One of the more underrated techniques for creating wealth is simply cutting your expenses. While many people equate large incomes with wealth, that isn’t necessarily true. After all, whether you make $50,000 per year or $500,000 per year, if you’re spending what you’re making, you aren’t building wealth. It also isn’t about the big gains in a stock you sold or the property you sold. While those things are part of the wealth creation process, if you spend all the profit from your investments, you will never create real wealth.
The best kept secret to creating wealth is cutting expenses. Today, I want to introduce a simple, two-step approach anyone can use to help you build real wealth.
Tip # 1: Let’s start with what I call your capital need calculation. Here’s how it works. How much money would you need to have in the bank to generate $1,000 in interest each year? We all know interest rates at the bank are the lowest since World War II. But just for argument’s sake, let’s assume we’re in a normal interest rate environment and you get a 1-Year CD at a bank that pays 3%. In order to generate $1,000 per year of interest, you would need to buy a $33,333 CD ($1,000 divided by 3%). Look for dividend paying stocks or funds so that your money makes money without you having to buy and sell something.
Tip # 2: Here’s something that pops up on my calendar to-do list every six months or so. With all the choices for our cable/internet/phone bundle needs out there, one can easily see their monthly “bundle” bill creep up to $180 to $200 per month. What if you spent a few minutes every six months and shopped your bundle between your current carrier and their competitors? What if you save $70 to $80 per month every year just by shopping your bundle and not being afraid to switch? At $80 per month or about $1,000 per year of this, you would be “creating” wealth of $33,333 using the 3% capital need calculation just shared in Tip # 1. Same thing with eating out. Decrease your times eating out each month by one or two meals. Let’s say you save $50 per month or $ 600 per year. Again, using Tip # 1’s example at 3% interest, that’s the equivalent of having $20,000 working for you ($600 divided by 3%).
While I know you actually don’t have $33,333 or $20,000 in real money with these tips – that isn’t the point of this exercise. The point is when you cut expenses and redistribute that savings to your emergency fund, you don’t have to use a credit card that costs interest if you can’t pay it at the end of the month. Or, you can redistribute that savings to your 401K, your IRA, or your Roth IRA. Or, you can apply that $1,000 a year to your mortgage principle to save interest on your mortgage and pay your home off sooner. You’ve all the saying, it isn’t what you make, it’s what you keep. Don’t just focus on income and investing to build wealth. Cutting (negotiating) expenses can have just as big an impact.
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