How to Make the Most Out of Your Money

Six easy tips to building wealth

“How do I build my wealth?” is considered the million-dollar question. As it turns out, the answer is easier than you think. The secret is making the most out the money you make, regardless of your annual income. Meaning, it’s not what you make, it’s how you spend it. By following these six tips, along with a little persistence and patience, you will be on the path to building wealth in no time.

Pay off debt ASAP.
Paying off debt, no matter how much you owe, is the first step to building wealth. According to a recent study by NerdWallet, the average American household with credit card debt owes $6,829 in revolving balances. In addition to the monthly principle payments, those same households are paying an average of $1,141 in interest payments each year. That’s $1,141 that could be placed into savings and contribute toward future wealth! The study also states that the average American household with an auto loan owes $27,708, those with student loans owe $47,783, and those with mortgage loans owe $188,903. Depending on which types of debt your household carries, the total balances and interest payments can really add up.

There are a couple simple approaches to paying off debt that allow you to focus on paying one balance at a time without becoming discouraged or overwhelmed by your total debt load. You can start by directing any extra cash toward the account with the smallest balance first and then moving on to the next largest balance. (Note – be sure to keep paying at least the minimum payment on all other accounts.) Or, you can pay the account with the highest interest rate first and so forth. Regardless, as soon as the first balance is paid off, apply the payment that would normally have gone to that balance to the normal payment on the next balance until it is paid in full. Repeat that process until all debt is paid off.

Live below your means.
If your household does carry debt, there’s a decent chance that it’s because you aren’t living below (or even within) your means. Simply stated, you are spending more than you earn by purchasing goods and services with credit cards and not paying them off each month. If that sounds familiar, you’re not alone. Various studies indicate that nearly 50 percent of Americans live beyond their means. You can counter this by creating a monthly budget and sticking to it. Subtract your monthly bills (mortgage/rent, utilities, groceries, insurance payments, necessary prescriptions, etc.) from your total monthly income. Any remaining income can be used for miscellaneous spending and saving. Stick to your allotted budget for miscellaneous spending. If you can’t afford something within that budget, don’t buy it (or save up until you can).

Another approach to living below your means is developing the mindset of “just because I can afford it, should I purchase it?” For example, your budget may allow you to live in an apartment that rents for $1,200 a month, but maybe you should opt for one that is available for $800 a month and suits your needs just as well? Or, your budget may allow you to eat out three times a week at $20 a pop, but you could easily prepare a couple of those meals at home for $5 each. Imagine how saving $400/month on rent and $30/week on eating out could add up over time!

Make your money work for you.
When it comes to building wealth, you may have to do a lot of the heavy lifting but you don’t have to do it all. Don’t place your savings under you mattress or in a coffee can. Not only is that risky but the compounding interest (more on that later) that you will earn by entrusting your money to a financial institution will be a huge factor in helping you build wealth. Make your savings work for you by placing it into an account or accounts that pay interest on your account’s balance such as a savings, money market or certificate of deposit account. Each type of account has different interest rates and terms, but most banks have a variety of personal savings options to meet your specific needs.1 And, as your wealth continues to grow, a wealth management solution may be needed to help you build, manage and protect your wealth.2

Start saving now.
Whether you are 25 years old, 45, or older, you need to start saving now. Why? Because compound interest is your friend! With compound interest, you not only earn interest on the money you save each month, you also earn interest on top of the interest you already earned! So, the sooner you start saving, the more money you will be able to accumulate before you retire. Consider this example provided by NerdWallet that shows the value of compound interest and how the age at which you start saving makes a huge impact on your wealth by age 65. Assuming you invest $250 each month with an 8 percent average return on investment: 

• at age 25: You'll accumulate $878,570 by age 65
• at age 35: You'll accumulate $375,073 by age 65
• at age 45: You'll accumulate $148,236 by age 65

If you don’t have $250 to save every month, no problem! It’s okay to start small and gradually increase your contributions as your budget allows. Try saving five to 15 percent of your monthly salary to get in the habit of contributing regularly to your savings plan. Review your spending each month, and look for opportunities to reduce those expenses and increase your savings. You can probably survive without daily trips to the gourmet coffee shop, weekly outings to the movies or that expensive cable package. As any debt you have gets paid off, turn those monthly payments into savings deposits. As you receive pay increases at work, increase your savings rate by the same percentage as your raise (or more). When you get windfalls such as an unexpected bonus or inheritance, apply them to your savings. Over time, these small sacrifices will really add to your increasing wealth.

Build your emergency savings fund.
Once you start saving, your first goal should be to make sure you have an emergency savings fund to cover any unexpected expenses. “Building an emergency fund is one of the most important steps you can take to increase your wealth,” said Mike Earleywine, Senior Vice President, Branch Banking and Mortgage, First National Bank. “Emergency funds help individuals cover unexpected expenses without impacting their accumulated wealth as a result of having to cover those expenses by using high interest credit cards or other lending options. At First National Bank, we recommend that every household have a savings account with a balance equivalent to three to six months of living expenses to ensure you are prepared for unexpected expenses or emergencies that could come your way.”

Max out retirement savings options
According to First National Bank of Omaha’s ‘2018 Retirement in America’ Survey,’ 39% of Americans who have yet to retire are not saving for retirement at all, and 38% of people who have yet to retire do not regularly contribute to a 401k. Contributing to an employer-sponsored retirement account such as a 401k is one of the easiest and fastest ways to build wealth. That means most Americans are leaving easy, wealth-building money on the table! First, contributions are typically auto-deducted from your paycheck, on a pretax basis, and are invested on your behalf so very little personal discipline is required (easy). Second, many employers offer a match on contributions such as a 50 percent on the first six percent of the employee’s contribution (wealth building). The high annual contribution limits in 2020 ($19,500 for those under age 50 and $26,000 for those over age 50); means that maximizing your contribution can add up quickly. Generally, 401k contributions are invested in stocks and mutual funds, so there is some risk involved, but for many, the benefits far outweigh the risk.

If you don’t have access to an employer sponsored retirement plan or are looking for additional ways to save for retirement, there are multiple other tax-advantaged options available. Examples include traditional IRAs, Roth IRAs, “Solo” 401ks, etc. An investment advisor can help you find the best options.

How to build wealth may be the million dollar question but as you can see, it doesn’t come with a million dollar price tag. Making the most out of your money by paying down debt, living within your means, saving early and maximizing your retirement savings will help you build wealth over time. A Personal Banker from FNBO can help you start your journey to wealth by opening a savings account1 with competitive interest rates and easy access to your funds. If you’re further along on your journey, or need advice on opening an investment account, our trusted Wealth Advisors will help you build, protect and manage your wealth for the long-term.2 Come and visit us at your local FNBO branch, or give us a call for more information.

¹ Only deposit products are FDIC insured.

² Investment Products are:
NOT FDIC INSURED • NOT A DEPOSIT OR OTHER OBLIGATION OF THE BANK • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT GUARANTEED BY THE BANK • MAY LOSE VALUE

This material does not constitute legal, tax, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material.