Each week we ask a question to help you focus on an area of your finances that might need a closer look. This week: Where should I start building wealth?
You know you want to make changes to improve your financial health, but you have no idea where to start. That’s completely understandable because personal finance can seem very complicated. There are hundreds of options to save more, make more and invest more. So, where exactly do you start building wealth?
I’m going to let you in on a secret that financial advisers reveal to all their clients: money is actually not that difficult.
The basis for any wealth accumulation is as straight-forward as “spend less than you earn”. You can add a couple of extras to that: “save first, spend second” and “invest your savings”.
- Spend less than you earn
- Save first, spend second
- Invest your savings
Let’s break those three points down to give you a proper jumping-off platform to dive into your new wealthy life.
1. Spend less than you earn
This is the fundamental truth of any budget and the foundation you need to start building wealth. You don’t want to spend every penny you make, and you certainly don’t want to spend more than you make. Each month, you want to have money leftover so you can start to put it towards wealth creation.
Easier said than done, right?
Well, there are two ways you can approach this – and preferably you’ll attack it from both ends.
Earn more money
The first is earning more money in the first place. Don’t let anyone ever tell you that it’s not hard to save money when you don’t earn a lot. It’s really, really hard. No matter how careful you are with your spending (see below), living a reasonable life costs a certain amount of money.
If your job isn’t paying you as much as you need, there are a number of things you can do to earn more. You can:
- Ask for a pay rise
- Change jobs to get a pay increase
- Retrain or upskill to earn more
- Take on a second job outside your regular working hours
- Start a side-hustle to bring in some extra money
- Work your passive income streams
Spend less money
The second way to start building wealth, is to spend less of the money your earn. All the usual suspects come into play to make that happen: set a budget, don’t impulse buy, take care of the pennies and carefully watch big ticket spending like your rent or mortgage, your insurances, your utilities and your holidays.
Here are several resources to help you spend less:
- Try the Discount Grocery Challenge to save money all year
- 5 ways to negotiate a better deal and save plenty of money
- 4 small lifestyle changes that will save you big money
- Shopping around for health insurance could save you heaps
- 19 pain-free ways to save money… right now!
- Save money these school holidays and still have a ball
- 101 frugal tips to help you live a richer life
2. Save first, spend second
If you spend less than you earn, you’re well on the road to a better financial future. But if you want to add a jetpack to your journey, you need to get into the habit of saving first, spending second.
What does that look like?
Well, it’s the old ‘pay yourself first’ mantra. When you get paid each month (or week, or fortnight, etc), you automatically pull some money out of your everyday account, into your savings account. You essentially save it before you even see it.
The amount you decide to save first is completely up to you and may depend on any debts you are carrying.
If you’ve got debt, read this first: How can I get out of debt?
Once you’ve paid off your debts, you can put your allocated amount towards building your savings. You can work it out how much you put aside for this based on a percentage of your salary, or commit to setting aside a fixed value instead.
However you work out the value, automate it and make it come out as soon after your pay hits your account as possible. That way, you won’t be tempted to spend it.
Get to know your future self
“Imagine if you could see what your life in later years might look like? What if you could feel it? Even experience it?” Rae says .”What sort of lifestyle you might be able to lead based on how much you’ve saved? What about holidays, cars, wine? How could you help your family? Do you think getting to know Future You would help you to save more?”
3. Invest your savings
To get ahead, you need to invest your money elsewhere and there are plenty of options offering great returns (yes, even in today’s volatile market).
Talk to a financial adviser
Deciding where to put your money can be tricky, so talk to a financial adviser to tailor a strategy to your needs. You can elect to have a ‘one off’ chat with an adviser, or enter into an ongoing relationship where they continue to guide your financial decisions.
These articles can help you understand what you’re looking for:
- What a financial adviser does and why you probably need one
- The difference between general and personal financial advice
- How to choose a good financial adviser
An adviser will help you find your risk tolerance and outline the best way to invest your money. There are many options available, but property, shares or super are the main three for the average investor. Here’s an outline of some of the options available:
- Sharemarket 101: How can absolute beginners get started investing?
- What are bonds and when should you invest in them?
- Want to become a property investor? 6 simple steps to becoming a landlord
- A super strategy for self-employed entrepreneurs
- Should you pay off the mortgage ASAP or top up your superannuation?
- Should you invest in property or shares?
- Alternative investment avenues you might not have thought of
Find the rest of our Money Focus series here.