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Wednesday, 16 November 2016

Habits: How to build wealth on a Small Salary

Car from wealth showing small salary income
While a six-figure inheritance or high-paying job can land you in the top 1% of earners, it’s the little things — your money habits — that often make the difference between a life of prosperity and one of constant financial stress.

Building wealth goes beyond mere financial salary pay be it big or small, and annual net worth; it connotes strict financial decisions to wealth, savings and expense management.

“If you look at the average amount of money you will earn over your lifetime, and figure out how many years you are working — most people earn more than a million dollars over their working life but very few people become millionaires,” says Nancy Butler, a Certified Financial Planner™. “How they manage what goes through their fingers usually makes the difference.”
So what are these easy changes that can help move you further along the road to prosperity? We asked two financial planners for their favorites.

#1. Reverse Your Thinking
We know: After taxes are taken out and the bills are paid, your paycheck can seem a little anemic — which can make the idea of having to save for retirement too seem like a real stretch. But to build wealth, a change in mindset is required. Namely, instead of spending the rest of your take-home pay, you’d actually take another cut of your paycheck and put it toward your biggest financial goals.

“Most people spend some money, pay their bills and save what’s left,“And that’s backwards: You should be saving for your financial goals first, paying your bills and and then consider spending the money you have leftover.”
Another trap is putting your good money habits off till “later,” when life will get easier. The thing is, somehow the minute your income increases, the demands on your money seem to as well.
Now, keep in mind, we’re not suggesting you sock all of your money away and live on rice cakes. “I’m not asking you to put $1,000 away a month, I’m asking you to put away $50, or a small amount that you can afford. We really can’t underestimate the power of starting small, because most of the time that momentum builds, and once we see progress, we tend to repeat behaviors.”

#2. Look Where You Want to Go
Just as performance athletes imagine themselves making the shot over and over again — check out this study for how goal setting improves motivation in athletes — knowing what you want your money to do for you gives your goals a better chance of being reached.
To get going on saving for the future, financial experts often suggest having a five-year plan, where you create specific money goals you’d like to achieve in five years and what you need to achieve those goals. For example, saving six months of income for an emergency fund, or saving for a big event, like a down payment on a house.
“Anytime we have a specific goal in mind, that helps us to save.” Whether that goal is emergency savings, or saving for a trip, or saving for college, it doesn’t matter.

#3. Adopt Your Own Private Mind Tricks
Locked wallet showing wealth habit for small salary income
What if not spending $1,000 on a designer purse or new must-have gadget were as easy as following a rule that dictates you can’t spend more than $300 on something that isn’t essential to your life? The good news is you can create financial rules just like that for yourself; in fact, doing so can be a great habit to get into.
Also known as “heuristics,” these rule-of-thumb strategies we create for ourselves — such as not spending more than $15 on an item of baby clothing, or more than $50 on a pair of shoes — can help simplify the many choices we make in a day. Behavioral economists believe that adopting good heuristics can help one develop good money habits.
If creating a great heuristic seems like an overwhelming task, just start with something simple, such as eating out only twice a week, reducing beer from 5 bottles to 2 bottles or “not going to ShopRite weekly for exclusive fun and squander Naira (especially Nigerians),” a heuristic that helped few of my friends save money.

#4. Live Like a “Secret” Rich Person
For some, the image of a millionaire conjures visions of sprawling mansions and shiny Bentleys. But most millionaires don’t live large like that — rather, they tend to live well below their “means” and do more saving than spending. In other words, they’re not flashing their money. For instances, Mark Zuckerberg as a billionaire still maintains routine grey polo and canvas…simplicity.
Also, Las Vegas–based David Sapper, who owns a successful used car business, and his real-estate broker wife make a combined income of $500,000 per year. Yet they live like “secret” rich people, only spending $2,500 per month on all bills and extracurricular expenses like eating out, unlike many of their peers. By putting 90% of his income into savings and investments, Sapper says he’ll be able to retire early.
His advice? “Find the point that you get what you need and you’re happy and comfortable, and just stay there,” says Sapper. “I had an ‘aha!’ moment when I was watching MTV, and LL Cool J was saying, ‘I lease a Honda Accord for $399 a month,’ while other rappers are going broke.”

