Your net worth can be easier to improve than you think.
Do you know your net worth?
Knowing your net worth may not seem like an important detail to know, but being aware of this piece of information helps to keep you on track with your finances and monetary goals.
So, how do you determine your net worth and what is it? Basically, your net worth is the value of your assets (bonds, savings and retirement accounts included) subtracted from your liabilities (or debts). Calculating your liabilities is fairly easy, considering is it the total amount you owe including any loans, mortgages, and the like. Assets, on the other hand, can be a little trickier to establish due to debates many have in the industry about whether or not certain items, like your home or car, are actually considered an asset due to their depreciation over time as well as costs going in for maintenance. Assets should put money in your pocket, not take it out; however, for the sake of argument, let’s say your vehicle counts toward your overall net worth.
So, if your total assets are more in value than your liabilities, you have a positive net worth. If the value of your assets are less, then your net worth is negative. Throughout your life, your net worth will fluctuate. The goal, though, is to create a steady trend up to increase your assets, decrease your debts and, therefore, enhance your net worth.
If this stresses you out and it feels like you will never have less liabilities than assets, fear not. There are many ways you can improve your net worth. Here are a few:
Increase your income. Easier said than done, right? But with the growing digital age, there are many ways you can make money online simply by being on your computer. If getting a higher paying job isn’t an option for you right now, look into blogging or selling items on Ebay or Esty. These are great ways to make some extra money each month, with little costs in overhead. Plus, you can use this side business for write-offs in the home on your taxes.
Pay more money toward your debt. Any chance you have to pay more money toward your debt you should take. If you are only paying the minimum payment each month credit cards, student loans, etc., adjust your budget to try to include higher payments toward this debt. For instance, you may find that over the course of a month you are spending $30 or more on just going out for coffee. Cut back on those coffee shops and use that money toward your liabilities instead. Every penny counts, and your net worth will thank you.
Save a quarter of your income. If you want to increase your net worth at a faster rate, saving more will help you do this. While a common recommended amount to save is 10% of your income, 25% will give your net worth percentage the extra oomph it needs. If this seems like a lot, consider taking 10% of one paycheck and 15% of another and use that total toward either a savings account, a retirement fund or something similar.
Create a passive income. They say time is money, and the less time you have to spend actually making money while simultaneously increasing your bank account, the better for your net worth. There are a few routes you can take to create a passive income. Affiliate marketing is an option (if done ethically and correctly), but you can also invest in stock and bonds. Index funds, Guaranteed Investment Contracts (GICs) and dividend stocks are examples of opportunities for you to make more money through income-generating assets. If you’ve never invested in stock, you will want to consult with a professional first.
You won’t increase your net worth over night, but you can take continuous steps to improve it so that you can reach your financial milestones much faster.
Investment strategies should be one of your top priorities upon graduating college.
For those preparing to graduate from college this month, this post is for you.
If you have been following us, you may have read last week’s post regarding financial mistakes to avoid upon leaving your past four years of sanctuary. This week, we would like to discuss wise investment strategies for you as you (hopefully) begin interviewing more and potentially accepting promising job offers.
If you did not study finance or economics in your undergrad and you have never consulted with a financial planner, investing may seem like a foreign concept to you.
In addition to what we discussed last week, here are some ways you can set yourself up for a promising financial future:
Create a personal spending budget.
By not having a budget for yourself, you are more likely to spend more than you make each month as you begin to see an increase in your bank account thanks to your new job. However, holding yourself accountable will prevent any slip –ups as well as promoting positive spending and saving habits for your future. When everyone tells you to start now, they really are not kidding.
Set up your Individual Retirement Account (IRA).
If you’re lucky enough to land a job that offers a 401K, be sure to always add to it to help increase its value, even if your employer matches. The more you add in now, the better for your future. If you are among the many who do not receive this as a benefit with their place of employment, open an IRA now. A summary of what to look for in a retirement savings account includes:
First, there are two types: the Traditional and the Roth. Contributions to Traditional IRAs are tax deductible, but withdrawals during retirement are taxed. Roth IRAs are not tax deductible, but withdrawals are generally tax-free. In other terms, you avoid taxes when you put money in to Traditional IRAs, and you avoid taxes when you take money out in Roth IRAs during retirement.
No-fee IRA’s. Some charge you for simply holding an account with them known as a “custodial fee.” You will want to ask your institution if they charge any fees for hosting the IRA.
