Your net worth can tell you many things, but it is simply a way to gauge your own financial success. Many have calculated their net worth and come to the conclusion that it is in need of a revamp, yet improving it can seem very difficult. However, it only requires some guidance, a little willpower, and a lot of patience.
Key Takeaways
- The first step to increasing your net worth is by wiping away debt. Net worth is equity minus debt, so lowering that debt increases net worth considerably.
- Making smart investments, not just in stocks, is a surefire way to increase net worth. Buying a sensible car or a house, and keeping luxury expenses low, are all important steps.
- Net worth doesn't need to mean rich. For some, a positive net worth is a goal they should be proud of. People with high levels of debt like those with medical bills and student loans should celebrate when their net worth finally turns positive.
Pay Off Your Debt
The money you owe is money that could be used to grow your net worth. Pay off all your debt as soon as you are able, but be aware of penalties that can be applied for early payment (like with mortgages).
Consolidating your debt by taking out a loan at a lower rate to pay down high-yield debt is a tried and true strategy. The bottom line here is to know what you owe and have a plan for paying it back. Make extra payments where possible and work to reduce your overall debt burden.
Identify high-interest debt and target that first, paying off lesser debt along the way.
Max Out Your Retirement Contributions
Many private employers provide retirement plans that have desirable tax characteristics. Other tax-advantaged accounts (ex. a Roth IRA) are also available. In fact, many employers have matching programs that will help you grow your contribution faster.
By not taking advantage of such programs, you are leaving money on the table. Retirement contributions create a two-fold benefit. They defer your taxable income to your lowest earning years and increase your available generative assets. Taking action now for your retirement will help slow one of the biggest impediments to the growth of your net worth: taxes.
Cut Expenses By Realizing Expenses
Nobody likes to hear that they spend too much and need to cut back. We all know that eating out at restaurants or buying the latest gadgets catches up with us, but what we don't realize is how quickly smaller expenses can add up, too.
Make a habit of noting your expenses every day for a week and you will be shocked by how much of your paycheck is trickling away. The intent is not to stop eating out or quit hobbies entirely, but instead to become aware of your spending habits and identify areas where you can make adjustments; a little goes a long way.
In addition, remember that debt from step one? A large bulk of that comes from credit cards. Cutting up your credit cards and using only the cash you have available will help to curb your spending.
Keep Money You Have Saved Where It Will Grow
You probably already have a savings account, but are you using it? Your checking account should be lean enough for your regular spending and everything else should be in interest-bearing accounts. Even better, invest what you can. Some people tend to be risk-averse, so take a look at guaranteed investment contracts (GICs) or bond funds.
If your savings are in a coffee tin above the fridge, you are not making your money work for you and are undermining your hard work. As a side note, resist the urge to immediately spend any windfalls you may receive; invest it to ensure that you will continue to reap the benefits well into the future.
Buy the Car You Will Drive Forever
It can be practically guaranteed that a vehicle purchased today will be worth much less in one year's time. Couple this depreciation with maintenance costs and insurance premiums and you have a recipe for the true financial cost of owning a car.
Every new car you buy ultimately decreases your net worth. You can reduce the negative financial effects of owning an automobile by purchasing only the vehicle (or vehicles) you need, with an eye to driving it until it needs to be replaced.
Talk to a Professional
This is the most important step and yet the most overlooked. People don't want to pay to consult an accountant or financial advisor often because they are embarrassed about the state of their finances.
With that said, talking to a professional can get you the latest information on how to utilize tax breaks or assist you in your budgeting. Never be ashamed to ask for help and use the resources that are available.
FAQs
You can significantly boost your net worth by maximizing contributions to retirement accounts and leveraging employer matches. Strategically tackle high-interest debt, especially credit card debt, by paying more than the minimum. Utilize budgeting tools to streamline your spending and identify ways to save money.
How do you answer net worth questions? ›
Net Worth Calculation
Once you have an inventory of all your assets and liabilities, you can calculate your net worth. To do this, simply subtract the total amount of liabilities from the total amount of assets.
