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6 Ways to Build Wealth on a Budget
Here’s a hot take: You don’t have to be rich to build wealth.
That’s right. True wealth building has less to do with your income, and more to do with how you save and invest.
“Wealth” probably doesn’t mean what you think it does. So stop picturing fancy cars and big houses. Instead, think of wealth as having enough money saved up for a comfortable retirement or to ensure a down payment on a modest mortgage.
When you adjust your understanding of wealth, you might realize that it’s more within reach than you previously thought. Ready to get started? Here are six money moves to practice wealth-building — no matter your budget.
No. 1: Create a budget
To build wealth you need to save money. Understanding where your money is going is the first step to reducing expenses and saving more. That’s where a budget comes in.
A budget is a plan on how to spend your money each month. It tracks the money coming in (income) and the money going out (expenses). Don’t worry — budgeting isn’t complicated once you start. Here’s how to create one.
First, identify your income. How much money do you have coming in? Then, identify your fixed costs. For instance, your rent or mortgage, utilities, insurance, and debt payments are all examples of expected monthly costs that won’t change.
And what are your variable costs? These can include dining out, ordering food, entertainment, and other changing costs. Remember, income must exceed expenses. If it doesn’t, start trimming your variable costs.
A good rule of thumb for budgeting is to follow the 50/30/20 rule. This rule states that you should aim to spend 50% of your income on fixed costs, 30% on variable costs, and save or invest the last 20%.
How do your finances stack up?
No. 2: Live within your means
Avoid living in a deficit. To build wealth you need to adjust your lifestyle to live within your means. This might look like sticking to a budget and making sure your expenses are easily covered by your income.
But this is tricky thanks to lifestyle creep. Lifestyle creep is when an individual’s standard of living improves as their income increases. Items that were once luxuries become necessities. For instance, upgrading to a more expensive apartment after a salary bump. Basically, the more you earn, the more tempting it is to spend.
Instead, budget additional income to work for you while maintaining your current lifestyle. Additional income is better spent on paying down debt, saving, or investing.
No. 3: Build an emergency fund
Life happens. But an unexpected cost shouldn’t break the bank. Prior to the most recent economic downturn, most Americans could cover a $1,000 bill, but what about a larger sum? It’s important to prepare your finances to weather the ups and downs in life -- similar to what many are facing now. An emergency fund is a smart way to do so.
An emergency fund is money set aside to cover unexpected costs like a medical expense or unemployment. But $1,000 isn’t enough. Financial experts recommend saving about three to six months of living expenses in an untouched savings or investment account. The exact dollar amount depends on your financial situation — namely, your income and fixed monthly expenses. Make sure you save enough money to comfortably cover a surprise cost.
No. 4: Pay off high-interest debt
Debt is a slippery slope — whether it’s student loans, credit cards, or an unexpected emergency. And most debt racks up interest. That means the longer a debt remains unpaid, the more it costs in the long-run. Worst-case scenario — debt can ruin your credit score and delay your wealth-building journey.
It’s crucial to pay off debt, so it should be part of any budget. Create a plan and stick to it. There are two debt repayment methods to try:
- Debt avalanche: The debt avalanche method focuses on paying off debts from highest interest rate to lowest interest rate. If you tackle your debts with the avalanche method, you will pay less in interest.
- Debt snowball: The debt snowball method targets the smallest balance amounts and pays them off in increasing amounts. This strategy helps keep your motivation high — capitalizing on little wins.
No. 5: Generate income
The best way to build wealth is to generate income. Be proactive. Negotiate a higher salary or pick up a side hustle.
Research salary for your current role. Your salary should fall in line with the industry standard depending on your geographic location, experience, and skills.
It might benefit you to have a conversation with your boss and request a raise. Make a list of your achievements and tie your worth to a reasonable dollar amount. Still not receiving pay equal to your worth? It’s time to find a better paying job. Switching companies often leads to a higher salary.
A side hustle is an ideal way to capitalize on passive income. Is there a skill you can sell with minimal investment? Get creative. For example, create an online course that teaches others about your expertise. There are infinite ways to generate money that can lead to long-term wealth.
No. 6: Invest early
Have you heard of compound interest? It’s a trick that grows your money over time. Compound interest is the interest earned on a principal sum of money. Basically, it’s interest on interest.
Take advantage of compound interest by investing sooner rather than later. Typically, a long-term high-yield investment account will return a greater profit than a standard savings account.
Start investing with any additional money you have in your budget. Remember the 50/30/20 rule? Ideally, you should invest up to 20% of your income. Investing is difficult because you won’t see immediate results. Rather, investing is a promise to pay for your future self — like homeownership, a college fund, or retirement.
Building wealth doesn’t always have to do with how much money you earn. It has to do with how you spend it, save it, and invest it.