How to build wealth from scratch

When you are living paycheck to paycheck, down on your luck, or living a student lifestyle, it can be difficult to imagine a world where you are suddenly building wealth. Take this comment from Kendra on one of our Ask the Readers posts, “What do you do when you're broke?”

“I feel like like Caleb a bit — in that most of these blogs don't cover how to get started. I mean for a student, for someone who's been born into poverty, how does one get started? I'm a student. I have NO income and my graduate program won't allow me to get a job. I only have ‘living' money from loans — and quite frankly, when I need more, I just get another school loan. (I have full faith that I'll be able to pay debt off quickly and make great pay at a job sometime in June/July).

“But as someone who doesn't know much about money other than what's on these blogs how do I START making money work? What can I do with $20? $50? You know what I mean?”

It's easy to understand Kendra's perspective. We have been taught our whole lives that it takes money to make money — that to get ahead, you need a steady stream of income and a streak of luck.

And much of that is true. To start saving, you do need an income first and foremost. And if you are in debt or living on your own, it can be much harder to see the light at the end of the tunnel.

No matter what, it is much easier to start with a clean slate than it is to dig yourself out from a hole.

But you have to start somewhere, which is what nearly everyone who is wealthy today did at one point in their lives.

Here are a few steps that can put you on the path toward building wealth from scratch — even when you are starting with nothing, or worse, with debt.

Step #1: Keep Your Expenses Low as Long as Possible

One of the biggest challenges you will encounter as you try to build wealth is keeping your income in line with your expenses. To get ahead, you need expendable income; and when you are spending up to the brim of what you bring home, you will always end up with nothing to save.

The solution to this conundrum is simple, yet may be painful for many: You need to keep your expenses as low as possible for as long as possible. For some people, that could mean living a few extra years at home with mom and dad while you pay off student loans. For others, it could mean getting an apartment with three friends instead of scoring your own place. Go without cable television for a while, ditch your smartphone, eat cheap and easy meals, and ride a bike instead of using public transportation as often as you can.

Remember, this move might only need to be temporary as you position yourself in a better financial place. But the bottom line remains the same: Saving money is immeasurably easier when your expenses are as low as they can go. So start cutting.

Step #2: Avoid New Debts and Actively Address the Ones You Already Have

Another demon that could be killing your wealth-building dreams? Good old-fashioned, debt. Unfortunately, as many of us have found over the years, getting into debt is a piece of cake. Combine a few credit cards with a few bad months and you can easily be staring down years of minimum payments in no time. Of course, the solution is, and always has been, to stay out of debt in the first place.

But for a lot of people, the solution isn't quite that easy. Today's young people have something their parents didn't have — a huge mountain of student loan debt. According to the Project on Student Loan debt, the graduating class of 2013 left school with an average $28,400 in debt per borrower. And as we all know, student loan debt cannot be discharged in bankruptcy, nor can it be bargained down. In most cases, the only way to get out from under it is the old-fashioned way — by paying it off.

Regardless, whether it's student loans to pay off or credit card debt to avoid, you will be much better off if you avoid new debts and destroy the ones you already have. To get out of debt, you can try the snowball method, the avalanche method, or the tsunami method. Do whatever it takes to get the job done.

But, doesn't that take money?

Step #3: Building Multiple Streams of Income

Most of us think of income in terms of our regular 9-to-5 jobs or part-time work, but that perception is slowly changing. A new sharing economy built around technology has managed to capture our freelance aspirations. You no longer have to get a second job to start bringing in more income; you just need to find a way to earn more money than you are earning now. But, how do you do that?

Related >> The sharing economy and taxes

According to Jim Wang of Bargaineering.com and Microblogger.com, it's about finding something — anything —someone will pay you for and building a business around it.

“Building wealth is about creating value and then recapturing that value in financial compensation. Whether it's providing services, knowledge, or experience, if you aren't creating value then there's nothing for you to build wealth with,” Wang said when asked about building wealth from scratch. “This value can also take many forms, it can be actual monetary value or it could be providing entertainment or saving time or reducing headaches, etc; the more creative you are, the more opportunities you'll see.”

