"Net worth" is the simplest indicator of your overall financial well-being. Simply defined, it's the difference between your assets (such as investment accounts, retirement funds and properties) minus all liabilities (including mortgages, credit card debt and other loans). Your net worth is very important in helping you determine how much debt you have and how it can affect your future wealth. It also helps you to highlight critical areas in your financial life that you should focus on early enough.
If you have already calculated your net worth and found that it’s lower than you expected, or that you need to increase it starting now; here are a few simple ways to help.
1. Review Your Liabilities and Pay off Debt
This is one of the simplest ways to raise your net worth. Review all your liabilities keenly and try to reduce or eliminate them all-together. Your liabilities may include student loans, credit card debt, car loans, and mortgages, among many other types of loans that you may be owing friends and colleagues.
Focus on paying off the debts with the highest interest rates first, and pay off the other low-rate debts along the way. A lower debt burden means a higher net worth and the vice versa is true.
2. Review and Increase Your Assets
Determine the total worth of your assets and how it's likely to change over time. Are your assets appreciating or depreciating? How much equity do you have in your home? How are your rental properties performing or likely to perform in the future? What is the state of your stock investments, bonds, mutual funds, retirement funds?
Ask yourself as many questions as possible about your assets and review them thoroughly. Increase the assets while simultaneously lowering your debt and your net worth will automatically shoot up.
3. Reduce Expenses
Reducing your expenses is easier said than done, but it’s a great way to help boost your net worth. Work out your current expenses and see if there are expenditures that you can afford to cut back. Remember, the less money you spend, the more you are accumulating in net worth. A great tip on how to start spending less is to avoid the use of credit cards in favor of cash. A large bulk of uncontrolled debt comes from the use of credit cards.
4. Find New Sources of Income
Getting additional income from several sources can go a long way in helping you increase your net worth. It will not only help you pay off your debts sooner, but also take way your need to borrow often. You can get additional income from a second job, doing some freelance work, selling items online, or starting a part-time business. There are many endless opportunities out there; all you need to do is find the one that works for you.
5. Maximize Retirement Contributions
Retirement contributions benefit you in two ways. One, they defer your taxable income because they are deducted before taxes. Second, they boost your available generative assets. Check if your employer offers a retirement plan and start contributing towards it. If you already have a 401(k) plan through your employer but aren’t contributing to the maximum, consider doing it if you want to boost your net worth by a big margin. You can also open an IRA (Individual Retirement Account) and start investing there.
6. Store Your Money Where It Can Grow
Avoid storing your money in savings accounts where it can’t grow or earn interest. Keep the money in interest-bearing accounts or invest it in stocks where it can work for you. On average, you can get a 7% annual growth from the S&P 500 index.1 This is one of the simplest ways to increase your net worth through long-term investing.
Calculate your net worth today and see where you stand financially. If it needs a boost, use the above tips to increase that number!
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Jerry Broussard, CFP®