The 10-Step Formula for Building Wealth


If you want to be wealthy, there is an extremely simple formula that has worked for generations: Live beneath your means and invest the difference.

It's such a simple formula that everyone should be doing it. While it takes effort and discipline to live below your means, doing so will help you achieve your financial goals and help you avoid debt and the stress that comes with it.

There is an impression that living within your means is the same as being tight with money and not being able to purchase the things you want. That impression couldn't be further from the truth. Being frugal simply means taking great care in the way you spend your money so that you can use it in the ways that you want to most. It means not spending it on an image, but instead on what is truly important to you.

Take Warren Buffet as an example. He's the second wealthiest man in the word, according to Forbes and could purchase almost any home in the world that he wants. Yet since 1958, he has lived in the same house that he purchased for $31,500 in Omaha, Neb. Even though he could buy a much bigger and fancier house, doing so apparently is not important to him.

While Buffett's frugal ways are not the sole reason for his riches, it says something about a man who has accumulated such vast wealth. Unfortunately, many Americans do not share the same principles. They have instead fallen for the false promises of advertising and the image that you can have it all right this instant.

According to the Federal Reserve, Americans carry nearly $2.5 trillion of consumer debt, which is almost twice as much as 10 years ago.

If you want to make sure that you are building wealth, here are 10 easy steps you can take toward living within your means:

1. Borrow: Not money, but products that you are unlikely to use more than a few times. Before you buy, ask yourself if it's possible to borrow the item you need. Many items such as books and language tapes all can be borrowed from your local library at no cost. A neighbor may have the tool you need that you know you'll need to use only on rare occasion. Borrowing, when appropriate, can save a large amount of money.

2. Buy used: While there are some rare exceptions, you are almost always better off financially buying used rather than new. Whether it's the books that you read or the cars that you drive, the price falls quite a bit the second that the item leaves the retail store. Today, with the Internet making the world smaller, it is easier than ever to find virtually anything that you need used. Getting into the habit of purchasing pre-owned products will save you thousands of dollars a year.

3. Never pay retail price: Before you purchase something, take the time to compare prices. If you do this when you do need to buy something new, you'll never pay full retail price. With rare exceptions, a bit of price comparing can save you at least 20% and often much more on virtually any product or service. This is especially important on big-ticket items such as cars, home electronics and appliances. Doing so can mean hundreds of dollars or more in savings.

4. Forget brand-name products: Brand-name products -- whether it's food, clothing or anything else -- have a premium price for the image they have created through advertising. You are paying the premium price for that image, not necessarily for a better product. Whether you have a $2,000 watch on your wrist or a $20 watch, chances are they both perform the function of telling you time pretty much the same.

5. Use credit only when you have money: If you believe that credit cards are for when you don't have money, you are more likely to be a slave to debt. It's important to use credit cards to your advantage, instead of having them be a financial liability. You should use credit cards onlywhen you have enough money in your savings account to pay them off in full each month. If you don't, then you shouldn't be using them.

6. Wear it out: In the consumer nation that we live in these days, we often throw away things long before their useful life is over. A glaring example is trading in your car every few years for a new one. Well-built cars have a running life of more than a decade, and by using them until they are worn out, you save thousands of dollars compared to buying a new one every few years.

7. Use it up: According to a 2004 University of Arizona study, the average U.S. household wastes 14% of its food purchases. Of this, 15% is food that hasn't expired and has never been opened. The average family of four throws away $590 per year of meat, fruits, vegetables and grain products, according to estimates. This is just food. Add in the other products that you buy but never use up, and it can be well over $1,000 a year wasted.

8. Repair: When something breaks, many times the initial reaction is to replace the item. By learning how to make simple repairs yourself, you can save hundreds of dollars each year. Many products can be repaired easily, and an investment in a repair book (or one borrowed from the library) can pay for itself many times over.

9. Try homemade: In a nation of convenience, we have often have lost the ability to make things ourselves. Eating at home vs. dining out is a good example, but you can take it even a step further. Look at the difference of eating pre-made processed foods and making your own meals from scratch. Not only is it healthier, it will make your food budget last a lot longer.

10. Do without: We all believe that we need many more things than we really do. Take a few seconds to look in your closet, basement, attic and storage spaces. Most of that stuff sitting in there is stuff that you bought that you never needed. Use the simple wait-a-week test -- if you want to buy something, wait a week, and if you still want it after that time period, then you can buy it -- which can help you avoid purchasing those things that you really don't need or want.

In the end, living below your means is about making priorities for your wants and establishing them within your current earnings. You can still have those things that are most important to you, in addition to building wealth for the future.

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