Do you know where your money goes each month?
- Dave Ramsey says your income is the best way to build wealth, as long as it’s not tied up in debt payments.
- High-interest debt can prove expensive over time and eat into your disposable income.
- Increasing the gap between what you earn and what you spend frees up cash for other financial goals.
When you think about getting rich, you might imagine winning the lottery or inheriting a fortune from a long lost relative. On a more practical level, you might hope for a pay raise or lucky break in the stock market. But bestselling author Dave Ramsey says most people already have their most important wealth building tool at their fingertips — their incomes.
Ramsey goes on to explain that if you spend a lot of your income servicing debt, you’ll struggle to get rich. In a recent tweetthe personal finance guru said: “Your income is your most important wealth building tool. As long as your money is tied up in monthly debt payments, you can’t build wealth.”
Ramsey’s guide to building wealth
Dave Ramsey has built a brand around his straight-talking money management advice, particularly the importance of becoming debt free. If you’re carrying debt, particularly credit card debt, it will eat into your disposable income. Not only will you have to make monthly payments, you’ll also likely be paying interest on that money. Interest payments can add up and severely hamper your ability to become financially independent.
Being debt free is only part of the picture. Ramsey argues that the way to build wealth is to live below your means, avoid debt, and invest consistently. If you spend less than you earn and use the difference to buy assets that will generate income such as buying stocks, over time you can become wealthy.
Here are some of the findings from Ramsey Solutions’ survey of 10,000 millionaires:
- 94% said they live on less than they earn.
- 75% have never carried a credit card balance.
- 75% said they built wealth through regular, consistent investing.
The good news is that many millionaires didn’t earn ridiculous salaries or inherit big bucks. The route they followed is one that many of us could emulate. The bad news? It could involve some lifestyle changes, particularly if you carry debt.
Paying down debt is easier said than done
Telling people to avoid debt is all very well, but there’s a reason debt levels in America are rising. Higher living costs have made it difficult for some people to cover the essentials, never mind putting money aside for the future. Some people take on debt because of medical emergencies or other financial crises, even if they know it could cost them more in the long term.
Moreover, many Americans are living paycheck to paycheck and struggle to break out of that cycle. The challenge is that if you’re spending every cent you earn, it is extremely difficult to build any kind of financial security. For example, it’s only when there’s a decent gap between your income and your expenses that you can do any of the following:
- Build an emergency fund: If you have three to six months’ worth of living expenses socked away in a savings account, it will cushion you against the unexpected and mean you’re less likely to have to borrow money in an emergency.
- Pay down debt: There are many different ways you can tackle your debt. You might tackle the smallest balances first so you can celebrate your progress. Or you might focus on the debt with the highest interest rate so you pay less in interest overall. Whatever approach you choose, you’ll need extra cash and a plan.
- Invest for the future: Once you’re set on your short-term financial goals, you might be able to turn your sights to the future. One way to build wealth is to buy stocks or other assets that will generate income over time. It’s important to keep a long-term horizon and only invest money you won’t need in the coming five to 10 years.
Increase the gap between your income and your expenses
Ramsey says that your income is your biggest wealth-building tool. I’d argue that it’s actually the gap between what you earn and what you spend. That’s the cash you can use to become more financially secure.
If you’re unsure of where to start, take a look at where your money goes each month. A budgeting app might help you track your spending and identify areas where you might cut back. You may feel like you’ve already made all the cuts you can. In which case, perhaps you could take on extra hours at work or even a side hustle to bring in some more cash.
Whether you do it by cutting costs or earning more, increasing that gap is a crucial part of building wealth. Until you do that, you’ll struggle to achieve other financial goals.
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