Although earning money is essential to building wealth, the ability to earn does not automatically translate into wealth.
High income earners do not necessarily turn out to be wealthy, and not all wealthy people start as high income earners.
The key difference between income and wealth lies in having a good understanding of how to channel your earnings into savings.
Money that is not spent should be saved and invested.
The moment we start to earn money, we tend to exhibit one of three behaviors:
1. Saving up
If you are the type that saves up, you will tend to keep as much of your disposable income as possible for a given period of time, then use it to buy what you want.
You prefer to have full control over your take home pay, and will usually sacrifice a few luxuries as you patiently accumulate money to satisfy your needs, wants and desires.
The result is usually a solid foundation of cash reserves. However, what you do with your savings will determine how wealthy you become.
2. Saving down
If you usually purchase what you want right away then pay for it later, you are the type that saves down.
You may even prefer to borrow as much money as you can to deliberately make sure your take home pay is as little as possible.
This is because you believe if you do not direct a good fraction of your money towards loan repayments for things you have taken on credit terms, you will fritter it away.
In most cases, you may end up with so much debt that you can’t exactly tell what you spent the money on.
Interest on borrowed money is also a cost you may not be taking into account, but at least you find saving down a lot easier than saving up.
3. Saving up and saving down at the same time
There are those who attempt to save up and save down simultaneously.
If you fall in this category, then a good fraction of your money goes towards repaying loans, while you try as hard as possible to save the balance that is left over.
A good number of people in the higher income bracket who have very little wealth fall in this category.
This is because the ‘promise’ of another paycheck keeps them borrowing money in the hope that they can pay back all their debt for as long as they are still earning.
At the same time, they realize that there is a need to save money, although they rarely have any savings at all, leave alone investments.
The main idea behind converting income to wealth is to go beyond saving and starting to invest.
This can be very difficult to do if you are overburdened with consumer debt.
Investing your own savings is usually cheaper and less risky than investing money you have borrowed.
This is why your best bet is to get into the habit of saving up.
You do not need to earn a high income before you can start saving money.
Train yourself to believe that you earn much less than you actually do, then save the difference.
To discover how to start managing your money effectively, click here to download The Money Management Blueprint today.
This 23-minute personal money guide will help you gain confidence and total control over your money.