If you have a talent or skill, find ways to monetize it. Search for a new side hustle on freelance sites like TaskRabbit.com or ELance.com. Buy and resell items on Ebay.com. Mow yards. Clean houses. Refinish furniture for resale. Tutor high school students. The options are only limited by your abilities and passion. Obviously, all side hustles don't apply to everyone, but that doesn't mean that everyone doesn't have at least one skill they can capitalize on.

Step #4: You Have to Invest the Difference

Once you cut your expenses and embark on a debt pay-off plan you can live with, it is time to take the next step — investing. And according to the experts, this might just be the most important step of all. We've written dozens of articles on how to start investing and Investing 101 if you are looking for a place to get started, but the most important thing is that you do, in fact, get started.

Related >> How to start investing

If your work offers a company 401(k) and company match, that is an excellent place to start. Figure out how much of your income you can live without and let them deduct it from your paycheck automatically. It might make your paycheck a little bit smaller at first, but you will get used to it over time. And most importantly, you will be building wealth with no effort on your part.

Related >> Investing 101

If you don't have a work-sponsored retirement plan, you have a little more work to do. Still, the resources are there if you look hard enough. Check out Vanguard for resources on opening your own retirement or brokerage accounts, or check out our many articles on best investing practices and strategies.

Just remember, there is no one right way to start investing. As Todd Tresidder at FinancialMentor.com put it:

“The principles to building wealth are so simple everything you need to know can be stated in just one sentence — spend less than you make and invest the difference wisely. How you accomplish that objective is where things get interesting.”

The Bottom Line

Inheriting money is easy, but building it from scratch is a whole ‘nother story. But you have to start somewhere and, unfortunately, sometimes “somewhere” is at the bottom of the pack.

Just remember, the keys to building wealth are keeping expenses low, eschewing debt and as many financial obligations as possible, finding a way to earn more money, and investing all along. The path to get there can take a million different twists and turns, but the end result will always be better than if you had not tried in the first place.

What strategies are you using to build wealth from scratch? What are the biggest challenges you have overcome?

More about...Budgeting, Investing

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Phillip
Phillip
5 years ago

Very good article, I’m 24 , I got out of the Army in January last year and I’m finishing up my degree. I personally have quite a bit saved up and I always wonder why other people my age just don’t live a simpler life and save more then they spend that is the only real secret. I think it’s because young people nowadays days don’t like to suffer a little bit and they can’t handle hardship. The Army taught me a lot about myself and constantly deploying and training in different places taught me how little I really need… Read more »

JoeM
JoeM
5 years ago

I really think the biggest hurdle for most people is mental. Not in the sense that they can’t make and track a budget, but in the sense that what works for someone else might not work for you. Especially with social media and you see your friends/classmates graduating and getting a nice car, world trip, or even a condo/house. Even if you’re not an envious person – I’m not – you still get that twinge jealousy in the form of “Why not me? Why not now?” It’s not fun to move from your own apartment in a swanky Chicago neighborhood… Read more »

PJ Ryan
PJ Ryan
5 years ago

For someone in a temporary situation like Kendra, the real keys are keeping your expenses as low as possible and bending over backwards to refrain from taking on new debt. If you can live within your limited means now, you’ll have no problem building wealth later. If you count on your future self to pick up the slack for your present self, though, you will almost certainly struggle. If your graduate program prevents you from having a job, is there any way you could pick up odd jobs? Cleaning houses two mornings a week? Babysitting on evenings? The money would… Read more »

Wiggles @ FirstYouGetTheMoney
Wiggles @ FirstYouGetTheMoney
5 years ago

Keeping expenses low for as long as possible is key. As you continue to make more and more as your career progresses, if you keep adjusting your spending up along with your raises, you’ll never get ahead. The goal is to save more as you make more. Invest more as you make more. Not spend more as you make more.

Virginia Cardoza
Virginia Cardoza
5 years ago

Good advise Wiggley, I highly agree. I think I would have liked a little more on how she could save and live on what she received for living expenses etc. from those loans. Don’t you think it makes sense to divide the monies by the months it covers and that’s all she uses. Then, how much can she save? Pay herself first just like a paycheck. There’s no time like the present to start saving. People say there is nothing left over to save. They just don’t realize they should be putting themselves first, not last. You come first, you… Read more »

Courtney @ CreditSolutions
Courtney @ CreditSolutions
5 years ago

Absolutely, the “lifestyle creep” I believe it’s called is something we all need to pay attention to and keep at bay in order to get ahead. It’s always more tempting to consume more rather than save more.

