6 Ways to Exponentially Grow Your Net Worth
- December 29, 2019
- by Ashley Chorpenning
What do you look at when considering your financial situation? A good start is your account balances, outstanding debt, and associated interest rates. By setting a monthly budget and monitoring it you can start to gauge where your money is going. Another important factor is your retirement accounts and how they are allocated. Putting it all together gets you to one "big" number that measures your overall financial success – your net worth. It doesn’t hurt to track this number and steer where it is headed. Read on for tips on how to exponentially grow your net worth.
Understanding Net Worth
In short, net worth is a way to gauge your financial success. You can calculate your net worth by adding up all your assets and liabilities, then subtract your liabilities from your assets. This will tell you your net worth
For example, if you own a home worth $250,000, have a car worth $20,000, and have $30,000 in savings and retirement, your assets equal $300,000. If you owe $200,000 on your home, $15,000 on your car, and have $10,000 in credit card debt, and $30,000 in student loans, then your liabilities equal $225,000. By subtracting your liabilities from your assets, we discover that your net worth is $45,000.
There is a bit more to it than that, in terms of what actually belongs in net worth, such as your primary residence, family heirlooms, etc. It is also very important to understand what makes up your net worth (stocks, bonds, home equity, cash) etc, which is called asset allocation.
How To Increase Your Net Worth
Building your net worth is the key to financial success. There are several simple methods anyone can use to improve their net worth. By boosting your income and assets while reducing your liabilities, you can exponentially grow your net worth rapidly. Here are 6 ways to increase your net worth, some immediate, some strategic for the long term:
Increasing your net worth isn’t just about making more money, but about decreasing debts and other liabilities. Credit card debt, student loans, auto loans, and mortgages all count against you when calculating net worth. You should work hard to pay off debt and start by paying off debts with higher interest rates first. Credit cards tend to have the highest interest rates followed by personal loans.
It is important that you understand what you owe and always make at least your minimum payments on each account. Make extra payments toward your debts when possible and work to reduce your overall debt burden.
You may want to look into consolidating or refinancing your high-interest debt to get a lower interest rate or payment so that you can eliminate your liabilities more quickly. Refinancing to a lower rate means that more of your payment will go toward the principal you owe each month, thus allowing you to pay off your debts more quickly. If you have credit card debt, you may want to explore a 0% balance transfer to a new card.
A creative way to pay off your debt more quickly is to increase the frequency at which you make payments. Instead of paying monthly, you could make weekly or biweekly payments instead. This can help to reduce the principal faster, thus reducing the amount of interest that you pay.
Another way to pay off your debt is to use a home equity line of credit or HELOC to consolidate your debt. If you own your home and have a significant amount of equity in it, this could be an option for you. By taking out a line of credit on your home, you could pay off some or all your high-interest debt and pay a lower interest rate on the line of credit. While this could yield a lower interest rate, it is important to consider that your home is what is used to secure the loan. If you default, you could lose your largest asset.
Just as it is important to understand your liabilities, it is important to understand your assets as well. You should take the time to figure out how much your home(s), investments, collectibles, and other assets are worth.
One way you can maximize your investments is to look into your company’s 401k or stock options. Oftentimes, companies will match your 401k investment up to a certain percentage. This is free money, and you should always invest at least as much as your company is willing to match. If your company is publicly traded, they may have an employee stock option plan. These plans often offer the stock at a discount or match your contribution.
It is important to note that a savings account, while an asset, does not grow as quickly as other investments. Be sure that you are investing your money in programs with high average growth rates.
Your property and collectibles likely have a resale value. You may want to work with a team of experts who can help you to figure out what those assets are worth and what they will be worth in the future. For example, a home will likely increase in value over time whereas a car or boat will likely decrease over time. You may want to evaluate selling items that will depreciate to repurpose the funds in a way that will increase your net worth.
