The term “net worth” sounds like something only the rich and famous would talk about to one another. But we should all try to increase our net worth. There are a number of moves you can make to begin increasing your net worth.
Step 1: Determine Your Net Worth
Before you begin increasing your net worth, it is important to take a hard look at your current situation. To determine your net worth, deduct your liabilities, including your mortgage, credit card debt and other debts, from your assets, such as your checking account balance, house value, investment accounts, retirement funds, etc. If your liabilities currently outnumber your assets, don’t despair, but do start taking steps to improve your situation.
Step 2: Pay Off Your Debt
After you have a clear picture of your financial health, it is time to start eliminating your debt, particularly credit card debt. If you are carrying balances on your credit cards, you are losing money every month in interest, which is cash you could invest to increase your net worth.
If your credit card APR is 15%, you will pay $150 a year for every $1,000 you owe. If you did not have that credit card debt, you could invest that $1,000. If you earned even 3% on that investment, you would gain $30 per year. Thus, someone who is debt-free is $180 further ahead after year one than someone who is only $1,000 in debt.
Other debt, such as auto loans, mortgages and student loans, will take longer to pay off. However, focus on creating a feasible plan to pay these off as soon as possible, and try not to accumulate any new debt. If you can pay an extra $500 on your mortgage each month, this will go toward your principal balance and can increase your net worth by $30,000 in just 5 years.
Step 3: Avoid Buying a Car
Since cars depreciate quickly, they are not a great way to increase your net worth. When you consider depreciation, maintenance costs and insurance premiums, your car is probably adding to your liabilities and not your assets. Thus, if you live in a city where you must have a vehicle, it is smart to buy one that you will keep for as long as possible.
Step 4: Start Saving
Once you are out of debt, you can start focusing on saving, which is the fastest way to increase your net worth. To increase your wealth, try to save 25% of your net income. Keep in mind, this includes all of your savings, including retirement, your emergency fund and savings for any shorter term goals you have, such as vacations or major purchases.
If you are struggling to save, consider trimming your budget. These four things can help you save quite a bit:
- Take coffee and lunch to work each day: Save $200+ per month
- Cut or decrease your cable package: Save $60 to $120 each month
- Skip meals at restaurants: Save $75 to $200 per month
- Use coupons and smarter shopping strategies to decrease grocery costs by perhaps $100 to $200 per month.
By decreasing your costs in these areas, you can save, at minimum, $300 a month. If you invest that money, your net worth will increase by $18,000 in 5 years–not including the interest you will earn.
Step 5: Invest in Income-Generating Assets
Once you have money set aside in your budget for savings, put those funds to work. There are a number of ways to do this.
First, you can increase your 401(k) contributions. Currently, you can contribute up to $18,000 per year or $24,000 if you are 50 or over. If you make $40,000 per year and invest 15% of your income into your 401(k) that is a $6,000 investment each year. If the investment earns just 5%, your net worth will increase $34,000 in 5 years. If your employer matches your contributions, your earnings will be even higher.
If you do not have access to an employee-sponsored 401(k) program, you can still invest in your retirement and increase your net worth. Talk to a financial advisor about opening an IRA or Roth IRA. The IRS allows you to contribute $5,500 to an IRA each year, or $6,500 if you are 50 or older.
Other income-generating assets include:
- Dividend-paying mutual funds. These accounts offer investors income from common and preferred shares of stock and offer an average of 7% growth annually
- Real estate. Buying a house is not always the smartest financial move. But if you plan to stay in your home for five years or more, it will give you an asset that may increase your net worth.
- High-yield checking or savings accounts. These accounts will pay you higher interest than traditional bank accounts, but they may require minimum deposits.
While your net worth will not miraculously increase over night, you can start to see improvements in a few years if you cut your spending, eliminate debt and invest your earnings. Create a reasonable plan, stick with it and you will reap the rewards of your hard work.