Hello and welcome back for Part 2 of our 3 Part Blog series on building wealth on a small salary. Hopefully the reason you’re here is that you found Part 1 informative and helpful. If you did, the good news is that we have more of the same here on Part 2! So, without further ado, let’s get started! Enjoy.
One of the best ways to build wealth is to live well below your means. What this means is that, even if you’re making enough money to, say, drive a high-end luxury vehicle and live in a five bedroom home, you instead drive a good car and live in a smaller home that fits your needs but isn’t over-the-top.
Dr. Thomas J Stanley, one of the co-authors of a book called “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy”, says that many of America’s millionaires don’t “live large” but instead become diligent savers, live well below their means and don’t “flash” their money everywhere they go.
If you want some excellent advice from a surprising source, take it from LL Cool J, the famous rapper and actor. During an interview a few years back he was quoted as saying that “I lease a Honda Accord for $399 a month while other rappers are going broke”. That’s a perfect example of someone living below their means.
Our next bit of excellent advice is to start saving for retirement as soon as you start working full-time. Yes, retirement can seem like such a long time away when you’re in your 20s or 30s and may not seem like a “necessity”, but the longer you put off saving for retirement the harder it will be to actually reach your retirement goals, especially since you won’t have compounded interest to help you.
Just for the sake of example, let’s say that at age 30 you started putting $30 a month into a retirement account with a 7% return rate. In 30 years you would have $56,000. Now let’s say that you did the same thing but started at age 40. In order to reach that same amount of money, $56,000, you’d have to put more than triple in the bank, $110. a month.
As you can see, the difference in just 10 years is quite large. Extrapolate that out and you can see how putting aside, for example, $400 a month starting when you turn 30 will turn into quite a bit of money by the time you’re ready to retire, thanks to compound interest.
Our last piece of advice here in Part 2 is to know as specifically as possible what money is coming into your hands and what’s going out.
The simple truth is that, good intentions aside, if you don’t know what’s coming into your bank account as well as exactly what’s going out, which means tracking your income and your spending habitually, you’ll never know how much of that money you can devote to your financial goals.
In other words, there’s no way you can expect to change your financial reality if you have no idea what your finances actually look like. The good news is that tracking expenses is much easier today if you have a smart phone because you can download any one of a number of budgeting apps to help you.
One of the basic tenets of building wealth is to know everything possible about your money, and keeping track of your income and expenses is the best place to start.
Good stuff, yes?! Make sure to come back for our big finale, Part 3, and more excellent advice on how to build wealth on a small salary. See you then!