How To Save Money & Build Wealth (Even on a Low Income)
If you want to grow your wealth you need to do three really important things – spend less than you earn, save money and invest.
This is a process anyone can do, and even if you are in your 40s and you’re suddenly looking at your savings and comparing yourself to stats showing what the average person has, do not panic.
There’s still time to save more money and achieve financial freedom.
It means you have money for the future, you have a sustainable way to finance your lifestyle and you are debt-free. Put simply, your wealth is your assets, minus your debts and liabilities.
So what you want to do is switch from a money mindset where you get paid and live off your income, and instead leverage your earnings to create wealth that can sustain you in the future.
You may also like: 8 Frugal Habits to Save Money
3 steps to building wealth
This is a realistic look at how you can build wealth even on a low income.
Spend less than you earn
It’s the foundation you need to lay for yourself right from the very start. How successful you are in the other steps is entirely determined by how well you are able to budget and live below your means.
Your spending can go beyond your means for a number of reasons such as that your essential bills are more than your income or your spending habits need to be examined.
The key to becoming wealthy is to save money and not spend it.
How to resist the pull of consumerism
One of the things we may struggle with the most when trying to save more money is the pull of consumerism. Often that can be because of the image we want to project outwardly – the nice car, the bigger house, the on trend fashion.
However real wealth is quiet – it’s the stuff we do not see. It’s the money tucked away for rainy days and the future.
Even someone on a rich income, who lives what you may consider to be a rich lifestyle, may not be wealthy if they are spending all that they bring in and they may be on a road to being broke if they aren’t saving for the future.
$150k soon goes if you have a large mortgage, flash new cars, expensive holidays and private school fees to pay. What we are seeing is not their wealth, but the money they spent.
If nothing is going towards savings, then this person has far less significant wealth than they would have done. They have their house, but everything else is just stuff rather than assets for future comfort.
What if they lose their job, and have no emergency fund to cover them for a month, three months, six months of no income. The likely outcome is debt which is the opposite of wealth.
Real wealth is rarely flashy, it isn’t in your face hey check out my new sports car. While someone may give the outward appearance of being incredibly wealthy with the image they present to the world of a large house, designer clothes and an exciting lifestyle, that doesn’t really tell us much.
Real wealth means positive cashflow, no debts, and an emergency fund to cover you in case of illness or losing work.
So how can you spend less than you earn?
You need to take a look at the numbers, where is your money going and how can you make savings.
These might be big savings, such as on your housing, could you consider downsizing or moving to a cheaper area, or they might be small savings, such as cutting back your grocery spend and subscriptions.
Be clear on what are your wants, ie stuff like new clothes, nights out, takeaways, and what are your needs, the things you actually need to live.
And try to avoid lifestyle creep if you do get a pay rise. It’s easy to increase your spending in line with a pay rise, but that increase in pay can be swallowed up quickly by extra spending.
If you have trouble with impulse spending on wants a good habit to have is to make yourself feel poorer by emptying your bank account. Not at the next sale you happen across, but into your savings.
Try to keep your current account balance lean so that you don’t feel like you have extra money to spend spontaneously. It’s often those spontaneous impulse purchases that catch us out the most and if there’s money there in our current account, we may feel more inclined to just go for it.
So have money in that current account to cover those important expenses, the ones you already have in your budget, but move any excess into a savings account.
Making saving money a habit
Now that you have your spending under control, it’s important to make saving a habit.
Your savings priorities may look something like this:
- Emergency fund – try to have one to three months of expenses minimum.
- Pension – your retirement savings.
- Big picture savings – this could be going towards your next house purchase.
- Annual costs savings – also known as a sinking fund. This is the money for expected annual expenses such as garden maintenance, Christmas and birthdays.
- Your kids savings – it’s nice to give our children a head start in life by setting money aside for them regularly.
One of the most frustrating truths about finances is that it’s far easier for the rich to get richer than it is for someone who makes super smart financial decisions with a low income to become rich.
When you try to grow a large pot of money your returns are much better than trying to grow from zero. 10% of $100k is a bigger number than 10% of $100.
But that shouldn’t leave you discouraged and here’s why. Savings are about more than just taking money and seeing it grow to offer you more wealth. It’s also about avoiding debt.
