How to Grow Rich on a Budget
Learn Money Girl’s 4 ways to build your wealth and grow rich—even on a budget.
When you think about people who are rich, Bill Gates or Donald Trump may come to mind. Though you might not be able to become as wealthy as them, you can accumulate a small fortune of your own over time. Just realize that having a personal fortune isn’t about driving a Lamborghini or hanging out on a yacht all day (although that would be nice). It’s about having a secure financial future that can provide for you when you stop working. In this article I’ll lay out four top strategies to help you build your wealth and grow rich.
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How to Grow Rich on a Budget
To start building your fortune you don’t have to work three jobs or create a huge company with thousands of employees—though that works for some people! The key to building wealth is to focus on slowly increasing your net worth. Net worth is the value of everything you own minus the value of everything you owe.
Here’s an example: Let’s say you have a car worth $25,000, a bank account with $10,000, and a few household possessions that really aren’t worth much. That means your total assets are worth approximately $35,000. But that’s not your net worth because you also have to subtract out your debts. If your only liability is a car note with a $20,000 balance, then your net worth is $35,000 (your assets) minus $20,000 (your debt), or $15,000.
The best way to keep track of your wealth is to monitor your net worth on a regular basis. The idea is to increase your assets—like bank accounts, retirement accounts, real estate, precious metals, businesses, and intellectual property—and to reduce your debts.
In my book that’s coming out on December 21st, , I take you step-by-step through the process of creating a Personal Financial Statement so you can easily stay on top of your net worth. The book is packed with quick tips and one of them is a formula to determine your target net worth for your age.
Grow Rich Strategy #1: Spend Discretionary Income Wisely
The first strategy to grow rich is to spend your discretionary income wisely. Many people have great jobs and plenty of income but have zero net worth. Having good cash flow is fantastic! But guess what? It doesn’t increase your wealth if you spend it carelessly on things that don’t appreciate in value like clothes, vacations, and nights out on the town. Stars like MC Hammer and Toni Braxton come to mind as extreme examples of people who earned tons of money but didn’t end up with anything to show for it and went bankrupt. Hammer burned through something like twenty million dollars and Toni just couldn’t make ends meet on $47,000 a month!
In order to turn your income into a fortune you have to use some of it to increase your net worth by doing what I previously mentioned—increasing your assets, reducing your liabilities, or by doing both. If you’re not sure whether it’s better to use your discretionary money to make investments or to pay down your debt, be sure to read what I wrote in a previous /money-finance/credit/whether-to-invest-or-pay-down-debt-part-i.
Grow Rich Strategy #2: Start Investing Earlier Rather Than Later
They say the early bird gets the worm. That proverb is certainly true when it comes to building a fortune. Putting time on your side can explode your wealth due to one of the greatest gifts math has ever given us—compounding interest.
Here’s an example that says it all: Let’s say your goal is to retire at 65 with a cool one million dollars. If you begin early, like when you’re 25 years old, you’d only need to save a little over $400 per month, assuming an average annual return of 7%. Paying $400 per month over 40 years comes to a total investment of $192,000 ($400 x 12 payments x 40 years).
But if you wait until you’re 35 to start investing, you’ll need to cough up almost $900 per month, also assuming a 7% average annual return. You’d have to invest a total of $324,000 ($900 x 12 payments x 30 years) to accumulate a million dollars in 30 years. And if you’re a financial late-bloomer and don’t get started until you’re 45, you’ll have to shell out over $2,000 per month, assuming the same 7% return. My friends, procrastination is expensive! You’ll end up investing $480,000 ($2,000 x 12 payments x 20 years) to become a millionaire in 20 years.
Comparing these scenarios makes it clear, right? I don’t know anyone who’d rather invest $480,000 instead of $192,000 to reach their retirement goal. There’s simply no better way to accumulate a healthy nest egg than to start early. Even if you put aside $200 per month for 30 years at an average 7% return, you’d amass over a quarter of a million dollars.
Time is a critical factor that affects your ability to build wealth. So stop using excuses like, I don’t have enough to invest, the market is too high, or the market is too low. Remember that waiting to invest is hazardous to your fortune and future financial security.
Grow Rich Strategy #3: Protect Your Fortune
Once you begin to accumulate wealth, you need to keep it safe. Protect your fortune by having enough of the , such as health, life, disability, /money-finance/insurance/who-needs-long-term-care-insurance, and an umbrella policy. Review your insurance needs once a year with an experienced insurance agent.
Grow Rich Strategy #4: Get Good Financial Advice
If you’re not sure what your financial goals should be or if you’re unsure how to manage your money properly, spend some time with a financial adviser. They’ll help you make long-term plans for building wealth. I seek the advice of a trusted investment adviser who helps me strategize and manage my portfolio. I listen to him carefully and we make financial decisions together.
Unless you win the lottery or have a dear rich uncle, building wealth takes time and happens slowly. But you have to start somewhere, so make a commitment to get started. You’ll look back years from now and be really glad that you did.
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From now until the end of 2010, I’m doing something special to thank you for being a part of the success of Money Girl! The https://itunes.apple.com/podcast/money-girls-quick-dirty-tips/id209859739 has been downloaded over seven million times, so I’m giving away seven personal finance books written by different authors, including me. There will be one winner each week. To be eligible to win, sign up at https://www.smartmovestogrowrich.com/.
Money Girl’s Smart Moves to Deal with Your Debt
Do you want to attack that mounting pile of debt? Download a free Kindle e-book, , and follow a 10-step plan to get rid of your debt for good. This special e-book includes a preview of Laura Adam’s new book—Money Girl’s Smart Moves to Grow Rich—that covers everything from investing, buying real estate, reducing taxes, boosting your credit score, using technology to better manage your money, and the whole enchilada! Early reviews are praising the book as one that will enable you to “create a richer life—both financially and emotionally.” (Publisher’s Weekly)
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
