UT Extension Provides Six Simple Strategies to Build Wealth and Create Sustainable Spending Patterns

KNOXVILLE, Tenn. — The new year is a time that encourages many people to evaluate goals and plans in a myriad of areas, from weight loss and nutrition to education and career management to financial health and spending. While strategic money management may be challenging for many, University of Tennessee Extension consumer economics specialist Christopher T. Sneed has laid out six simple steps that anyone can follow to build wealth and develop lifelong, sustainable spending practices.

Build a Budget
The first thing you need to do is to gain an understanding of how much money you have coming into your household (income) and how much money you have going out of your household (expenses). Building a budget will help you gain this understanding.

While some people think budgets are boring or only for people that have money, understanding how you spend money can be insightful and a learning experience for all. Everyone – rich, poor and everyone in between – needs a budget.

Ultimately, the goal of building a budget is to have your money work for you. You will be able to clearly see your income versus expenses and create a plan to begin building assets and savings. A variety of budget tools are available to help with this process, including resources available from your local UT Extension office. Two UT Extension publications can also help with you build a budget: Track Your Spending W 1018-A and My Money Plan W 1018-D.

Building a spending plan is a process — not a one-time event. Check your plan often and make changes to help it fit your situation. The more you work with it, the better it will work for you!

Live Within Your Means
The next task is the hardest for many of us – living within your means. In order to accumulate wealth, your income must be more than your expenses. If you know or suspect you are spending more than your income each month, you have two options: increase your income or reduce your spending. In reality, a combination of these options may work best as you work out a successful financial plan.

To reduce spending, consider cutting discretionary items to start, like streaming services, subscriptions, takeout coffee and eating out at restaurants.

Build an Emergency Fund
Building and having an emergency fund allows you to take charge of life’s financial curveballs, addressing them with a plan and confidence. Outstanding debt, job security, working patterns and family status all help determine the right size emergency fund for your family. For most families, 3-6 months of net income is ideal. If you have high-cost credit, such as credit card debt, your emergency fund should be equal to 1-2 months of your net income after taxes until those debts are paid off, when you can continue building your savings up to 3-6 months of your net income. If your job is seasonal or unstable, you’ll need more stashed away in case emergencies occur in leaner months.

UT Extension publication Building an Emergency Fund W 1018-E provides further guidance for this step.

Pay off High-Cost Debt
After you have gotten your spending under control and built an emergency fund, it is time to pay off high-cost debt. This is generally the credit card charges carried month to month which are accruing interest. A great way to do this is by using the snowball method. In this approach, you focus on your smallest debt first with the goal of paying it off as quickly as possible. Continue making minimum payments on all your debts but put any extra funds you have toward paying off the smallest debt. This will help you pay it off faster.

Once the smallest debt is paid in full, add the payment you were making to the minimum payment of the next smallest debt. This way, you create a “snowball” of payments as you eliminate each debt.

Consider Homeownership
Home equity is still the number one way most Americans build wealth. Investing in a home can help you build wealth in three ways. First, well-chosen real estate property is expected to increase in value. If you live in a fast-growing urban or suburban area, your home may increase in value at a higher rate. Second, as monthly mortgage payments are made, wealth builds as you own more and more equity in your home. Lastly, mortgage interest can be a deductible expense for income taxes which may help lower your tax burden as well.

Save for Retirement
Figure out how much of your savings you can save for retirement and how much you will need to save for pre-retirement needs. Your company or your spouse’s company may offer salary deferred accounts to set aside income in which you will postpone paying taxes until you withdraw it at retirement. Such accounts could include a 401(k), 403(b), Employee Stock Ownership Plan or other accounts. If you don’t have one of these options, almost everyone qualifies for a regular individual retirement account (IRA) through a bank or investment company. Depending on your tax bracket, you can realize 15 percent or more savings increases by tax-deferring income. Just remember that you’ll pay a hefty penalty in addition to taxes on the amount you withdraw if you must take money out of a tax-sheltered fund before you reach retirement.

Working through the strategies above takes time and discipline – but it’s worth it. With a plan and clear goals, you can face the new year with the resolve and skills you need to reach your financial goals.

Through its land-grant mission of research, teaching and extension, the University of Tennessee Institute of Agriculture touches lives and provides Real. Life. Solutions. utia.tennessee.edu.