Is a high salary the secret of how to build wealth? While a six-figure salary is a beautiful thing, if you’re spending all of it, you’re not building any wealth. Many working adults are doing just that! Wealth inequality makes the news often, but building wealth is never discussed. As stated in the title, a high salary can help, but it does not build wealth by itself.
The two most important things to learn and take to heart if you are going to build wealth:
- It’s not what you make; instead, it’s what you keep!
- Make your money work for you!
Personal Net Worth (Wealth)
Before I discuss how to build wealth, let’s discuss what it is. When we talk about rich or wealthy people, most of us picture expensive cars, big houses, the newest tech, and maybe even a private jet. But more likely than not, all of those items were probably purchased with debt (mortgage, auto loan, credit card, etc.), which does not make them rich and instead makes it harder to build wealth.
Surprising as it may be, most millionaires are the ones who drive older cars, live in simple homes, and do not have fancy things. They focus on building portfolios of assets and work to decrease liabilities like debt. The Millionaire Next Door is an excellent book if you’re interested in learning more about how some of America’s millionaires might live in your neighborhood, but you never realized it.
Personal Net Worth = Total Assets – Total Debt
I highly recommend calculating your net worth as it gives you great insight into your financial health. Think of your net worth as if you sold everything you own and paid off what debt you have, your net worth is the money left over.
This number is probably the most accurate way to track your financial progress. The reason this is better for monitoring financial goals is that it takes into account debt. Many financial experts focus on building more annual income, but that is pointless unless you are investing the additional funds to get that money working for you.
Money Made vs. Money Kept
If I told you that two friends lived in the same town, but one made $25,000 more than the other, could you answer who is richer? Nope! Money made means nothing! I made a fake example that doesn’t take into account many things but illustrates my point.
Bob lives in a large house, drives a great car, eats out a lot, always has the latest tech, and takes impressive vacations.
Fred, on the other hand, has a modest house that he shares with a roommate and drives an older car that is almost paid off. He still takes a vacation and has fun, but it’s not as Instagram worthy as Bob’s vacation. Fred’s focused on investing as much as he can while still living life!
|Yearly Cost||Bob – $75k||Fred – $50k|
I would say that Fred is a lot wealthier than Bob due to the low debt and his ability to find money to work for him. I know this example is extreme, but I think many of us can think of someone who is probably in Bob’s situation.
Another disclaimer is some people say, I don’t have a big house or an expensive car, so I am good, but be careful. A friend of mine had a great saying that some people like getting poor $20 at a time. What my friend means is they never spend a lot of money, but they spend a little bit often. Mind your expenses and debt!
Focus on what is essential! Enjoy life, live within your means, and have a financial plan. If you invest (to make your money work for you) and avoid debt, you will build wealth. It’s that simple!
Make your Money Work For You
Almost everyone works for a living, and they exchange their time/effort for a paycheck, but the real goal is to get a paycheck without trading your time/effort. My dad always joked growing up that he was on the hunt for a new job, the same pay no hours. Well, I might not have known it at the time, but that job does exist. It just requires some hard work and dedication to get to that point called financial Freedom!
How do I make my money work for me? Great question! Here are my top tips:
- Eliminate your Debt – If any of you are Shark Tank fans, one of the sharks, Kevin O’Leary (Mr. Wonderful), declared that debt is evil! Debt works against you as the interest makes the loan harder to pay off. The less debt you have, the easier it is to have your money work for you.
- Automate Savings/Investing – I find automating my savings and investing drives more money to the accounts. People call this paying yourself first. I have my paycheck from work split and sent to multiple accounts. My checking account looks smaller, but my savings & investment accounts grow each paycheck, and I am never tempted to spend or use that money for something else.
- Don’t Auto Pay Credit Cards – If you are anything like me, I use my credit card for everything and rarely use cash. This is great for tracking my spending, but it also lets you spend as much as you want without the worry of having enough cash to buy something. Reviewing your spending each month can help reduce future expenditures. PSA – Pay off your credit card every month! Credit card debt is horrible and hard to pay off!
- Invest in your Retirement – Utilize a 401k, Roth, or IRA to build tax-free savings to provide a comfortable retirement. If your employer has a matching program, ensure you give enough to get the match. Also, if you do not max out your retirement, raise it 1% each year automatically. I promise you that you will not even notice the change, but this will drastically improve your retirement savings.
- Use the most powerful retirement account, an HSA account. It is called a triple tax free account as it is not taxed going into the account, the earnings are not taxed, and the withdraw is not taxed. If you have the opportunity to build up a balance in an HSA account while your young and healthy, that will pay dividends (pun intended) when you’re older. Healthcare costs are one of the largest costs affecting retirees.
- Invest Outside of Retirement – Any money you have leftover each month after your debt is paid off and an emergency savings account is funded should be invested! This could be real estate in the form of a rental property, investing in the stock market, peer to peer lending, REITs, basically, anything that will generate future earnings and appreciation. Investing outside of your retirement accounts is essential if you have goals that you want the money for before retirement age! If your interested in starting to invest check out my Investing 101: How to Start Investing!
- Build a Side Hustle/Business – Building a side hustle/business is often overlooked or not considered but investing some money and time into a business/side hustle can help accelerate your wealth building. Most people never get started investing because they do not have money, but you can always earn money. Doordash pays about $12 for delivering food. What if you delivered food 1 hour a day after work, five days a week? That is about $60 bucks a week or $240 a month. I think investing $240 a month is a pretty good start on a path to building wealth.
To summarize how to build wealth can be boiled down to focusing on what money you keep and getting that money to work for you! Building wealth is just that simple and it is not your salary! When you get a raise, raise your investing not your lifestyle!
If you are interested in building an emergency fund prior to investing and looking for something other than a savings account to put the money, check out my Top 5 Alternatives to a High-Yield Savings Account page
This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.