of your income today is better than never getting started. When you start taking positive action, it’s amazing what magic can happen.
When you pay yourself first, you’re taking care of your future self.
Automate your savings
The most foolproof and resilient system is automatic transfers from your salary to a savings account before your salary gets deposited in your checking account. You never see the money so you don’t get used to it as part of your monthly income. Your money grows “magically” in the background while you get on with your life.
If automating your savings at the employer level isn’t an option, set up automatic transfers from your checking account to your savings account. It’s slightly less foolproof because you see the money going into your bank. You can stop the automatic transfers if you’re feeling stretched.
Nevertheless, it’s still a good plan. Experience tells me that what gets automated doesn’t get forgotten.
Create a budget or spending plan
For some folks, budget is a dirty word. It kind of feels like a diet – and no one wants to feel restricted. That’s why I use the term spending plan. Planning for things like vacations and weddings is exciting and joyful.
But regardless of what you call it, when you create a spending plan, you’re in charge. You decide at the beginning of the month where you want your money to go. You don’t wait till the end of the month for your money to tell you where it went. A spending plan gives you choice.
If you’ve struggled before to come up with a workable monthly budget, here’s a system you can try:
Calculate the total of your bare bones, must-have, basic-needs monthly expenses. Working with my clients Nancy and Adam (not their real names) we came up with the following basic expenses: mortgage, utilities, school tuition for their children, after-school activities that can’t be canceled this month, basic food expenses, minimal transportation expenses, insurances, taxes, and few more items. These are their fixed monthly expenses.
We then subtracted the fixed expenses from Adam and Nancy’s monthly income. What was left over could be used for discretionary spending – all the items that are not absolutely necessary. The big shocker was that after calculating their fixed expenses, Adam and Nancy had only $479 left for the month.
That was a surprise and a tough pill to swallow. But knowing what they had for discretionary spending at the beginning of the month gave Nancy and Adam the opportunity to get creative. They had to figure out ways to rework their finances to make their spending plan work.
Spend less than you earn
Once you create your spending plan and you know where your money’s going, you have clarity. And clarity gives you choices. You can prioritize certain expenses and make sure your choices align with your values. Spending stops being haphazard and impulsive. You’re no longer shooting from the hip.
When you clearly see where your money’s going you get to make low cost and no-cost substitutions that help you hold on to more of your income.
You simply spend less than you earn.
Save more money
Spending less means saving more. It’s win-win! For some folks that means they’ll crush their debt more quickly, while for others it means they’ll be able to turbo-charge their investing. Wherever you are on your money journey, it’s all good. Keep taking one step forward.
Let’s move on to investing.
- Beginners guide to wealth creation
- On the Importance of Getting Started Investing NOW
- One Simple Step to Getting Started Investing
- How I Got Started Investing
Key #3 How much you invest
Investing is how you make your money work for you. Keeping your money in a savings account means you’ll earn only a few cents on the dollar in interest income. The interest you earn won’t keep up with inflation over the long term. As prices rise, your money loses purchasing power.
That’s not very smart.
To beat the impact of inflation you need to invest your money. Investing is how your money multiplies over time.
Let me show you how that happens.
Recently, I met with a couple whom I’ll call David and Theresa. Ten years ago, Theresa’s mother passed away and Theresa inherited a million dollars. Unfortunately, Theresa let the money sit in the bank for the last ten years – a period in which the US stock market has risen by an average annual rate of 12% per year.
Imagine this: any money which Theresa would have invested would have tripled in value over the last 10 years.
Yikes! That’s a lot of wealth to miss out on.
Let’s take a look at what could have happened to Theresa’s inheritance if she’d invested part of it.
Keeping it super simple, let’s assume Theresa kept part of her money in bank deposits earning 0%. She invested the remainder in the total US stock market.
I chose three different portfolios:
- Conservative – 20% Stocks / 80% Bank deposits
- Balanced – 50% Stocks / 50% Bank deposits
- Aggressive – 80% Stocks / 20% Bank deposits
Looking backward at what could have been, here’s what Theresa and David missed:
If they had invested only 20% of the inheritance in the US Stock market, their wealth would have grown by $420,000 to $1,421,169. Investing 50% of the money in stocks would have doubled their money. And if they had been very aggressive investors, investing 80% of their money in the US Stock market, their portfolio today would be worth nearly $2.7 million.
That’s the magic of compound interest!
That’s what happens when your money earns interest, and interest on the interest. And interest on the interest on the interest.
Are you still delaying your entry into the stock market? What’s keeping you back?
Key #4 What are the stories you’re telling yourself?
We all have our stories. I like to think about them like gremlins whispering in my ear. But really, it’s your subconscious talking. When your subconscious feels stressed, overwhelmed, small, anxious, or just not enough, it starts acting weird and sending negative messages that block you from making big changes in your life.
What kind of stories are your gremlins whispering to you?
- The economy is bad, there are no jobs available
- That job is beneath me
- Nobody hires people my age
- My job skills are outdated, nobody wants me
- I need to buy that thingy
- A new car is going to make me feel like a million bucks
- If only I had a new outfit, people would like me better
- Sticking to a budget is too restrictive; I want to feel free
- Investing is overwhelming; I don’t understand it
- Money is a man’s world
- People won’t like me if I’m wealthy.
- Rich people are snobby and shallow.
- Poor people are hardworking and noble.
- Money makes the world go around.
- There’s a limited supply of money in the world.
- Money burns a hole in my pocket.
The list goes on.
It’s so easy to come up with umpteen million reasons why you can’t save more money and build wealth. But really, if you challenge your story and move forward, I think you’ll beat your inner gremlins.
Are you conscious of the stories you’re telling yourself? Do they stop you from getting ahead financially? What’s your next money step – do you need to make more, save more or build wealth?