You may have heard that budgeting is a way to improve your financial situation. Although this may be true in the sense that you will save more money by sticking to a budget, it doesn’t necessarily mean you will be able to reach financial freedom. If anything, this way of thinking may cause you to develop a scarcity mindset that can limit your potential.
Budgeting relies on the earnings you already have, and does nothing to increase this income or create long-term wealth. It’s important to track where your income is being spent, but this is just the starting point to becoming wealthy.
In this article, we will discuss:
- Why Saving Alone Doesn’t Make You Rich
- How Inflation Erodes Your Savings Over Time
- How Income Growth Matters More Than Cutting Expenses
- Investing: The Missing Piece in Most Budgets
- The Psychology Behind Money and Wealth
- Budgeting and Wealth-Building Strategies
Why Saving Alone Doesn’t Make You Rich
Saving and budgeting is not a get-rich-quick scheme. It is a great strategy to manage your expenses and prevent overspending, but it won’t help you grow your income. For example, say you cut back on a monthly treat that costs £10. This will save you £120 a year, and although this might sound great, it means sacrificing something you enjoyed, and it doesn’t exactly increase your annual income by a noticeable amount. However, growing your income by negotiating a pay rise, starting a popular side hustle , or making small investments can increase your annual earnings without making sacrifices and falling into the scarcity mindset.
How Can Budgeting Impact Your Overall Wealth?
Budgeting, although great for monitoring your spending, can actually create a cycle of limitation, rather than an opportunity to build growth.
To build wealth, you should think beyond saving and cutting costs and focus your efforts on generating more income to achieve a better financial potential.
How Inflation Erodes Your Savings Over Time
Inflation is the increase in prices over time. Inflation rate is always changing – for better and for worse. It is important to think of this when thinking about your savings, as inflation can affect whether you make a profit or not. For example, if you have a savings account that pays 1% interest, after a year, you will have 1% more money than you started with. However, if inflation is more than 1%, things will cost more, and your money won’t buy as much as it could have before.
No matter how much you save, if inflation is high, it can erode your savings over time, making it feel impossible to reach your wealth goal. To make sure you make money on your savings, you need a savings account that will give you a higher return than the inflation rate.
How Income Growth Matters More Than Cutting Expenses
Budgeting is a great stepping stone to start controlling your current wealth, but wealth and financial freedom are built through focusing on income growth. Cutting your expenses will help you to feel in control of your money, but it won’t necessarily create exponential wealth, as it simply relies on using and saving the money you already have. Income growth, on the other hand, focuses on bringing more money to your pot. The more money in your pot, the wealthier you are.
So, what are some strategies to build your income?
Increase Your Income Streams
Building multiple streams of income through investing, freelancing, or other means is a great way to increase your wealth. The additional streams of money will create a buffer against financial uncertainty and boost your wealth accumulation efforts.
You can choose to save the extra income or use it to further invest and build more earnings.
Build Your Skills and Network
High-value skills are one of the most lucrative ways to grow your income. By learning or improving in-demand skills, you can offer more to the people you serve, either in your working life or personal life. On top of this, creating strong relationships with people can open up opportunities you may not have found on your own.
The more sought-after skills you have, the more valuable your time is.
Investing
Investing is similar to placing your money into a savings account in the sense that you can gain interest on the money you put in. However, with investing, there is more potential for bigger earnings (as well as risk for failure) that can help build your wealth potential. Whether you choose to invest in stocks, real estate, or building equity in a business, you can multiply your wealth over time.
When done correctly, you can reinvest your earnings and constantly increase your return on investment.
Why Investing Is The Missing Piece in Most Budgets
If budgeting is your main strategy right now, you might have started to wonder why you don’t seem to be feeling the benefits. Budgeting is indeed a great way to keep control of your finances and save you a bit of extra cash here and there, but it won’t increase your income exponentially. So why not consider investing that bit of spare cash you’ve been putting to one side?
Investing may seem a little daunting, but with the right advice and techniques, you can build wealth from even small amounts. Instead of placing the money you have saved through budgeting into a savings account, you could choose to invest it. By investing, you could grow your annual average income and even set money aside to continue to invest, and begin a cycle of wealth building.
If you have no idea where to start, or are worried about failing when it comes to investing, take a look at STARTrading and the online trading courses we offer – some are even free!
The Psychology Behind Money and Wealth
Believe it or not, but sometimes, it is not your lack of income that is keeping you from reaching your wealth goals, but your own mindset.
There is a psychology of wealth behind money that could be holding you back. This could involve past experiences, certain emotions you feel towards money, your beliefs regarding financial behaviours, and a fear of failure or the scarcity mindset. Once you begin to unlock the psychological influences that could be holding you back, you’ll begin to view wealth in a more positive light and be able to work towards your goals.
If you want to read more about mindsets that could be detrimental to making you rich, take a look at our article: “10 Limiting Beliefs That Are Keeping You Broke”.
Budgeting and Wealth-Building Strategies
Starting to get your finances under your control starts with a strong budgeting strategy. Once you feel more comfortable with your income and how you can save money, you can then look into other ways to begin to build on your wealth.
Everyone budgets differently, and the strategy that works for you may be different to one that works for someone else. However, below, we have listed a few of the top choices.
The 50/20/30 Budget Plan
The 50/20/30 budget is a popular strategy where you put 50% of your income towards your needs, 20% goes towards your savings, and 30% goes towards your wants. Your needs are things like paying bills and buying food, whereas your wants are things such as date nights and treating yourself to a new book. The idea is that you stick to these amounts and don’t dip into one or the other for anything other than the things they were set aside for.
Pay Yourself First
The ‘pay yourself first’ method includes viewing yourself as a ‘bill’. As soon as you receive your earnings, the first payment you make should be to yourself in the form of placing it into your savings account. The rest of the money is then divided out for the rest of your outgoings and whatever else you want to spend your money on. Try automating the amount you place into the savings account each month so you’ll be less likely to forget or skip it.
By paying yourself first, you can lessen the temptation to tap into that money as you can no longer see it in your main bank account once you’ve placed it into your savings.
Zero-Based Budget
A zero-based budget is where you account for every single penny of your income and assign it to a specific expense. This can take some time, as you need to plan ahead and anticipate your upcoming expenses so that you can allot the right amount of income to each expense. If done correctly, you should have a balance of £0 once everything has been assigned. This can help you stick to your budget as you’ll only have a certain amount to spend on your wants. Be sure to account for savings too!
Grow Your Wealth With STARTrading
If you’re tired of simply budgeting and not seeing the financial benefits, or maybe you’ve decided to put your savings to good use and build your wealth, STARTrading can help. We have 10 years of experience in the trading and financial markets and love to share that knowledge with others so that they too can begin their journey towards financial freedom through trading and investments.
With our events, trading eBook , mini-series, trading mentorship, and podcast, you can learn irreplaceable skills and be on your way to trading confidently, successfully, but most importantly, safely.
Contact us today to get the support you need to begin your trading journey.
