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.
Pay Off Your Debt
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).
Identify high-interest debt and target that first, paying off lesser debt along the way.
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.
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.
- 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, a house or rent you can afford, 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.
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. Most people tend to be risk averse, so take a look at guaranteed investment contracts (GICs) or index funds.
If your savings are in a coffee tin above the refrigerator, 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.