We’ve all heard the saying, “It takes money to make money”. For those looking to build wealth, unless a windfall or inheritance is on the way, the only real way to accumulate money is through savings. There are two types of people in this world: savers and spenders.

Savers naturally seem to live a lean lifestyle. Regardless of income level, they spend less than they earn, and build up savings.

Spenders, on the other hand, struggle to avoid debt, let alone build regular savings.

There is hope for natural-born spenders to whip their cashflow into shape. The first step is to identify the two types of saving: “saving to spend” and “saving for wealth”. Saving to spend involves putting money aside for short or medium-term spending goals, taking a holiday or buying a car. These are not everyday expenses, but unless you save for them, they will either not happen or, more likely, be bought on credit.

To compare saving versus debt, consider this: at 8 per cent a year and with payments of $200 a month, say into a managed share fund, a saver can build up a $20,000 investment in six and a half years. A $20,000 debt however would take more than 13 years to repay. That’s the difference when interest works for you, instead of against you.

Saving for wealth is the regular accumulation of money that builds long-term financial health. This is the “money making money”. Whether it’s saving for a home deposit, regular investment into some shares or a managed fund, or salary sacrifice to superannuation, these are amounts that ultimately add to your personal wealth. The recipe for building wealth is a combination of time and disciplined saving into productive investments.

The trick for spenders is to create a simple system to automatically enforce a set spending limit. First, work out an achievable amount for both savings types – saving to spend and saving for wealth, even if you start small. Next, set up a regular transfer to an account every pay cycle. This account is off-limits. It’s your only means of affording those larger expenses or future investments. Cancel your credit cards, and feel free to use your main bank account as you normally would. By saving first, and spending what’s left, you will find you don’t really miss the saved amount, yet over time the savings build up.

Once the system is in place, take a closer look at where your spending goes. Do you need to take drastic action? Keep a record of all your expenses for a month and list those that are essentials – rent, mortgage and utilities, those that are likes, and others that are frivolous or luxury. For each item, are you getting value and do you really want to continue spending on these items, compared to achieving your other goals?

There are a number of high-tech tools to help you track expenditure, stick to a budget and send a reminder if you get off track.

Spenders do have options, and being realistic about spending behaviour and taking some positive action can make a world of difference to future financial health.

Alex Berlee is a financial adviser with AMP

Posted by Alex Berlee – Money Manager (Fairfax Digital) on 23rd June, 2015