Dave Ramsey says this is your “most important tool for building wealth”

Do you know where your money goes each month?

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Key points

• Dave Ramsey says that your income is the best way to build wealth, as long as it’s not tied to debt payments.
• High-interest debt can prove costly over time and reduce your disposable income.
• Increasing the gap between what you earn and what you spend frees up cash for other financial goals.

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When you think about getting rich, you might envision winning the lottery or inheriting a fortune from a long-lost relative. On a more practical level, you can expect a raise or a lucky break in the stock market. But bestselling author Dave Ramsey says that most people already have their most important wealth-building tool at their fingertips: their income.

Ramsey goes on to explain that if you spend a large part of your income servicing debt, you will have a hard time getting rich. in a recent tweetThe personal finance guru said, “Your income is your most important tool for building wealth. As long as your money is tied up in monthly debt payments, you can’t build wealth.”

Ramsey’s Guide to Building Wealth

Dave Ramsey has built a brand around his straightforward advice on money management, particularly the importance of being debt free. If he has debt, particularly credit card debt, it will affect his disposable income. He will not only have to make monthly payments, but he will probably also pay interest on that money. Interest payments can add up and seriously hamper your ability to be financially independent.

be debt free it’s only part of the picture. Ramsey argues that the way to build wealth is to live below your means, avoid debt, and invest consistently. If you spend less than you earn and use the difference to buy assets that will generate income, such as buying stocks, you can become rich over time.

Here are some of the findings from Ramsey Solutions’ survey of 10,000 millionaires:

• 94% said they live on less than what they earn.
• 75% have never carried a credit card balance.
• 75% said they accumulated wealth through regular and consistent investments.

The good news is that many millionaires did not earn ridiculous salaries or inherit a lot of money. The route they followed is one that many of us could emulate. The bad news? It could involve some lifestyle changes, especially if you are in debt.

Paying off debt is easier said than done

Telling people to avoid debt is all very well, but there’s a reason debt levels in the United States are increasing. Higher living costs have made it difficult for some people to cover essentials, never mind saving money for the future. Some people get into debt due to medical emergencies or other financial crises, even if they know it could cost them more in the long run.

Also, many Americans are live from salary to salary and fight to get out of that cycle. The challenge is that if you spend every penny you earn, it’s extremely difficult to build any kind of financial security. For example, only when there is a decent gap between your income and your expenses, you can do the following:

• Create an emergency fund: If you have living expenses for three to six months saved in a savings accountit will protect you against the unexpected and mean you are less likely to have to borrow money in an emergency.
• Pay the debt: There are many different ways to deal with your debt. You can tackle the smaller balances first so you can celebrate your progress. Or you can focus on the debt with the highest interest rate to pay less interest overall. Whichever approach you choose, you’ll need extra money and a plan.
• invest for the future: Once you’ve established your short-term financial goals, you may be able to look to the future. One way to create wealth is buy actions or other assets that will generate income over time. It’s important to keep a long-term horizon and invest only the money you won’t need in the next five to 10 years.

Increase the gap between your income and your expenses

Ramsey says that your income is your greatest wealth-building tool. I would say it’s actually the gap between what you earn and what you spend. That is the money you can use to become more financially secure.

If you’re not sure where to start, take a look at where your money is going each month. A budget app it could help you keep track of your spending and identify areas where you could cut back. You may feel that you have already made all possible cuts. In which case, maybe you could take overtime at work or even an extra side hustle to earn some more cash.

Whether you do it by cutting costs or earning more, increasing that gap is a crucial part of wealth creation. Until you do, you’ll have a hard time reaching other financial goals.