When it comes to finances, Americans are optimistic.
Only 15% of U.S. adults say they're currently wealthy, according to a recent survey from MagnifyMoney, but 51% believe they will be wealthy someday.
There are many ways to build wealth and become richer. You could start a business, invest in real estate, or climb the corporate ladder to earn bigger paychecks, for example. But there's one simple thing everybody can do right now to become wealthier: Start tracking your spending.
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Why tracking your expenses is key to becoming rich
One of the keys to building wealth is handling your money wisely. If you don't have the best money-management skills, then even if you do eventually become rich, you likely won't stay rich for long. And the foundation of good money management is being able to track your spending.
Tracking your spending has several benefits. First, it can give you a clear idea of exactly where your money is going each month. When you don't keep a close eye on your expenses, it's easy to overspend without realizing it. Case in point, the average American spends around $483 per month on non-essential costs, despite the fact that close to 60% of those same people say they're living paycheck to paycheck, a survey from Charles Schwab found. If you don't know exactly how much you're spending each month and where your money is going, it can feel like you're struggling to get by financially -- even if you actually do have plenty of cash to spare.
Another benefit of tracking your money is that it makes it easier to see if there are areas of your budget where you can cut back. Sometimes it's hard to grasp exactly how much you're spending on certain expenses, especially smaller costs. If you spend $10 per day going out to lunch, that doesn't seem like it would make a significant impact on your overall financial situation. But that $10 per day can turn into $300 per month or $3,600 per year. When you have all your expenses mapped out in front of you, it's easier to spot these trends and cut back if your spending habits start to get out of control.
Grow your savings exponentially by investing
But finding extra money in your budget is only the first half of the equation when it comes to building wealth. You also have to invest your money wisely if you want to maximize it.
Now, that doesn't necessarily mean you should throw all your savings in a single up-and-coming stock you think will be the next big thing. Rather, a slow-and-steady approach can help you consistently (and safely) build wealth over time.
One of the best ways to earn relatively high rates of return while limiting your risk is to invest in low-cost index funds and mutual funds, which are large collections of stocks, bonds, and other securities. One of the most appealing features of these funds is that you can diversify your investments. So rather than putting all your money into a few individual stocks, you're spreading your cash across dozens or even hundreds of different investments. Although that may sound complex, it's easy to get started investing in these types of funds. In fact, if you're saving in a 401(k) or IRA, you're probably already investing in index and mutual funds.
Of course, like any investment, index funds and mutual funds don't always see positive returns. There will be ups and downs, but given enough time, you should see your money grow exponentially. And even if you don't have much to save each month, the more time you have to let your investments compound, the richer you'll be.
For example, let's say you've started tracking your expenses and found that you can cut your spending by around $200 per month. If you invest that money and are earning a 7% annual rate of return, you'll accumulate close to $152,000 after 25 years. If you're able to stash away, say, $300 per month, your savings will climb to around $228,000 in the same time period.
Slow but steady wins the money race
Tracking your expenses and investing your savings isn't a get-rich-quick scheme, and you won't become a millionaire overnight. But you will end up richer than you are now, and depending on how much you're able to sock away each month and how many years you have to save, you could end up amassing over $1 million.
Building wealth takes time, but it's an achievable goal. And the best part is that it takes minimal effort to start saving now. You can either track your expenses the old-fashioned way by keeping your receipts and building a spreadsheet, or you can take a more modern approach by syncing your bank accounts and credit cards to an app that does all the work for you.
Regardless of what method you choose, tracking your spending is key to building healthy financial habits. Once you have a good understanding of what you're spending versus saving each month, it becomes easier to cut back, save more, and build wealth one dollar at a time.
