Net worth can tell you many things, but it can also be used as a gauge of how successful you are financially. There are many people who have calculated their net worth and come to the conclusion it needs an update, but improving it can be difficult. Nevertheless, it only takes some guidance, a great deal of patience, and a little willpower.
What is Net Worth?
The value of your assets less the value of your debts is your net worth. Your net worth is your assets minus your liabilities.
You will then have a net worth figure. When you look at liquid vs. illiquid net worth, you can gain a more nuanced understanding of your net worth.
Cash, investments, and other liquid assets are part of your liquid net worth. In the financial world, liquid means easily convertible into cash or cash-like instruments.
The illiquid net worth compares these assets to assets that are not easily accessible and convertible to cash, such as real estate, rental property, retirement assets, or a new car, and then subtracts the outstanding debt.
Even if you ignore these liquidity concerns, you can compare your total assets with your overall debt burden. Your net worth will be determined by this.
Learn more about how to prepare a net worth statement.
How To Increase Your Net Worth
1. Pay Off Credit Card Debts
In addition to being a liability, credit card debts can adversely affect your ability to increase your net worth. Pay off all your debts as soon as you can and ensure there are no penalties for making frequent or early payments.
By paying off your cards in full every month, never running a balance, and taking advantage of rewards, you can actually earn money by using your credit cards.
What is the key to staying out of credit card debt? Never borrow more than you can afford to pay back right away. Your credit card purchases should fit into your budget. Plan every purchase and know how you’ll pay for it before you use your credit card.
With a solid spending cap in place, your credit card balance won’t grow out of control. For example, people tend to spend more around the holidays. If you use your credit cards to do holiday shopping, you may not pay off the charges until months later.
Make a holiday spending budget before you shop, and if you can, try saving small amounts of money throughout the year in a special holiday gift fund. Using credit cards often leads to impulse spending and overspending, and those items that seemed like such bargains end up costing you 10 to 20 percent more than you thought, due to credit card interest.
Some people use their credit cards for nearly all of their expenses and pay off the balance in full at the end of the month. This can help in budgeting and keeping track of where their money goes.
If you don’t have the money or the discipline to pay off your balance every month, you should avoid using a credit card for things such as clothing, food, gas, dining out, and other recurring expenses.
Besides, cash advances on credit cards come with huge price tags, including higher interest rates and fees. Cash advances almost always come with a transaction fee of anywhere between 2 and 3 percent of the amount you get.
Plus, grace periods don’t apply to cash advances, so you pay interest from the day you get the cash. To add insult to injury, the interest rate on cash advances is significantly higher than the rate on purchases.
All in all, your cash advance can end up costing you a bundle of money. Bottom line: Don’t use your credit card as a bank account, and avoid cash advances whenever possible.
Learn more about how to get out of your credit card debts.
2. Build an Emergency Fund
It is important to create an emergency fund in order to grow your assets and increase your net worth without having to rely on other sources of funding, especially high-interest debt from credit cards or expensive loans.
Everyone should have an emergency fund, but you probably won’t know how much your fund should be unless you know what your basic monthly expenses are. Financial advisors usually suggest having enough savings in an easily accessible account to cover your living expenses for three to six months, but it’s not a one-size-fits-all situation.
Depending on the number of breadwinners in your household and your other sources of cash, your family may need more than six months of expenses in an emergency savings account.
Having this financial safety net will give you peace of mind about how you’ll meet your most basic financial obligations in the event of illness, job loss, unplanned expenses such as major house or car repairs, or medical costs not covered by insurance.
If you’re uncertain about your job and the job market, an emergency fund is especially important. When you have a budget in place, you can easily calculate how much money you’d need to cover your basic, no-frills living expenses if you had a sudden loss of income.
Write down your goal for your emergency fund and decide on an amount to contribute to it each month, using the “pay yourself first” rule.
Keep the fund in a separate account, such as a money market account (not a money market fund, which is not FDIC-insured), so you’re less tempted to dip into it for nonemergencies. Since emergency funds might be needed without notice, they should be kept in liquid accounts that are easy to cash in quickly.
3. Max Out Your Retirement Contributions
You can save and invest your money in 401(k) retirement accounts offered by many private employers. These accounts offer great tax benefits. For example, many employers offer match programs that help you build wealth faster than you could alone.