Great article Holly!

Mike
Mike
5 years ago

You have to start small, and first build a cash cushion. Pay the minimum payments on student loan debts (hopefully there is no credit card debt). Save the rest towards an emergency fund until you have $1000. The $1000 emergency funds helps you to avoid going into more debt in case something bad, expensive, and unknown happens (car repair, health problems, bail money [hahaha], etc). After saving the first $1000 emergency money, then save whatever you have to, to your 401k to get the full company match, finally, pour all the extra into paying off debt. Debt is the enemy… Read more »

Chelsea @ Broke Girl Gets Rich
Chelsea @ Broke Girl Gets Rich
5 years ago

I think it’s really important to learn to live within (and below) your means when you’re at rock bottom and don’t have much of an income to speak of – whatever you can manage to save at that point is incredible.

Then, when you get a full-time job or a raise, you’ll really have to watch yourself to not let your lifestyle inflate so you can start making more significant contributions to your savings.

Tina
Tina
5 years ago

To go a little further, I feel that putting into a retirement fund is just as important as having a er fund. When I started contributing, I couldn’t do much and only contributed 6% which got me a 3% employer contribution. But as the years went by, each time I got a raise(example 3%) I would increase 1% to 401k, 1% to savings and 1% to our bills so you still feel you got a raise. If the raise was less, I didn’t give our budget a raise since we were already used to living on less. Now I am… Read more »

Sam
Sam
5 years ago

We currently have a net worth of $1.5 Million dollars, from 1999 – 2002 I had a negative net worth due to student loans and other debts. In 2001 I started my budget/spending plan and started really focusing on getting my finances in order (although I was still using credit cards, that didn’t stop until 2007). I think more than anything the simple habit of having a spending plan, thinking about my finances a lot and on a regular basis helped me more than anything else. Clearly, to make progress you need an income stream, but coming out of college… Read more »

Alea
Alea
5 years ago
Reply to  Sam

Congratulations, what an awesome job. I started with a major negative net worth as well and that was the turning point in my life. At age 38 even though I worked steadily, I had absolutely nothing to show for it. And yes, it was all in my head, that I was poor and was going to stay that way, but once I decided to turn things around, it has been an amazing ride to realize that I can do this. No real estate for me (way too expensive where I live for what I earn), but the simple thing of… Read more »

Waverly
Waverly
5 years ago
Reply to  Sam

What’s real art?

Sandi_k
Sandi_k
5 years ago
Reply to  Waverly

Not posters. 😀

My definition would be art you can buy in a gallery or directly from the artist.

We have bought three pieces of original art – two giclees and one piece painted/printed on aluminum and then lacquered for protection. Each piece wasn’t crazy-expensive, and it gives us both a lot of pleasure. But they cost ~ $2k each for the giclees, and about $1k for the metal piece.

Carla
Carla
5 years ago
Reply to  Sandi_k

I guess “crazy-expensive” is relative. As much as I love art (I create it), paying $2K for it is beyond my fantasy.

Fervent Finance
Fervent Finance
5 years ago

Start with an IRA at Vanguard or similar, where I believe there are no minimums. Just keep plunking that $20 or so into a total stock market mutual fund, and watch compound interest work its magic!

Dick
Dick
5 years ago

Discipline…. That’s right , no grandiose schemes or excuses or hiding behind whatever …

Mrs. Frugalwoods
Mrs. Frugalwoods
5 years ago

I think the place to start is with your mindset. That’s definitely what helped me initially–and continues to drive my approach. If you can remove the desire to inflate your lifestyle once you do start making money, you’ll be off to an ideal start. Keeping expenses low has given me the freedom to invest my savings, live comfortably, and plan for early retirement. While there are certainly mechanics involved in saving and investing, I find the mental component to be the most critical. Once I committed myself to avoiding emotional spending, and only focusing on what I truly need, my… Read more »