How do you add up your net worth? ›
To calculate your net worth, you subtract your total liabilities from your total assets. Total assets will include your investments, savings, cash deposits, and any equity that you have in a home, car, or other similar assets. Total liabilities would include any debt, such as student loans and credit card debt.
How do you build a good net worth? ›
What to Do
- Review the stability and dependability of your earned income. ...
- Reduce your monthly expenses. ...
- Acquire assets that are more likely to provide income or appreciation potential over the long term. ...
- Maximize contributions to IRAs and employer-sponsored retirement plans. ...
- Reduce your liabilities. ...
- Final Notes.
Millionaires put their money in a variety of places, including their primary residence, mutual funds, stocks and retirement accounts. Millionaires focus on putting their money where it is going to grow. They are careful not to invest large sums into items that will depreciate.
Why increase net worth? ›
Individuals who consistently increase their net worth are considered to be in good financial health. As you start to save and invest money and pay off your debts, your net worth will increase. It's a good idea to calculate your net worth every so often to see how you're doing.
What net worth makes you rich? ›
Wealthy: To be considered well off, a person must be in the 90th percentile, possessing a household net worth of $1.9 million. This level of wealth affords trips, charity donations and college funds for children.
What should my net worth be at 40? ›
Average net worth by age
| Age by decade | Average net worth | Median net worth |
|---|
| 30s | $277,788 | $34,691 |
| 40s | $713,796 | $126,881 |
| 50s | $1,310,775 | $292,085 |
| 60s | $1,634,724 | $454,489 |
4 more rowsYes. The value of your 401(k) account is a part of your net worth and should be included in your net worth. Like anything else of financial value, the vested balance of your 401(k) account — or any retirement account, for that matter — is considered an asset.
What is the fastest way of increasing your net worth? ›
Net worth is equity minus debt, so lowering that debt increases net worth considerably. Making smart investments, not just in stocks, is a surefire way to increase net worth. Buying a sensible car or a house, and keeping luxury expenses low, are all important steps.
At its most basic, net worth is everything you own minus everything you owe. To calculate your net worth, tally the value of all or your assets, including bank accounts, investments, and perhaps the value of your home or vacation home.
Do you add income to net worth? ›
Even though it's your biggest wealth-building tool, income is only part of your financial picture. Think of it this way: Your income is how you make money, but your net worth measures your actual level of wealth, providing a much more accurate picture of your overall financial health.
How to grow financially? ›
That is the ultimate goal of a long-term financial plan.
- Set Life Goals.
- Make a Monthly Budget.
- Pay off Credit Cards in Full.
- Create Automatic Savings.
- Start Investing Now.
- Watch Your Credit Score.
- Negotiate for Goods and Services.
- Stay Educated on Financial Issues.
To figure out your net worth add up your assets (the cash you've got in bank accounts, investments, retirement accounts, etc. as well as the value of any properties you own) and then subtract any liabilities (debt, including student loans, credit card, your mortgage, etc.) that you owe.
How do I project my net worth? ›
Start with what you own: cash, retirement accounts, investment accounts, cars, real estate and anything else that you could sell for cash. Then subtract what you owe: credit card debt, student loans, mortgages, auto loans and anything else you owe money on. Then boom—you've got your net worth.
Does a 401k count towards net worth? ›
Yes. The value of your 401(k) account is a part of your net worth and should be included in your net worth. Like anything else of financial value, the vested balance of your 401(k) account — or any retirement account, for that matter — is considered an asset.
What is the average net worth by age? ›
The average American net worth is $1,063,700, as of 2022. Net worth averages increase with age from $183,500 for those 35 and under to $1,794,600 for those 65 to 74. Net worth, however, tends to drop for those 75 and older.
How much should your net worth increase per year? ›
Pay off debt.
Make it a goal to increase your net worth by 25% each year of your income. By the time you reach retirement, your ultimate goal would be a net worth that consists of all assets without any liabilities.