Additional charges. Another question you will want to ask your custodian is whether or not they charge any kind of transaction fee. These are typically charged when you go through a financial adviser to purchase your mutual fund. Be sure to also inquire about other fees that may be associated like contract charges.
It’s often recommended for those starting out their investment portfolio with limited funds to begin with a Traditional IRA. A concern is that individual tax fees for Traditional IRAs could be higher but is not guaranteed. You will want to weigh out all your options with both in order to determine what is best for you.
Ignore Get-Rich-Quick Schemes.
If something seems extremely complicated, it probably is. As a newbie to the world of investing follow the K.I.S.S. rule (“Keep It Simple Stupid”). Choose one source and keep it simple. Over time, you can grow your net worth, but it will be hard to accomplish if you don’t understand what’s happening to your money.
Don’t be afraid to purchase used items first.
The goal and purpose of growing your investment portfolio is to decrease debt. As a college graduate, you will already have loans unfortunately accumulated on your shoulders upon stepping foot off that campus for the last time as a student. So, buy used items and live below your means. You will work your way to having those nicer items much faster by choosing to spend less now.
Know your assets.
In this previous post, we discussed what comprises of an asset and what does not. In summary, an asset is something that puts money in your pocket; not removes it. Consider this as you make big purchases over the next few years.
Choose the right savings account.
If you are already excellent at saving money, that’s awesome! But, did you know you can make it a little more worth your while? Have your savings pay you back by choosing the right type of account to increase your investment will waive some worries for you in the future. Some to consider are:
Online Savings Account: Earning potential is higher.
Money Market Deposit Accounts: Despite minimum balance requirements and monthly fees, the interest paid is typically higher than that of traditional savings accounts.
Certificates of Deposit (CDs): Another opportunity for higher interest rates paid, but limitations do apply for withdrawals.
Automatic Savings Plans: Can help you obtain lower banking fees.
As always, and with any choices you make, be sure to do your research and ask a lot of questions to see what fits you best.
Invest in an emergency fund.
This may not seem important, but with the economy so up and down, you will want to be prepared for the worst. I’ve heard of several stories of companies going under or downsizing, leaving individuals back on a job hunt in an increasingly competitive market. In fact, the company I did my undergraduate internship with closed down several offices, leaving no opportunities for me upon graduating. I watched co-workers one by one receive the unfortunate talk. There is also the possibility of being fired, which I have also heard of from individuals who seemingly held a strong position in their occupation. It happens, and you need to be prepared. The recommended strategy is to save six months of savings to keep you afloat in case of an emergency.
Invest in higher payments to your student loans.
Only paying the minimum on your student loans will keep them hanging over your head longer, and thus, keeping more debt in your life longer. The average time it takes for a college grads pay off student loan debt is 21 years. It doesn’t have to be this way though.
Make your future better and financially more stable through these tactics and tips.
Do you already have an investment strategy in place for when you graduate?
Today’s post was created in partnership with Credit Sesame.
In a strong economy, affluent Americans change their spending habits. They ease up on the budget, take longer vacations, and indulge in luxury a bit more than usual. In fact, 42% of Americans say the economy has a strong effect on their day-to-day spending habits. Some are even taking on debt because they feel confident that they can pay it back quickly. With money flowing more freely, there’s no reason to delay gratification. Nearly one-third of Americans with significant investable assets believe it’s worth going into debt to buy something they can’t currently afford. At the same time, 31% wish they’d paid off their current debts faster.
While it’s common knowledge that the ability to reach long-term financial goals is impacted by day-to-day spending habits, it can be difficult to apply that knowledge to make a positive difference in the quality of life during retirement. Only 50% of non-retirees are saving with the specific intent of improving their standard of living in retirement. No matter the state of the current economy, it’s smart to take some time to reassess goals and focus efforts to save money.
Retirement should be a time to relish independence, enjoy a more relaxed schedule, and make a few big dreams come true. For many Americans, the failure to save enough money to maintain or increase their standard of living means living on a smaller budget and pushing their dreams further into the future.
How much should real life cost?
For people with average income, spending habits can make or break a high standard of living in retirement. It’s difficult to know how to set up the kind of budget that leaves breathing room for a high-quality current standard of living while also allowing room to save for the future.
It’s important to evaluate a budget at the bare-bones level. Specifically, break down income by category and use percentages as spending goals.
