Successfully building wealth comes down to two simple steps – spend less than you earn and keep a lid on personal debt. People often assume you need to earn a supersized income to achieve wealth but that’s not always the case.
If you’re not convinced, just take a look at the world of show biz for well-publicised examples of celebrities who have failed to build financial security despite mammoth incomes. Singers Michael Jackson and Whitney Houston for instance were both said to be heavily in debt at the end. Film maker Walt Disney experienced bankruptcy several times during his lifetime. Sammy Davis Junior and Judy Garland both died deep in hock despite hugely successful careers.
Yet at the other end of the scale, I recently read about an elderly American man – a former petrol station worker, who accumulated investments worth around $US6 million by the time he passed away aged in his 90s in 2014.
These sorts of extremes highlight the role that sensible money management plays in personal wealth creation.
That’s why I was intrigued by a recent banking industry report that found one in two (47%) Australian households are managing to grow savings each month by spending less than they earn. In fact, it turns out these savers are managing to tuck away some pretty impressive sums of cash – with average monthly savings of $770.
Among the remaining households, 44% are breaking even – spending what they earn each month. But worryingly, about one in ten households say they are spending more than they earn each month. The only way this can be done is by dipping into personal savings or taking on additional debt, and among these households the average overspend is $480 per month. At that rate it is easy to see how overspending can quickly lead to out of control debt.
I realise that saving can be hard if you’re on a lean income with little fat to trim from the household budget in the first place. But if you are struggling to set aside money for savings, try keeping a spending diary for a month or so. The government’s free TrackMySPEND app is very handy here, or just keep a handwritten record of spending. Either way, seeing exactly where your money goes can be a real eye opener, and it’s a sure fire way to work out where you can cut back without too much pain.
Once you have worked out what you can afford to save on a regular basis, the next step is deciding the best way to use the money. In today’s low rate environment you could be better off using savings to pay down debt – especially high interest credit card debt, than holding the money in a separate savings account.
For more hints and tips on how to find a bit of extra cash for savings and growing wealth, check out the government’s MoneySmart website, or take a look at my book Making Money.