Why the Key to Wealth Isn’t About Cutting Costs

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For most people, in order to build wealth, you need to start by cutting back on some expenses to free up more money for saving and investing.

However, cutting costs is not the true key to building wealth, which requires more strategy, thought and time than simply rearranging your budget. 

Experts explain some of the real ways to build wealth.

Make a Mindset Shift 

Financial experts may urge paring back on your dining out and looking for discounts as a first step to wealth-building, but that’s only skimming the surface, according to Taylor Kovar, CFP, founder and CEO at 11 Financial.

“A lot of people think the path to wealth is paved with extreme couponing and skipping the morning latte, but in my experience, focusing only on cutting costs can actually keep people small,” he said.

If your focus is on “every dime,” he said it’s hard to “dream big or take strategic risks.” Thinking only about cutting puts people on the defensive about money rather than thinking about how to grow it. 

Frugality vs. Vision

While frugality is a good trait to have, because it’s tied to discipline, frugality only focuses on reducing expenses. “That is only half the equation,” according to Robert R. Johnson, PhD, CFA and professor of finance in the Heider College of Business at Creighton University. 

“A true wealth-building mindset pays attention to expenses, but focuses on building revenues and revenue sources that work for you instead of the other way around,” he said. 

He quoted billionaire Warren Buffett, who once said, “If you don’t find a way to make money while you sleep, you will work until you die.”

Investing Is Key

Building true wealth comes from investing your income over the long term and “taking prudent risk,” Johnson said. “One doesn’t build true wealth by investing conservatively. The difference in investing aggressively versus conservatively is large.”

He shared a statistic from Ibbotson Associates: Since 1926 the average annual return on a large-capitalization stock index (such as the S&P 500) is 10.3%, whereas investments in long-term government and long-term corporate bonds have on average grown annually by 5.7% and 6.2%, respectively.

Kovar added that wealth builders “take calculated risks,” and that he’s seen more success “from people who started side businesses, developed new skills or negotiated better salaries than from those who just focused on spending less.”

Time and Compounding

What investing in the stock market does is allow for “compounding interest” — where the interest you earn is reinvested, Johnson explained.

“Because of compounding, time is the greatest advantage in investing.” The earlier you invest, the sooner you let that compounding process “work its patient magic over decades,” Johnson said.

You Can’t Cut Your Way to Wealth

As important as it is to free up funds to save or invest, “You simply can’t cut costs to create long-term wealth,” Johnson said. 

Kovar agreed, adding, “Income growth matters more than people think. You can only cut so much, but there’s almost unlimited upside to increasing your income through entrepreneurship, investing or leveling up in your career.” 

Kovar finds that when people start viewing money “as a tool instead of a limitation,” their whole outlook changes.

“It’s not about how little you can spend, it’s about how wisely you can use what you have to multiply it. That’s the shift. Strategic money growth beats extreme sacrifice every time,” he said.

Budgeting Is Key, However

While cutting may not be enough to build wealth, budgeting is incredibly important in the process, Johnson said. 

“For those who are afraid they aren’t saving enough, they should budget for savings and invest those savings. Specifically, one should not simply budget and track expenses, but one should budget for savings.”

If individuals truly want to make savings a priority, you can’t just rely on what is left over after your expenses — it should be a line item on your budget, Johnson urged. 

“You don’t successfully build wealth by simply taking what you have left after all your expenses. We accomplish what we prioritize. Prioritize savings and invest those savings.”

Don’t Make Extreme Sacrifices or Goals

Additionally, Johnson finds making extreme sacrifices to build wealth “unrealistic and frankly unhealthy.” It’s better to balance current needs versus future needs and not neglect either, he said.

Similarly, extreme money resolutions or goals can also work against you. “Eliminating all discretionary spending is simply unrealistic and is a goal that cannot be met. We are all unique and what provides each of us with the most happiness is very different,” he said.

Thus, if you enjoy your daily cup of coffee out at the local cafe, or the occasional avocado toast, cutting that out isn’t necessarily going to make you much wealthier, and it might make you unhappier in the process.

The problem that people get into is that they spend money on everything and don’t prioritize, Johnson said. “Prioritize what makes you happy and direct your resources there. Minimize spending on items that don’t really matter to you.”

Sources

• Taylor Kovar, 11 Financial
• Robert R. Johnson, Heider College of Business at Creighton University

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