Carla
Carla
5 years ago

Step #3 is easy for me to poo-poo due to feeling that I have nothing to offer that anyone wants. I have to think beyond what I feel my limitations are and get feedback from the outside. I have 20 paintings I’ve painted over the past year that friends and strangers are almost begging me for. It wouldn’t hurt for me to have them posted in cafes and other spaces in an attempt to sell them. I tell myself that they are average, and that I’m not talented. They may not sell, but at least I can say I’ve tried.… Read more »

yoyo
yoyo
5 years ago

I find this article bit incomplete despite great common sense advise that is not common practice. Couple pointers: 1) Taking a student loan, one must be mindful of ROI- significance of the degree one will be earning in terms of market value…so one should work to enhance his/her skills to get the best in the industry( internships, interview people that are managers in your potential line of work) 2) build networks, relationships, participate in events that enhance 3) work for small businesses( preferably in area of your education) few hours a week even for free and you will learn a… Read more »

stellamarina
stellamarina
5 years ago

Re the student loan. My first thought is do not count your chickens before they hatch. Do not be so sure of a good paying job after school that you waste your student loan on stuff that has nothing to do with school. The next most important thing is to have an emergency fund.

Ross Williams
Ross Williams
5 years ago

1) The real trick is to keep your expenses low forever. Establish a lifestyle that is low cost. Create an interest in activities that won’t require you to spend a lot of money. 2) Use credit wisely. That means using credit for things that will last longer than the payments. Your education is a good example. Houses and cars are the most common long term purchases people. But that rule can apply to much smaller purchases like household items as well. Just make sure that you understand the real cost of those things when you consider the interest you will… Read more »

Beth
Beth
5 years ago
Reply to  Ross Williams

Re: #2 — When I got my first real job, my parents warned me not to be too aggressive with paying down my student loan. Their reason: once money is paid to the student loan, there’s no accessing it in an emergency. In my monthly budget, I had a certain percentage set aside for retirement, a certain amount for an emergency fund and an above-the-minimum payment on my student loan. All extra cash was then split between savings and debt repayment. I could have paid off the loan sooner, and I’m sure many people would disagree with my strategy, but… Read more »

lmoot
lmoot
5 years ago

You have to know where you’re going first. Identify your true goals and intentions–not what soceity tells you, corporations, industries, your peers or your community, neighborhood, even culture or family. If you don’t have something solid to believe in, it’s easier to get swayed by false idols. I live by the creed “use it up, wear it out, make it do or do without”. I literally repeat this to myself when I am contemplating replacing something that still has life in it. I do this with cars, phones, computers/electronics….all things that my society tells me are easily disposable. I keep… Read more »

Beth
Beth
5 years ago

I totally agree with the point about keeping your student lifestyle for as long as you can (if you can). I got a job where I went to grad school and was able to keep sharing a home for 9 months. When I did move, I gradually furnished my place with used items — it took me a long time, but I paid cash for everything. It allowed me to start building my savings. I respectfully disagree with the point about inheriting money being easy though. It’s not like winning the lottery — in my case, it was tied to… Read more »

Lusty
Lusty
5 years ago

I’ve always managed to concoct ways to save by hiding money from myself in some manner. When I was shortly out of college (back in the day when people could graduate with no deb), I had a low-end job at a copy shop and wanted to save money for a once-in-a-lifetime trip to Bangkok. This was before the day of automatic transfer to savings, so I just built myself a shadow balance in my existing checking account. Whenever I made a deposit I recorded something less than that in my check register (with a separate entry on the side for… Read more »

Nick @ Millionaires Giving Money
Nick @ Millionaires Giving Money
5 years ago

Building multiple streams of income is essential if you want to get ahead and build wealth. Its very hard for students to build wealth and I was in a similar circumstance where I just kept on borrowing more. In hindsight it would have been better to borrow less and work on ways to make income on the side to pay for my education. Great advice on offer here, thanks for sharing.

lmoot
lmoot
5 years ago

Oh yes. Multiple streams of income is a HUGE one. Sometimes multiple income is easier to achieve than raising a single income source. It also is a great way to spread the income loss risk.

