Published in: Banks | Aug. 10, 2019
How to Increase Your Net Worth
By: Christy Bieber
Your net worth is a great measure of your personal wealth and you want that number to grow over time. But how can you make that happen?
Net worth is simple enough to measure and tells you a lot about the state of your finances. Your net worth is the value of your assets -- all the stuff you own -- minus your liabilities or debts. The good news is, your net worth isn’t static -- it changes over time. And you can increase it by taking steps to acquire more assets and decrease your liabilities.
Having a high net worth cushions you from financial setbacks because it means you have money to fall back on or assets you can sell to generate cash. A high net worth is also essential if you want to achieve financial independence.
If you’re not sure how to increase your net worth, there are two simple steps to take: pay down your debt, and invest in assets that increase in value.
How is your net worth calculated?
To understand how to increase your net worth, you first need to understand how to calculate it.
First, add up the value of all your assets. This could include:
- Your primary home and any other real estate you own
- Personal possessions
- Investment accounts
- Bank accounts
- Certificates of deposit
- Money market accounts
Basically, you want to try to add up how much everything you own is worth. Use the current market value for your vehicles, home, and property rather than what you paid.
Then you need to add up all of your liabilities. This is everything you owe or any outstanding obligations you have such as:
- Student loans
- Personal loans
- Credit cards
- Loans from family or friends
- Car loans
- Medical loans
- Debt consolidation loans
Finally, subtract the sum of your liabilities from the value of your assets. So if everything you own is worth $100,000 and you owe $150,000 in student loans, your net worth would be -$50,000 ($100,000 - $150,000). But if everything you own is worth $500,000 and you owe a total of $200,000, your net worth would be $300,000 ($500,000 - $200,000).
Once you understand how your net worth is determined, it’s easier to see what you need to do to grow it.
Methods for increasing your net worth
There are only two ways to increase your net worth:
- Grow the value of your assets
- Reduce the cost of your liabilities
Of course, doing either of those things is easier said than done. But there are ways you can work on both that will really help your net worth to grow as quickly as possible.
How to grow the value of your assets
To increase the value of your assets, you can:
- Increase your income. The higher your income, the more money you can save, invest, or use to buy items that will go up in value. You can grow your income by negotiating a higher salary when you get a new job or by asking for a raise from your current employer if you aren’t already earning a competitive salary. You can also try to put in some overtime or consider a side gig in your off time to bring in more money.
- Reduce the money you spend on depreciating assets. Some of the things you buy, such as your stocks or real estate, are investments. That’s because you buy these things with the belief they will go up in value. Other things you buy are depreciating assets, which means you expect their value to go down over time. Cars, clothes, furniture and most personal possessions are examples of depreciating assets because they are usually going to be worth less than you paid for them after a short time (with a few exceptions such as when you buy antique furniture or collectible cars). While you need to spend some money on these things, you should budget carefully so your entire income isn’t going towards items that don’t increase your net worth.
- Invest your money wisely. It’s important to be smart about the assets you invest in because you want them to grow. This means you should try to put some money into the stock market, which has consistently proven to provide the best rate of return over time. If you’re going to invest in real estate, you need to do your research carefully and be aware that real estate doesn’t always go up in value. And even for money you put into the bank, it’s a good idea to look for high-yield savings accounts that provide the best possible rates of return.
How to reduce your liabilities
To reduce your liabilities -- and so reduce the amount that you have to subtract from your assets when calculating your net worth -- here are some steps to take:
- Avoid borrowing more than you need to. Try not to take out loans for unnecessary purchases, such as vacations or an extravagant wedding. And if you do need to borrow, keep borrowing costs as low as possible. For example, while it may make sense to take out student loans to go to school, borrow only enough to cover tuition and living expenses. Don’t use loans to pay for spring break trips or other luxuries.
- Create a strategic debt payoff plan. You’ll want to work on paying off debt, but do it in a smart way. For example, it may not make sense to pay off mortgages or student loans early if these debts have very low interest rates and you could earn a better return on your money by investing. But if you have high-interest consumer debt such as credit card debt, you’ll want to pay it off as quickly as possible by making extra payments or even consolidating the debt to a lower interest rate loan so you can pay it off faster.
How to track your net worth
Once you’ve begun taking steps to grow your net worth it’s a good idea to track your progress. You can maintain a spreadsheet with estimated values of your assets and with a list of your liabilities that you update periodically. Apps such as Mint get you to input the details of your financial accounts and other assets and then use that info to track your net worth for you.
Tracking your net worth can help you stay motivated to pay off debt and grow your assets because it provides a way to physically watch that number gradually rise.
Increasing your net worth can take time
The sooner you put these methods for increasing your net worth into action, the sooner you’ll start seeing positive results. You can work on growing your assets by increasing your income and making smart investments, and you can work on reducing your liabilities by creating a debt payoff plan and putting extra money toward your debt. It will take time, but it’s well worth the effort as growing your net worth increases your wealth and makes you much more financially secure.
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