Say you can save $50 a month for a year. You’ll have $600. Not a huge pot, and the interest gained on that, assuming you started with a $50 deposit, would be just $18.75 assuming a 5% interest rate.
BUT consider this. At the end of that year your washing machine breaks down – nightmare scenario for me with two kids getting muddy at school every day.
Instead of having to rely on credit or a loan or buy now pay later you can buy it outright with the money in that savings pot.
You can borrow money interest free of course, but what if your borrowings start to snowball, you have more emergencies. If you aren’t able to pay back that money in time, then you start paying interest and then you are losing money and that can really escalate quite quickly.
So the first priority for saving should be an emergency fund. Because even with all the best intentions in life, stuff goes wrong. And it usually happens in threes which is kind of annoying.
Try to have at least a month of expenses in a savings account. Better yet have three to six months put away. Having this on your side gives you the foundation to get started with growing wealth because you have a safety net.
Let’s talk about how much you should be saving every month. The answer to this is, as much as you can.
But a good place to start is 10%. 15% is better, 20% is even better. Let’s take a look at what even 10% can do. Whatever you start off with, make it affordable and make it a habit.
Say your take home pay after tax is $3000.
10% of $3000 is $300. If that feels like a lot, and it may well do if you are paying a mortgage, have kids and other expenses, let’s break it down further. You need to save $10 a day.
That means you are saving $3,600 in a year.
Save and invest
So that then takes me onto the third step towards building wealth, which is to invest and save your money to make it work harder for you.
Be smart with where you put your money. Your current account or a jar next to your bed aren’t going to give you the best returns. And in fact you’ll be losing money, because $20 in your hand today will buy you less in a year’s time thanks to inflation. The power of that money gets eroded over time.
What you want is to grow that money, without you even having to do anything.
Let’s look at what happens when you invest that $3600 a year you’ve been able to save. Using a bank’s investment return calculator I discovered that after 35 years of investing $300 a month your pot of cash could be worth $340,000. As you can see, the habit pays off over time.
There are lots of options for where you might put your money, and what you should do really depends on factors like your age and your appetite for risk.
Before getting started with investing, I made sure I had a foundation. That meant having three to six months of expenses in an easy access savings account – something with a decent rate of interest.
Then I made sure I was saving to cover annual and one-off expenses – such as replacing my car or Christmas. That also went in a savings account.
Only then did I feel ready to start with investing. That’s because the value of your investments can go up and down. The idea with investing is you stick with it for the longer term so that you ride those highs and lows.
Many advisers suggest having your money spread across a few different options, because some investments protect the amount you may initially put in but not offer such an attractive rate of growth, an example would be bonds, whereas others bear a risk of your money losing value or being lost altogether. Although those riskier ones can also reap the higher rewards.
A good example of that may be investing in volatile areas like cryptocurrency. I have invested in crypto, but the key thing is I have invested an amount I am comfortable with losing altogether, not every penny of my savings. Which would be scary given the rollercoaster Bitcoin has been on these last four years.
My personal preference for investing is in ETFs, which is basically a basket of funds curated for you to balance risk. I do this through my investment account with Trading212.
If you feel like investing isn’t for you or you feel intimidated, don’t, remember that if you have a pension you already are an investor because your pension is put into investments. That’s how you make gains over time.
The right combination will be personal to you, so consider the options out there and what your goals are before making any decisions. But remember, saving some money is better than not saving at all.
Grab these savings trackers
A great way to get yourself on track and stay motivated with savings is by using a savings tracker!
These shows you how far you’ve come and illustrate visually what you need to do in order to hit a savings goal.
I have three free savings trackers for you to use – two featuring pretty jars for you to colour in as you make progress and one where you can simply write down the amounts you are saving.
Download them here:
Final thoughts
Here’s a little bonus tip to help you succeed
Have an abundance mindset. If you feel like you never have enough money and you never will because there’s no way for you to increase it, that means you have a scarcity mindset.
Someone with an abundance mindset believes there is enough money out there for everyone and that you can change your financial situation.
This attitude shift can make you more motivated to make changes necessary to grow your wealth and make positive changes for your financial situation.