Lorri
Lorri
5 years ago

I agree with many of the previous posts I came from a poverty level background, single with children. I made a very detailed written plan (this is very important)! I had to work in order to feed my children so I went to school by taking as many online classes as possible. It took me 3 yrs to get an associates degree, however I didn’t owe a single penny for student debt. I cleaned houses and worked at a hospital who contributed to my education tuition. I lived very low beyond the level of comfort. We ate a lot of… Read more »

Caleigh
Caleigh
5 years ago

It’s pretty crazy how little a person actually needs to survive. A lot of people my age (I’m 28) are in the mindset ‘but I don’t deserve to suffer, I deserve to be happy’ and it spirals out of control from there. I am currently in phase 2, avoiding new debts and throwing everything I have at the debts we owe. As well, I am squirrelling away funds for our son and an emergency cushion. It leaves me with no wiggle room for miscelleneous spending and frankly, for me it’s safer that way.

Jane
Jane
5 years ago
Reply to  Caleigh

Your hard work now, will reap huge rewards in the future.

Brad
Brad
5 years ago

These are great tips!
Especially regarding the company sponsored retirement plans. If nothing else, that one tip is something people need to make happen if their employer offers it. If a company is willing to match up to 5%, and you choose not to participate, you’re essentially turning down a 5% raise. It’s crazy not to do it.

Ross Williams
Ross Williams
5 years ago
Reply to  Brad

That is true if you have no debt. But if you are, in effect, putting your share of the match on your credit card at 20%, you are probably not going to come out ahead. The effective return on your 401(k) after fees is likely to be around 6 or 7%. If you are paying more than double that in interest on your credit card you are going to lose money in the long run even with the 100% initial return. Especially when combined with the hit you will likely take from paying higher taxes in retirement.

jack
jack
5 years ago

Move to a country with zero or low tax, find a bloody job, work like crazy for a few years and maybe come back.

Michael
Michael
5 years ago

Great article as I think it addresses some of the fundamental elements of building wealth not only by stashing money away but also looking at the other end of the balance sheet in debt. It can actually be very difficult to balance the two. Paying down debt isn’t fun as it seems like you aren’t building anything, even though it’s likely the smartest financial decision as interest rate on debt is usually very high. There’s no need to start big, baby steps are plenty when starting out. Depending on an individual’s risk tolerance a mutual fund investment can be started… Read more »

Charissa
Charissa
5 years ago

I agree with a lot of the commenters above, the keeping your expenses low and living under what you make this very important. I also think that you need to look at alternate ways of bringing in more income and not just settle for whatever salary that comes with a job. You have to be creative about paying off your debt and also building wealth.

Omar farukh
Omar farukh
5 years ago

These are incredible tips!

Particularly with respect to the organization supported retirement arranges. In the case of nothing else, that one tip is something individuals need to make happen if their business offers it. On the off chance that an organization is willing to match up to 5%, and you pick not to partake, you’re basically turning down a 5% raise. It’s insane not to do it.

Andy
Andy
5 years ago

I’m 32 and disabled and have a lot of difficulty driving myself but I just borrowed $400 from my Dad to set up a home office from which I can work for a customer service contractor. I’m looking forward to getting back to earning an income and I know I need to save and invest but with me it’s not the saving part that bugs me. I’m extremely frugal shopper and I’m able to stretch my $787 all the way from month to month. So as long as I’m making more than that saving is possible. What scares the hell… Read more »

vivian
vivian
4 years ago
Reply to  Andy

hope this helps- 1 – Save long enough for big purchases (car, house) so that payments plus all other expenses don’t go over 50% of net monthly income. Save the other 50% 2 – Never EVER carry a credit card balance (unless it’s an emergency) 3 – Every time you get a raise, automatically direct the difference to a savings/investment account 4 – Understand the difference between a want and a need and try to indulge in fewer ‘wants’ 5 – Cut back spending on monthly expenses like cable, internet, insurance, etc. (look at $25/month auto insurance from Insurance Panda,… Read more »

Hermann Bock
Hermann Bock
4 years ago

I really like tip number four. At some point saving is not enough and you need to actively generate more wealth.

There is a limit to how much you can save, but no limit to how much you can generate/attract/earn, specially is you use multiple streams of income and use the power of compound interest.

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