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), dividend stocks and bonds are examples of opportunities for you to make more money through income-generating assets. If you’ve never invested in stocks, you will want to consult with a professional first.
Finally, a great book on this subject is The Millionaire Next Door. The authors are a couple of marketing professors by the names of Thomas J. Stanley and William D. Danko. Their book is groundbreaking because it takes a realistic look at how America’s rich got that way. What they found was that millionaires were self-employed or owned boring profitable businesses. They also famously found that millionaires made decisions based cumulative future value (for example, saving money over your lifetime by not smoking) and took aggressive advantage of tax-deferred investing strategies. If you are serious about increasing your net worth, buy, read and re-read this book.
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.