#5. Tackle Retirement Now
If you’re in your twenties or thirties, retirement can seem eons away — and saving for it might not seem like a priority. It’s easy to understand: In between paying to attend weddings (which average something like $600 per guest), saving for a down payment on a home, and using anything leftover to put toward “necessities” like vacation, how are you supposed to save anything for retirement?
Unfortunately the later you start saving, the more you’ll have to save. But the sooner you sock money away, the more time it has to compound and grow.
If, for example, you’re 30 and putting $50 a month into a retirement account with a 7% rate of return, that $50 a month would turn into $56,000 in 30 years. Should you wait to age 40, you would need to contribute $110 per month to get to that same goal. This is because your money has less time to grow which minimizes the impact of compound interest.

#6. Know What’s Coming in, and What’s Going Out
Most of us have good intentions when it comes to saving money. But if you don’t know what’s coming into your bank account and what’s going out, chances are you don’t know how much you can devote to your goals. And most people generally don’t track their income and spending. “It really is shocking to me that some colleagues I work with don’t always review their pay slips or even bank monthly statement,” that’s a poor financial practice.
There are free online apps that can help you budget and track your expenses, to aid savings and goal achievements.
Remember: Knowledge is the first step to lasting change.
“If I don’t know how much you spend on eating out, how can I expect you to change that?”
You kind of have to become the chief financial officer of your household.

#7. Getting Out of Debt
Image showing debt control habit to aid wealth on small salary
Everyone has debt at some point in their life. But if you have bad debt — not student loans and mortgages, but credit card debt, where you’re paying high monthly interest rates — fixing it and getting out of the habit of being a debtor — should be priority number one. “I want somebody to develop a plan, create a debtor paper and get out of debt 12 months or less. “It’s hindering you from making progress on your other goals.”
At the same time, emergencies happen — and a $600 car repair can hit anytime. That’s why it’s advisable to put half the money you could put into paying down debt into an emergency savings account. So, for example, instead of paying $600 toward credit card debt, consider putting $300 toward emergency savings and $300 toward credit card payments. While this means it will take longer to get out of credit card debt, you’ll have money stored up for an emergency.
After you get out of debt, consider having only one credit card and agree with yourself to spend only on emergencies. “Let’s say the car broke down and you can’t fix it — that’s an emergency.” “Something’s on sale, and I know I’m going to need it in six months — that’s not an emergency.”
#8. Increasing Your Earnings
There are two ways to increase your net worth: Spend less or save more money. “And spending less is only part of it — you have to save, and when appropriate, invest the rest,”
“Earning more often doesn’t lead to higher net worth because lifestyle expenses grow along with it.”
But if you grow your income, and set some of those earnings aside, you can grow your bottom line. Aside from getting a raise or winning the lottery, there are a few ways to get more money flowing in.
One suggestion: Diversify your income streams by working a second, part-time job doing something you love. As far as earning more, there are a few things one can do. For those who cannot cut their expenses enough, I love the idea of working part-time. “Now your hobbies can fetch you part time earnings to blend with regular jobs.
Another idea: Look for investment opportunities — perhaps with the help of a financial planner — or other ways to get income to come to you. I think retirement income should come from multiple sources such as rental income, part-time income, retirement assets etc.

#9. Consider Consulting an Expert
Expert advice as a habit to build wealth on small salary
There are times in life when consulting an expert pays you back in spades. Even if you’re doing everything you can to start good money habits, using a qualified financial planner can help keep you on track — and help you see the big picture.

“Often times most of us are too emotionally involved in our finances to make really good decisions,”  So what you’re looking for when you’re getting a professional is accountability and an outside view of what you’re doing. You need an adviser and a motivation with things go sour.
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