A lot of people are feeling discouraged by the current economic situation. The unemployment rate is at 9% and the underemployment rate is at 17%. A lot of Americans are feeling like their chance at the American dream is slipping away since wages are not growing. Since 1980 wage growth for middle income Americans has been tepid at best. All of these circumstances are causing people to believe that they will never be financially well off.
The truth is that you do not have to make a ton of money to amass a lot of money. Your salary does not have to be $400,000 or $500,000 a year. You can get rich over time off of a much smaller amount of money using the following tips:
Reduce your debt load
Most people do not understand that making more money is not always the solution to their money woes. Here is a perfect example of this situation.
James makes $35,000 a year. He buys a Honda Civic that has a payment of $350 a month and lives in a home with a monthly mortgage payment of $1,000 a month. He has credit card and student loan debt totaling $50,000. James believes that if he can just increase his income that his money problems will end. James gets a raise and winds up doubling his salary. Does James save the extra $35,000 a year?
Of course not! Instead James buys a BMW M3 which increases his car payment to $700 a month. He buys a newer home that is commensurate with his new income level that has a mortgage payment of $2,000 a month. James has higher utility, maintenance, and repair bills plus he still has the original loan debt. Although James is making a lot more money, he doesn’t save any more money because he increased his expenses right along with his salary.
That is the problem. The average person spends every dime that they make. They always find new expenses to eat up any salary increases that they may earn. That is why celebrities go broke so easily. They may make millions of dollars a year but they increase their living expenses to the same amount.
The only way to keep more of your own money is to reduce your existing debts. Paying down your debt allows you to hold onto more of your own money. A person that makes only $35,000 a year and is debt free is in a better financial position than someone who makes $70,000 a year and has $70,000 in annual debt.
Make every dime that you have work for you
The lower that your income is, the more important that it is for you to maximize 100% of your income. Every bit of money that you have should be earning you a return on your money. You can multiply your money faster by always getting a positive return on investment (ROI). This means applying wise stewardship principles to small amounts of money.
It may not seem like it matters to you but even small amounts of interest add up.
If your credit union is paying you 2% on your money and your bank is paying you 0.10%, move your money immediately. That 2% may look small but that is 20 times the rate of return you are earning. If you can get a 10% average annual return on a mutual fund compared to the 7% that another fund is paying, you should make the switch. That 3% per year is a 30% additional return just using simple interest.
Avoiding monthly maintenance fees at your bank, overdraft charges, and ATM fees can save you thousands of dollars over your lifetime. This is all money that you are just giving away to your financial institution for free. Small things like getting rid of mortgage late fees, auto payment late fees, and credit card late fees can mean the difference between having extra cash to invest and being cash strapped on a monthly basis.
When you are on a tight budget, you cannot afford to be lazy. Even small things like letting Coinstar process your change can cost you a lot of money over time. Wrapping your own change can save you from paying a 9.8% fee just for the privilege of turning your coins into cash. Little amounts of money added up over long periods of time can create wealth.
Building wealth requires that you take some risk. If you have a small sum of money then you may find that you need to be a lot more aggressive to grow your capital than a wealthier investor. Warren Buffett himself was a really aggressive investor at a young age. He created new investment capital by selling one stock to generate enough money to buy another one.
Being an aggressive investor does not mean that you need to be a foolish investor. A smart investor is incredibly aggressive when the market is cheap because he knows that it will not be this way for you. Occasionally, the market will prevent you with an opportunity to buy shares of a company at once in a lifetime prices. Do you take advantage of these opportunities or do you sit on the sideline?
If you want to earn a rate of return that other investors will not get then you have to be willing to take some risks that other investors will not take.