One of the questions that I regularly get from readers is this “How can I build wealth?” The answer is quite simple: spend less than you earn. Of course, applying this simple answer can sometimes be rather daunting. Another key is to carefully invest money so that it works for you.
Spend less than you earn: 80 percent rule
One of the best rules of thumb out there for building wealth is to use the 80 percent rule. This rule states that you should live on 80 percent of your income. Or even as little as 70 or 75 percent. This rule allows for you to put away 10 percent in savings, and to give 10 percent of what you earn to charity, if you like. Putting part of that money away is key, however.
The 80 percent rule should apply to your take home pay. This means that the retirement account contribution that comes out of your check automatically doesn’t count. It comes out before you bring your check home, as do taxes. It is vital that you create a budget that makes use of the 80 percent rule based on your take home pay.
Investing is another way to build wealth. Investing is a way of trying to get your money to work for you. However, this is not for everyone. Some find that contributing to their retirement account is quite enough investing for them. But you can take that 10 percent for savings and put it to work in something other than a regular savings account. Try an online savings account, or put the money in a money market account or fund. These are options with fairly low risk that offer you better results.