You may view your income as an asset because it will contribute to the payments on your debt and into investments in the future. For this reason, you may want to look into increasing your income. You can do this by seeking a promotion or raise at your existing job. It may also be wise to take on a side hustle and use the money from that to contribute directly to the assets and liabilities that affect your net worth.
Cut Monthly Expenses
When you spend less money, you will have more money to accumulate net worth. You may want to take a look at your budget and understand what all of your current expenses are so that you can identify areas you can cut back. While this may mean making small changes such as dining out less or how much you spend on shopping.
You should also look into recurring expenses such as storage facilities or subscription services. By eliminating a few monthly expenses, you could save hundreds of dollars a year. For example, you may want to cancel cable services that often cost over $100 a month in exchange for Netflix or other subscriptions that cost far less.
While small expenses add up, you may want to look into cutting larger expenses. For example, if you have a car that you rarely use, you may want to sell it and use the extra money to pay off a debt or invest. You may also want to downsize your home if possible. This could mean moving to a less expensive area, a home that is smaller and has lower taxes or eliminating a second home. The exception to this is if you have a second home that is rented out or creating additional income for you, or if the home you are living in is in an area that the property values are increasing rapidly.
Pay Off Major Debts
Major debts likely include a mortgage, a large auto loan, or other property debts. Although it may take a few years, consider paying off your mortgage as quickly as possible to remove the largest lump sum from your list of liabilities. You may also consider targeting debt with the highest interest first.
One way to pay off your mortgage faster is to increase your payments from monthly to biweekly. This not only helps to decrease the amount of interest and pay off your principal faster but also increases the amount that you’ll pay over the course of the year. The reason for this is that 12 monthly payments cut in half would ideally yield 24 payments a year, but with 52 weeks in a year, you will make 26 payments in a year.
You may also want to refinance your home with a shorter term or make larger payments into your mortgage. Ensure that if you make larger payments or lump sum payments that they apply to the principal of the loan. Additionally, remember to consult your lender to determine if there are any payment penalties. Penalties exist and can be steep depending on how much of your mortgage balance is paid ahead of schedule.
Review Recurring Costs that Seem Fixed
When you reviewed your monthly expenses and budget, some items may not have been obvious because they are annual expenses. For example, you may want to take a look at your insurance and healthcare premiums when your enrollment period comes around to see if you need to contribute as much into your insurance premiums.
Other recurring expenses include subscriptions like Amazon Prime and credit card fees should be included when you review annually recurring costs. You should evaluate if these expenses are worth the investment each time that they are due. You may also want to consider how to decrease other annual expenses such as planned giving, how much you spend on certain holidays, or finding ways to decrease spend on annual vacations.
By reviewing and eliminating recurring costs and being more frugal, you may find ways to decrease your spending immediately. You can in turn use this money to invest or pay down debt. By eliminating large annual expenses now, you are also decreasing your spend in the future.
Invest for Income
By now you’ve read how to decrease what you spend on debt and other expenses, so you may be wondering what the best ways are to invest. Every person’s situation is different, so you’ll want to decide what investment options are best for you. The goal is to have every investment grow faster than the market, thus giving you greater returns in the future. It is a good idea to discuss your options with a financial advisor.
One way to invest your money so that it gives you significant returns is to invest in the stock market, but timing it is essentially a form of gambling. By investing in low cost index funds on a regular basis over many many years you will likely see growth in your stock portfolio. Our calculator shows the historical average compound returns from a blended portfolio of 50% stocks and 50% bonds is 7.7% (not inflation adjusted). The stock market is not something where you will see returns overnight, so keep in mind that this is a long-term investment strategy. You may want to have an advisor or broker help you decide what the best options are.
The Bottom Line
There are many ways to increase your net worth. The simplest way to think about it is to decrease your liabilities and increase your assets. While this may seem like a momentous journey, know that there are several financial advisors to help you along the way.
For more information on how to organize your finances with ease, consider using Wealth Meta's goal-setting tools such as our financial calculators and net worth dashboard to help you plan for retirement and achieve financial success.