Can I save my way to wealth?

I'm sure you've seen people bashing on those who save every nickle and dime, and those proclaiming how they became millionaires by pinching every penny.

There are even entire forums and websites on the subject with varying opinions like Frugal_Jerk on Reddit, Dave Ramsey's website, or Ramit Sethi's excellent site “I Will Teach You to Be Rich”.  There are complete workshops out there for this like Dave's excellent Financial Peace University.

You've probably also seen those who claim that pinching pennies has nothing to do with building wealth, saying things like “You need to spend money to make money.”

So can you save your way to wealth?

My experience after adding more than $100k to my own net worth over the last few years?

Yes you can add to your wealth by saving.  If you ignore saving as part of your wealth creation strategy, you'll have a really difficult time getting rich.  On the other hand, if saving is ALL you ever concentrate on, you are not likely to ever become extremely wealthy.

The key thing to remember is that there are two sides to any cash flow statement.  Income, and expenses.

Here is one of the most basic formulas for building up wealth.

Income – Expenses = Savings.

It's really pretty simple.  It's not what you spend or earn that makes you wealthy.  What makes you wealthy is when you have savings left over that you invest in things that make you even more money.  When you invest in things that make you more money, it turns into a snowball effect.  The more money you make and the less that you spend, the more you can save and invest, which turns into making more money.

If your income is higher than your expenses, your wealth will go up.  If your expenses are higher than your income, your wealth will go down.

So you really only have two ways to drive your wealth.  Either increase your income, or decrease your expenses.

Me?  I prefer to do both.  Increase my income, AND lower my expenses.

Contrary to popular opinion, my experience is that just like it is nearly impossible to out exercise bad eating habits, it is incredibly difficult to out earn poor spending habits.  I've known many business owners over the years who have made millions, yet still ended up shutting down their business due to the fact that they never looked at the expense side of their business.

Spending money is NOT the same thing as investing!  That's why the phrase “You've got to spend money to make money” is fatally flawed.  

Unless you are spending money on things that make you more money than you spent, all you have created is additional expense!

If you earn 10 million dollars, yet spend 15 million dollars, that is not an equation that is going to make you wealthy.  That's an equation that will make you broke, and many orders of magnitude more broke than the guy making $30k with $29k in expenses.

There are many ways to control your spending, I recommend taking a look at this article to get started.

Where Did All My Money Go???

For a more comprehensive look at what it truly takes to build wealth, here's how I've added another $100k to my net worth over the last few years.

10 Steps to Creating Wealth

If you want to increase your income, focus on steps 7, 8, and 9.  Work hard, find mentors, read to find out how others have done it, and invest your savings into things that make you more money rather than things that create more expenses.

So to answer your question “Can I save my way to wealth?”  My experience?  Yes.  And No.

Savings is only one part of the equation.  If you want to build true wealth, you need to work on both sides.

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