When it comes to your finances, you may be fixated on a number of different figures.
It’s possible that you’re fascinated with the numbers in your checking account, savings account, various retirement accounts, and investment and trading accounts. You might be preoccupied with the amount you owe on credit cards, student loans, or a mortgage.
Of course, keeping track of your earnings as your profession progresses may be a priority as well.
All of these figures are crucial to knowing your entire financial situation. However, one figure in particular can indicate how successful you are at accumulating assets for the future: your net worth.
What Is a Person’s Net Worth?
The difference between the value of what you own your house, retirement assets, investment accounts, bank account balance, and so on and the value of what you owe mortgage, credit card debt, and so on is your net worth. Net worth is an important figure to remember because it may help you assess how much your debt will affect your future wealth and identify areas where you should focus your efforts before retiring.
The process of calculating your net worth is as straightforward as its definition. Examine everything you own, including assets such as your 401(k), stocks, and other items that will be part of your retirement plan.
Make a separate list of all outstanding balances, including debt, and deduct that amount from the total value of everything you own to arrive at your net worth.
Take a seat and compute the number for a few minutes. Are you pleasantly pleased by the figure, or did you anticipate a bigger net worth? If that’s the case, don’t be alarmed! Starting now, there are a few things you can do to boost your net worth.
Examine Your Financial Liabilities
Examine your liabilities in depth. This should be a simple calculation because it simply represents how much debt you due each month and in what form, such as a mortgage, credit card debt, or loan payment.
Is there anything you can do to remove or lessen your liabilities? Reducing your debt is a key step toward increasing your net worth.
Consider refinancing high-interest loans or credit cards to help you get out of debt faster. When you refinance to a lower rate, more of your monthly payment goes toward the principle you owe, allowing you to pay off your debts faster. In the case of credit cards, a 0% balance transfer can be used to refinance.
Just make sure you know when the special rate expires to prevent incurring interest charges.
Alternatively, consider switching up your payment schedule. Instead of paying a single monthly payment toward your debt, consider making weekly or bimonthly installments. This can help you pay off the principal faster, lowering the overall amount of interest you’ll have to pay.
Consolidating high-interest debt with a home equity loan or line of credit is another option. While this may result in a lower interest rate and easier monthly payments, keep in mind that the loan is secured by your house.
If you default, the bank may begin foreclosure procedures against you, which might result in the loss of your most valuable asset.
Examine Your Assets
You may not know how much all of your assets are worth or how that value will vary in the future, but you can acquire a rough estimate. Make sure you don’t forget about any assets. The following are your primary asset classes:
- Primary residence: “Equity” simply refers to the value of your home minus the amount you owe on your mortgage. The greater the amount of equity you have in your property, the higher your net worth might be.
- You’ll want to count your vacation house and rental property because they’re frequently paid for in cash. The same concept applies to investment properties in terms of equity.
- Stocks, bonds, mutual funds, and tax-deferred retirement plans are examples of investments. Remember to factor in the taxes on these assets when calculating your liabilities.
- Art, fine wines, jewelry, classic vehicles, and antiques the market for these items can change, but you can always hire an appraiser to help you figure out how much they’re worth.
You can also include daily assets in the number, such as the balances in your checking and savings accounts. When it comes to calculating your net worth, every penny counts.
Reduce Your Expenses
The less money you spend, the more net worth you can build. If you haven’t done so recently, check your current spending to see if there are any areas where you can save money, such as getting rid of one of your vehicles if you have multiple car payments, or smaller things like missing meals out or canceling magazine subscriptions you don’t read.
Remember that even a few dollars here and there over the course of a year or more can build up to a significant sum of money. Consider how much money you spend on a yearly basis and how much you could save.
What annual expenses are reducing your net worth, and which ones are unnecessary? Examine your insurance and healthcare premiums on a yearly basis.
Compare interest rates to discover if any of your annual expenses might be reduced or removed entirely. Then, to increase your net worth, commit to saving and/or investing the difference.
Get Your Mortgage Paid Off
Consider paying off your mortgage and eliminating your largest loan. Making biweekly payments will help you pay off your mortgage faster.
Remember to check with your lender to see if you’ll be charged a prepayment penalty. Depending on how much of your mortgage debt is paid off ahead of schedule, the penalty, if any, can be significant.
Invest for Profit
If done correctly, income investment can help you improve your net worth. The bucket system is one approach you can employ.
The primary idea of this strategy is to separate your liquid investments into three buckets: cash, income, and growth.
By putting money into several buckets, you’re giving yourself a variety of assets from which to draw to fund your lifestyle before and beyond retirement. This can enhance other retirement income sources like a pension or annuity, as well as social security payments.
It’s not about doing one thing or the other when it comes to increasing your net worth; it’s about employing a strategy that addresses all aspects of your financial plan. You may put yourself firmly on the route to a better net worth by making the many moving components of your plan function together.