For example, a 30-year-old making $60,000 per year may have taxable income (after pre-tax retirement savings of 5% plus a 2.5% company contribution, a standard deduction, and a personal deduction) of $46,700. After federal income tax and average payroll deductions of health and life insurance, she’ll bring home $3590 per month.
Pay the important things first
In an effort to watch for expenses that are way out of line and may harm future savings, she sets up her budget and allocates 25% to housing ($897), 5% to utilities ($180), 10% to transportation ($359), and 10% to an emergency fund ($359). Keeping expenses under control by taking care of the big things makes a more profound impact on her ability to save than obsessing over a Starbucks habit or denying herself lunch out with friends once a week. With this framework, there’s $1795 each month to invest and spend.
Having this framework in place feels less restrictive overall than trying to stick to a down-to-the-dollar daily budget. At the same time, it prevents the kind of big mistakes that are easy to make when it “seems” like there’s more than enough money to go around.
For example, a super sexy brand-new Range Rover has a 36-month $389 lease payment. After insurance and gas, it exceeds the transportation budget by enough that it would have a huge negative impact on the bare-bones budget. It may hurt a little to say no to the sweet ride now. These are exactly the kind of important compromises that have a positive impact on future finances. Once you start making payments you can start pulling your free credit report analysis to start seeing how your credit score is doing.
How to cut costs now
Most people pay their bills each month without really thinking about where the money is going, and why. If saving more is the goal, spending less is a great way to get there. Evaluating a budget to make sure it’s working is one way to protect the overall ability to save. It’s important to take a look at each column, try to cut costs when possible, and reallocate those funds to saving.
For some, there isn’t a lot of wiggle room, so increasing savings may seem like a silly goal. Creating a budget that throws a wet blanket of deprivation over life is justifiable if the solution involves short term pain for long term gain. Setting up a budget that excludes luxuries like movie channels, nights out with friends, weekend trips, Tuesday morning lattes, an occasional pedicure and new clothing can feel like a harsh punishment. This kind of austerity has “Fail” written all over it.
Negotiate on your own behalf
Instead, evaluate current spending in a way that holds vendors accountable. Start by making a simple spreadsheet with four columns. In the first column, list every payment in the budget. In the second column, list the phone number to each company, and in the third, list the account number. Gather the most recent bill for each company and start making calls. Get ready to negotiate.
The goal is to reduce spending by shrinking fees and interest rates. First check each bill for fees and penalties. For example, if you accidently paid your credit card bill late, you could be on the hook for a $29 fee. Call and ask for a refund. Be prepared to ask at least twice during the same call. Most customer service reps are carefully trained to say “no” the first time.
If you carry a balance on your credit cards, ask the issuers for lower rates. Find out if your utility companies offer a discount for enrolling in budget billing or participating in a green energy initiative. Compare your car insurance rates to other companies and see if you can lower that bill (or reduce your coverage or raise your deductible). Compare your cell phone plan to other companies. Often, simply communicating with these vendors can cut a significant chunk out of expenses that seemed unchangeable.
Record the outcome of each phone call in the fourth column of the spreadsheet with the dollar amount saved. Keep this record to make the next round of calls easier. In six months, repeat the process. It may take two or three hours to make the phone calls, but cutting even $100 per month equals $1200 per year of savings, and $400 per hour is a great hourly rate.
How redirecting savings to a retirement account dramatically impacts future quality of life
Putting raises into a company-matched 401(k), opening a personal IRA for financial windfalls, and leaving 401(k) accounts alone (or rolling the funds into another retirement account) when changing jobs are solid ways to increase retirement savings without impacting day-to-day life.
Raising 401(k) plan contributions just a tiny bit makes a huge difference in savings power. In the example above, an employee making $60,000 per year is saving 5% in a company-matched 401(k) plan at age 30. She has 40 years until retirement. If she sticks with this plan at a historic 8% rate of return, she’ll have $1,466,911 when she’s ready to stop working. If she increases her contribution by just 1%, she’ll shrink her monthly spending power by $50, while she increases the value of her retirement account by $195,588 for a total out of pocket cost of $29,332.
Upgrading to a better quality of life after retirement is possible, and there’s no reason to swear off restaurants and manicures to make it happen. Incrementally saving a bit more income each year makes a huge impact on retirement savings, which makes a great deal of difference in a post-retirement standard of living.