I'm a Financial Planner: 4 Ways To Build Wealth Without Earning More
One of the best methods to achieve long-term financial objectives, such as paying off bills, purchasing a new car or setting aside money for retirement, is to increase your income. Building wealth, however, can be done without making more money.
What you do with the money you regularly earn or already have is as important as getting that much-needed pay bump. Moreover, there are ways to increase your net worth without pinching every penny for all its worth.
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"We are all wired differently," said Robert R. Johnson, professor of finance at Creighton University's Heider College of Business. "I am weary of hearing proclamations about how people should stop their daily coffee purchases because if they did, they could save X dollars per year," he said.
Borrowing the utility theory framework from economics to make his point, Johnson suggested, "For some people, particularly boomers, the daily coffee purchase is a social activity as it may involve getting together with friends. The daily coffee purchase could, in fact, be one of the most economical purchases one makes, given the amount of happiness it brings per dollar spent."
So where can you save, and how can you build? Here are four ways to grow your wealth without earning more.
Make Spending Intentional
Johnson suggests Americans be more intentional with their spending. "The key with money resolutions is to ... budget realistically. Specifically, one should not simply budget and track expenses, but one should budget for savings."
"If one truly wants to make savings a priority, it cannot be a residual -- what is left over," he continued. "It should be a line item on your budget. You don't successfully build wealth by simply taking what you have left after all your expenses."
Where Can You Save?
Changing your mindset to take actions that will put your money to work sounds simple, but it takes self-control. Start with things like automating payday transfers and putting any "windfalls," refunds and bonuses into investment accounts. If possible, try to cut down on the biggest expenses: housing, transportation and food.
Additionally, paying off debt is important, but not the easiest thing to do when you're already struggling with everyday essentials. However, you have to reduce the wealth wreckers, and credit card debt will destroy even the strongest of returns.
Lean on Your Retirement Accounts
"Making the most of tax-advantaged accounts, such as a 401(k) plan and an IRA, including taking advantage of any employer matching funds, is another way to build wealth quickly without making more money," said Peter Reagan, financial market strategist of Precious Metals IRA company Birch Gold Group.
A 401(k) or an IRA does more than just save for retirement; it also reduces your current taxable income. Contributing $6,500 to a typical IRA might save you $1,500 or more in taxes while generating wealth. A health savings account (HSA) is even better because it's tax-deductible at the time of contribution, grows tax-free and is tax-free when withdrawn for medical expenditures.
Avoid Lifestyle Inflation
Lifestyle creep occurs when a salary raise causes you to spend more. It's a "silent killer" that affects people at every level income level. "People spend every raise, every bonus, every small win before it ever has a chance to work for them," said Pavel Efremov, director and board member at FinchTrade.
"The problem is not that people lack discipline. It is that they adapt. The moment income goes up, the lifestyle follows," said Efremov. "That extra few hundred dollars a month, invested early instead of spent, compounds into something most people would not believe if you showed them the numbers."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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