6 Ways to Build Wealth on a Budget

You don’t have to be rich to build wealth.

That’s right. True wealth building has less to do with your income and more to do with how you save and invest.

“Wealth” probably doesn’t mean what you think it does. Rather than associating wealth with fancy cars and big houses, instead, think of wealth as saving enough money for a comfortable retirement or to ensure a down payment on a modest mortgage.

When you adjust your understanding of wealth, you might realize that it’s more within reach than you previously thought. Ready to get started? Here are six money moves to practice wealth-building.

No. 1: Create a budget

To build wealth you need to save money. Understanding where your money is going is the first step to reducing expenses and saving more. That’s where a budget comes in.

A budget is a plan for how to spend your money each month. It tracks the money coming in (income) and the money going out (expenses). Don’t worry — budgeting isn’t complicated once you start. Here’s how to create one.

First, identify your income. How much money do you have coming in? Then, identify your fixed costs. For instance, your rent or mortgage, utilities, insurance, and debt payments are all examples of expected monthly costs.

Next, what are your variable costs? These can include dining out, ordering food, entertainment, and other changing costs. Remember, income must exceed expenses. If it doesn’t, start trimming your variable costs.

A good rule of thumb for budgeting is to follow the 50/30/20 rule. It states that you should aim to spend 50% of your income on fixed costs, 30% on variable costs, and save or invest the last 20%.

How do your finances stack up?

No. 2: Live within your means

Avoid living in a deficit. To build wealth you need to adjust your lifestyle to live within your means. This might look like sticking to a budget and making sure your expenses are easily covered by your income.

However, this can be tricky thanks to lifestyle creep. Lifestyle creep is when an individual’s standard of living improves as their income increases. Items that were once luxuries become necessities. For instance, upgrading to a more expensive apartment after a salary bump. The more you earn, the more tempting it is to spend.

Instead, budget additional income to work for you while maintaining your current lifestyle. Additional income is better spent on paying down debt, saving, or investing.

No. 3: Build an emergency fund

Life happens, but an unexpected cost shouldn’t break the bank. However, 44% of Americans cannot cover an unexpected $1,000 bill. It’s important to prepare your finances to weather the ups and downs in life; an emergency fund is a smart way to do so.

An emergency fund is money set aside to cover unexpected costs like a medical expense or unemployment. But $1,000 isn’t enough. Financial experts recommend saving about three to six months of living expenses in an untouched savings or investment account. The exact dollar amount depends on your financial situation — namely, your income and fixed monthly expenses. Make sure you save enough money to comfortably cover an unexpected cost.

No. 4: Pay off high-interest debt

Debt is a slippery slope — whether it’s student loans, credit cards, or an unexpected emergency. And most debt racks up interest. That means the longer a debt remains unpaid, the more it costs in the long-run. In the worst-case scenario, debt can ruin your credit score and delay your wealth-building journey.

Paying off debt is crucial, so it should be part of any budget. Create a plan and stick to it. Two debt repayment methods are worth noting:

• Debt avalanche: This method focuses on paying off debts from the highest interest rate to the lowest interest rate. If you tackle your debts with the avalanche method, you will pay less in interest.
• Debt snowball: This method targets the smallest balance amounts and pays them off in increasing amounts. This strategy helps keep your motivation high by celebrating small wins.

No. 5: Generate income

The best way to build wealth is to generate income. Be proactive; negotiate a higher salary or pick up a side hustle.

Negotiating salary

Research salaries for your current role. Your salary should fall in line with the industry standard depending on your geographic location, experience, and skills.

It might benefit you to have a conversation with your boss and request a raise. Make a list of your achievements and tie your worth to a reasonable dollar amount. If you still feel like you’re not being paid a salary commensurate with your worth, it may be time to find a better paying job. Switching companies can lead to a higher salary.

Side hustles

A side hustle is an ideal way to capitalize on passive income. Is there a skill you can sell with minimal investment? Get creative. For example, create an online course that teaches others about your expertise. There are infinite ways to generate money that can lead to long-term wealth.

No. 6: Invest early

Have you heard of compound interest? Compound interest is the interest earned on a principal sum of money. Basically, it’s interest on interest and can help grow your money over time.

Take advantage of compound interest by investing sooner rather than later. Typically, a long-term, high-yield investment account will return a greater profit than a standard savings account.

Start investing with any additional money you have in your budget. Remember the 50/30/20 rule? Ideally, you should invest up to 20% of your income. Investing can be difficult because you won’t see immediate results. Rather, investing is a promise to pay for your future self — like homeownership, a college fund, or retirement.

The bottom line

Building wealth doesn’t always have to do with how much money you earn. It can also be about how you spend, save, and invest it.