In addition to Traditional and Roth IRAs, you can also open an Individual Retirement Account (IRA) as well.
These accounts allow money to be invested for the long-term via mutual funds, stocks, and other investment options. You can build your savings balance as you get closer to retirement.
Tax expenses can be reduced by using these accounts and your income can be invested for the long term.
By maximizing your employer-matched retirement contributions, you will increase your income further and get more money to save for the future. If you ignore such programs, you miss out on valuable savings opportunities.
Two benefits are derived from retirement contributions. First, traditional retirement accounts allow you to postpone your taxable income until your lowest income years in retirement. Secondly, they increase your available investment assets.
Taxes can slow down the process of achieving your retirement goals. A proactive approach will prevent this and help you reach your retirement goals more quickly.
Put money into your employer-sponsored retirement plan and consider investing in index funds or target date funds aligned to your desired retirement age.
As you approach retirement, the funds invest in stocks and bonds and gradually transition your holdings in each over time.
Your savings goals automatically switch from wealth accumulation to wealth preservation, derisking your retirement assets and working toward ensuring a retirement income.
As an IRA owner, you can also invest in these types of investment vehicles. IRAs, however, offer a broader range of investment choices.
Using apps like M1 Finance, you have access to an IRA as well as a complete financial management experience.
The automatic investment in portfolios you choose can be set up as recurring deposits.
4. Create a Budget
To create a budget you can live with, you need to set realistic spending goals in each category. First, figure out where your money actually goes now. To get started, collect as many of your bills, credit card statements, bank statements, and receipts as possible for the last six to twelve months and total up your monthly spending.
Don’t forget to include any amounts you direct toward savings, including retirement savings. Once that’s done, calculate your average monthly net pay (after taxes and other deductions) by looking at the last six months’ worth of take-home pay. Don’t include unknown amounts such as year-end bonuses, commissions, or overtime pay. Do include other income amounts you receive every month, like dividends or Social Security. You’re figuring out your basic monthly income, so only include money you can always count on.
Every Expenses Counts
In addition to your regular monthly expenses, you want to make sure to include occasional expenditures. For the items, you identified that get paid quarterly or annually (or anything other than monthly), calculate the yearly cost and divide it by twelve to get the monthly cost. Include that amount in your monthly expenses to get a more accurate picture of where your money is going.
For non-monthly expenses that you know for certain you’ll face (like dentist visits), set aside the monthly amount in a savings account so you’ll have it handy when you need it. To really get a fix on where your money goes, you’ll need to keep track of your cash expenditures too. Save receipts to record later, or jot the expenditure down on a notepad as you use cash.
The more often you use an automated teller machine (ATM), the more important it is to write down your cash expenditures because this is where many people lose control of where their money goes. Tracking your cash expenditures is one of the tougher aspects of budgeting, but it’s also a common source of budget leaks.
Tracking Small Expenditures
Most people are more than a little surprised when they really start tracking their expenses and see where they’re spending more money than expected. Small cash expenditures can add up to significant sums of money by month’s end.
That daily cup of coffee is probably costing you almost $600 a year. Three six-packs of beer a week add up to at least $600 a year. If you smoke two packs of cigarettes a day, it’s probably costing you over $280 a month, $3,360 a year, or $33,600 in ten years—and that’s if you discount the impact of inflation!
Finding Ways to Reduce Spending
Once you’ve looked at your actual spending, you’ll begin to see a pattern, and will be better able to identify where you can comfortably make adjustments to start saving money. Consider this a process of self-discovery.
You can start with an in-depth look at your largest spending categories, and then move on to the smaller categories. Though it might seem like smaller expenditures would be the easiest to cut, mainly because that spending tends to be more discretionary, paring down your largest expenses can make a bigger long-term impact on your budget.
Learn more about how to create a budget.
5. Pay Off Your Student Loans
If you’re among the 69 percent of people with student loans, there’s a lot you need to know about repayment and how to keep your interest costs as low as possible. If the thought of paying off the large balances seems overwhelming, or if you’re struggling to make the payments, you have options available to you to make it easier.
The most common type of student loan is a direct loan. These are either subsidized, meaning the federal government pays the interest while you’re in school and during grace and deferment periods, or unsubsidized, which means you’re responsible for the interest from the day you take out the loan.
