6 Simple Ways to Increase Your Net Worth
If Your Net Worth Isn't What You Hoped, Make a Few Simple Changes Starting Today
When it comes to our finances, there are lot of different numbers that we’re all concerned about.
We're oftentimes looking at the numbers in our checking account, savings account, various retirement accounts, and investing and trading accounts. All of these numbers are critically important, but there’s one number in particular that can determine just how successful you are with building your assets for the future: your net worth.
What Is Net Worth?
Net worth is simply the difference between the value of what you own—your house, retirement funds, investment accounts, checking account balance, etc.—minus such liabilities as the mortgage, credit card debt and so forth. Net worth is an important number to keep it mind as it can help you determine just how much your debt can affect your future wealth, as well as highlight the areas you should focus on before retirement.
Calculating your net worth is as simple as its definition. Take a look at everything you own, including assets that will be part of your retirement plan, such as your 401(k), stocks and investments. Make a separate list of your outstanding balances and debt and subtract that amount from the sum of everything you own, and what’s left is your net worth.
Sit down and take a few minutes to calculate the number. Are you pleasantly surprised by the number or did you expect it your net worth to be higher? If so, don’t fear! There are a few things that you can do to increase your net worth, starting today.
1. Review Your Liabilities
Take a detailed look at your liabilities. This should be an easy number to figure out as it’s simply how much debt you owe each month and in what form, such as your mortgage, credit card debt, and loan payment. Are there liabilities that you can eliminate or reduce? Reducing your debt is a big step in helping your net worth number increase.
Consider refinancing high interest loans or credit cards to speed up the debt payoff process. Refinancing to a lower rate means more of your payment goes towards the principal you owe each month, allowing you to chip away at your liabilities faster. In the case of credit cards, you can refinance using a 0% balance transfer. Just be sure to be clear on when the promotional rate ends to avoid triggering interest charges.
Alternately, consider changing things up with your payment plan. Rather than making one payment towards your debt each month, consider making weekly or biweekly payments instead. This can help to reduce the principal faster, in turn reducing the total amount of interest you pay.
You may also consider using a home equity loan or line of credit to consolidate high interest debt. While this could potentially yield a low interest rate and simplify your monthly payments, remember that your home is what's used to secure the loan. If you default, you could risk losing what may be your biggest asset.
2. Review Your Assets
You may not know exactly how much all your assets are worth, or how that value is going to change, but you can get an estimated figure. Try not to leave any assets out. Remember, here are your main asset classes:
- Primary residence: Equity simply means what your home is worth, versus what you owe on the mortgage. The more equity you have in your home, the greater your net worth has the potential to be.
- Vacation home and rental property: Usually paid for with cash, so this is definitely an asset you’ll want to count! And the same rule for equity applies to investment properties.
- Investments: Stocks, bonds, mutual funds and tax-deferred retirement plans. Just remember to add the taxes on these assets to your liabilities.
- Collectibles: Art, fine wines, jewelry, classic cars, antiques—the market for these items will fluctuate, but you can always have an appraiser come help you determine their value.
3. Trim Expenses
The less money you spend, the more you can accumulate in net worth. If you haven't done a budget review lately, look at your current expenses and see if there are places that you can cut back. That includes bigger things, such as getting rid of one of your vehicles if you have multiple car payments, to smaller things, such as skipping lunches out or canceling subscriptions for magazines you don't read.
Remember, even a few dollars here and there can add up to a lot of money throughout the course of a year and longer.
4. Pay Off Your Mortgage
Consider paying off your mortgage and get the biggest lump sum off your books. Making biweekly payments is a good way to accelerate your mortgage payoff. Just remember to consult your lender to determine whether a prepayment penalty will apply. This penalty can be steep, depending on how much of your mortgage balance is paid off ahead of schedule.
5. Review Annual Costs
What annual costs are bringing your net worth number down—and which ones don’t you need? Take a look at things like your insurance and healthcare premiums each year. Compare interest rates and see if any of these annual costs can be trimmed or eliminated altogether. Then, commit to saving and/or investing the difference to add to your net worth.
6. Invest for Income
Income investing is a great way to increase your net worth—if done right. Read here for details on an approach that I have been using with clients for years called “The Bucket System.” The main premise of this approach is that you’ll divide your liquid investments into four buckets: the cash bucket, the income bucket, the growth bucket, and the alternative income bucket.
Increasing your net worth isn't about doing one thing or another; it's about using a strategy that's designed to address all of the areas of your financial plan. By making the various moving parts of your plan work together, you can put yourself firmly on the path to a higher net worth.
Disclosure: The Balance does not provide tax, investment, or financial services advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.