You’ve probably seen ads, online or elsewhere, advertising “Get Rich in 5 Easy Steps!” or “Become a Millionaire by joining my 14-step program!” While some of these are informative and have helped individuals build wealth, others are merely scams that encourage people to buy investment products or attend expensive weekend wealth-building seminars.
Building wealth can be distilled down to one simple habit. This habit can allow those with modest incomes to build large amounts of wealth. Individuals who develop and maintain this habit are likely to have a secure financial future.
What is this magical habit?
Spend less than you make.
Before you roll your eyes, consider that all other wealth-building behaviors, from investing to paying off debt, depend on the foundational ability for you to have money to spare on those expenses. Those individuals who are able to achieve impressive feats of personal finance management, such as paying off huge amounts of debt or retiring at the age of 50, do so by spending less than they make.
How do you do this?
When asked the best way to spend less than they make, most people will say something along the lines of “increase my income.” While increasing your income hypothetically will create a larger gap between your income and expenses, the reality for most people is that they increase their spending to correspond with an increase in income. This phenomenon is often coined “lifestyle inflation” or “lifestyle creep,” and is one of the most common barriers to building wealth.
Furthermore, most people cannot easily increase their income. While a second job or gig can bring in extra income, it’s often unsustainable due to the high likelihood of it interfering with your personal and family life.
The most direct way to increase the gap between income and expense is to spend less money. Obviously, reducing expenses is easier said than done. Ultimately, spending less than you make comes down to values. What is most important to you? Is your weekly night out with friends worth the money it costs? Perhaps it is, but what about the new pair of shoes you add to your growing collection every time you see a sale?
Take time to consider how the things on which you spend your money contribute to your overall happiness and long-term goals. Does that new pair of shoes make you happy for more than a day or a week? This exercise can be effective in helping you stop spending money on things you really don’t care about so you can have more money to build wealth or to spend on things you deem more important. Conscious spending isn’t about cutting out everything fun. It’s about being aware of your choices and how they may be affecting your long-term goals. Is it worth adjusting your spending habits to save for a dream vacation or to secure your future? It’s your decision how to spend your money, but do it consciously. Don’t allow mindless spending to empty your bank account.
Cutting costs and spending according to your values can help increase the gap between your income and expenses and give you the wealth building power you want.
For ideas on how to cut costs, visit moneymoments.com/money-management/cash-saving-tips/.