If you didn’t make any interest payments while you were in school, you’ll end up with a larger loan balance to pay than the amount you borrowed, because that interest was added to the balance of your loan. A larger loan means your monthly payments will be higher, and you’ll pay more interest over the life of the loan.
The day after you leave school, whether you graduate, withdraw or drop to less than half-time status, your grace period begins (usually at least six months). During your grace period, you don’t have to start making monthly payments. Your first loan payment will be due at the end of your grace period, but that doesn’t mean you can’t start making payments sooner. If you’re not sure when you have to make your first payment, check with your loan servicer.
Deferments and Forbearances
If you’re having trouble making student loan payments, you have options other than the default (where you just stop paying). Deferment is one option for relief during a period of financial difficulty. If you qualify for a loan deferment, you won’t be required to make principal payments on your loan during that period.
If you have an unsubsidized direct loan, you’ll be responsible for making the interest payments yourself during the deferment period, or the interest will be added to your loan balance. If you have a subsidized loan, the federal government will make the interest payments for you. You can qualify for a deferment under the following circumstances:
- Enrollment in school at least half-time
- Active military duty
- Serving in the Peace Corps
- Financial hardship
- Rehabilitation program due to disability
If you don’t qualify for a deferment, you may qualify for forbearance, a special arrangement with your lender that allows you to reduce or postpone principal payments temporarily. Interest continues to accrue during this period on both subsidized and unsubsidized direct loans, and if you don’t pay it during the forbearance, it will be added to the balance of your loan. This costs you more in the long run.
Learn more about how to pay off your student loans fast.
6. Buy Your Own Home
The purchase of a home is often the largest investment you’ll ever make. Although there are many ways to spend your money, buying a home is generally considered one of the best ways to increase your wealth.
It works because of leverage and return on capital: When a person buys a house, he or she usually puts down 20% of the price as cash, while borrowing the remaining 80%.
Home prices should appreciate over time, generating equity.
In general, the homeowner gets a better ROI on their investment because they pay less in interest and have more time to repay the debt than a renter.
By treating a part of your home as a rental, you can also build wealth and income. Renting out rooms or buying a separate property as a rental property can earn you extra money.
When you purchase a forever home and live in it for many years, you can build equity for when you later downsize and take the equity out for retirement.
Learn more about how to buy a house.
7. Keep Money You Have Saved Where It Will Grow
You probably already have a savings account, but do you use it? Everything else should be in interest-bearing accounts. Your checking account should be lean enough to cater to your regular expenditures. If you can, invest some of it (see our guide to investing in stocks). Consider guaranteed investment contracts (GICs) or bond funds for people who are risk-averse.
You aren’t making your money work for you if your savings are in a coffee tin above your fridge. In addition, resist the urge to immediately spend any windfalls you may receive; invest them so that you can benefit long into the future.
Learn more about the best places to keep your savings.
8. Buy the Car You Will Drive For Many Years
A vehicle bought today is practically guaranteed to be worth much less a year from now. The true cost of owning a car comes when you combine depreciation with maintenance costs and insurance premiums.
Your net worth decreases with every new car you buy. If you purchase only the vehicle (or vehicles) you need and drive them until they need to be replaced, you can reduce the negative financial effects of owning an automobile.
9. Invest in Yourself
By investing in yourself first, you are paying yourself more. You may have heard of it before, but investing in your own education is a good investment.
To improve your skillset and obtain higher salaries and better benefits, you may want to take part in more rigorous training programs or pay for a certification course through a company like Udacity.
Investing in ourselves first will allow money to flow into our checking accounts more quickly.
Investing in our health is also important. Exercise, a healthy diet, sufficient sleep for the individual and their family members, and relaxation techniques like meditation and yoga, as well as therapy sessions, can contribute to physical and mental wellness.
As you live longer and enjoy your life, these investments will help you to grow your net worth. If you’ve earned enough and want to help out a loved one, you might consider giving financial gifts or even stock as gifts.
10. Consult A Professional
Despite being the most important step, it is the most overlooked. The cost of consulting an accountant or financial advisor is often avoided by people due to embarrassment over their finances.
Therefore, talking to a professional can provide you with the latest information regarding tax breaks and budgeting. You should never be ashamed to ask for assistance and to utilize available resources.