8 clever steps to increase your net worth

Have you ever wondered how to increase your net worth? Your net worth is very important when it comes to financial planning. It can help you know exactly where you are spending more money or how to cut back to increase your savings. In addition, lenders use your net worth to calculate your creditworthiness.

It is not an easy task to increase your net worth as it takes serious financial decisions and making changes to some of your habits. Some people choose to increase their net worth and change their lives only to give up a few weeks later. Having a winning plan is the most important step that increases your odds of winning.

If you want to really boost your net worth and accumulate wealth, you have come to the right place. This article is your ultimate guide to increase your net worth and achieve the financial freedom you have long dreamed of.

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What is net worth?

Before we get started with increasing your net worth, we need to touch on the basics of net worth. Your net worth is the difference between all of your assets and all of your liabilities. That is the simplest way to define your net worth.

What does this definition mean?

The term asset refers to anything you own such as a car, house, land, etc. that has monetary value. That is you can sell those assets and make money in return.

On the other hand, liability refers to the money and other financial obligations you owe people and institutions. A good example of a liability is a mortgage. Even if you live in a house, it is not yours until it is fully paid off. Until then, the bank will continue to have a lien on the house. Should you fail to make your monthly payments, the bank will take the house in an effort to retrieve its money.

When it comes to your net worth, two important parameters come into play: (1) your assets and (2) your liabilities.

The difference between these two values is your net worth.

Net Worth = Total Assets – Total Liabilities

To increase your net worth, you must play with those two elements on the right side of the equation. For example, by reducing your liabilities, you automatically increase your net worth. Paying off your debts, however, is not enough to increase your net worth. You must take extra measures beyond getting rid of your debt.

The reason many people fail to increase their net worth is due to a lot of debts which deplete their resources and makes it difficult to buy more assets.

This article is designed to help you increase your net worth. The tips you will learn will guide you through every step necessary to boost your net worth.

Without further ado, the following are the ultimate 8 clever ways to increase your net worth.

1. How to increase your net worth: Evaluate your goals

In order to increase your net worth, you must first evaluate your goals. What is it you want to achieve in life and how this new net worth you want to achieve will align with that lifestyle? This is a very important question you must honestly answer before moving forward.

Also, knowing your goals is very important as it will help you know exactly the right path to take. That is your goals will directly affect the choices you make and the types of investments you put in your portfolio.

For example, let’s assume that you want to increase your net worth so that you can travel the world. Since traveling is your main goal and it is the only reason you want to increase your net worth, it will be important to put your money in investments that give you a monthly salary to cover your expenses while traveling. This way you will not have to worry about expenses since they will be covered by income from investments.

That is your portfolio could, for example, include dividend-paying stocks, rental properties, 401K, IRA, and bonds. This is because the interest you earn on bonds and dividends from stocks could be taken out as an income while keeping your principal work for you.

The same can apply to your rental properties. Your rental income could help you cover your living expenses while traveling non-stop. Even if you be traveling, you will soon retire and become unable to work. So, your 401K, IRA investments will continue to build your retirement accounts.

2. Review your financial standing

The next step you need to take is to evaluate your financial standing. You need to know where you are in order to know where you are going.

This process is made easy through budgeting. Some people think that budgeting is an old habit, but I guarantee you that you cannot get ahead without a budget. You cannot make proper and educated financial decisions without a budget.

So, what is a budget?

A budget is a tool to help you understand your current financial standing, and more importantly, know how to make proper choices moving forward.

Your budget will list all of your incomes, expenses, savings goals, etc. Think of a budget as quantification of your finances. You can use the budget to cut down some expenses in order to allocate funds somewhere else. For example, you can reduce your entertainment expenses to save for an emergency fund.

When it comes to understanding your financial standing, everything about your finances should be evaluated.

The following are things you should look into when evaluating your financial standing.

How much do you make?
Where does your income come from?
How much debts do you have (these debts include but are not limited to your credit card debts, mortgage, car loans, collections, student loans, etc)
What are your expenses (I recommend you get information from your budget if every expense you have is there)
Are you expecting changes in the near future?
What are investments you have (these investments could include but not limited to assets of all forms such as stocks, real estate, bonds, funds of all kinds, etc)
Etc.

By evaluating your financial standing, you will be able to have a general picture of where you are and some adjustments to be made if necessary.

3. How to increase your net worth: Pay yourself first

This simple sentence carries a strong message. Some people do not understand the true meaning of paying yourself first. You are probably saying: Who would I pay first if I don’t pay myself?

Let’s dig deeper. In order to help you understand what this means, I am going to ask you a simple question. I want you to be honest when answering the question.

How much money do you pay in tax and when do you pay it?

The truth is that the government takes its share right after your gross income is calculated. What you get is what the government leaves for you. So, you work hard, and yet, you get paid after the government took a chunk of your paycheck.

In order to turn your life around, you must end this cycle. How about you answer the next question.

What is percentage of your paycheck do you get to keep in your pocket?

The answer is also shocking. I was going to guess, but I cannot be able to make an educated guess of your tax. The truth is that most people do not keep much. According to Yahoo, 69% of Americans had less than $1,000 saved back in 2019. That is right. Most people do not know how to keep the money they make.

What does pay yourself first means?

Although there are many ways to define this simple sentence, I want to summarize them for you. The money you make is only yours to keep. For this reason, you should be the one who decides where and how much it is spent. The government should not be the one who decides how much you pay in taxes. The lender should certainly not be the one deciding how much you keep. The luxury store or restaurant near you should not be the one that decides how much you keep in your pocket.

You should be the one doing it. Why? Because it is your money, and therefore, you should be the one who decides how much you pay in taxes and keep in your pocket.

Your lender, car dealerships, loan officer, favorite store, etc. should not be the ones that decide how much you keep in your pocket. You should be the one who decides how much they take.

You have got to be smarter than everyone else.

How do you pay yourself first?

I thought you are not going to ask. Paying yourself first means you must be smart of how you make and use your money. Your first step is to figure out a way to legally pay less tax. Just because your tax bracket is 30% and you made $1000,000, it does not mean you must send IRS a $30,000 check. You can always pay less tax and get away with it.

How do you do this? The answer: Reduce your taxable income by participating in every tax-advantaged account, investment, etc. For example, you can max your 401K and HSA contributions. Do you know how much that will be? According to IRS, you can contribute up to $19,500 in your 401k in 2021. Forbes also reported that you can contribute up to $3,600 in your HSA account for a single covered individual and $7,200 for family coverage in 2021.

If your income was $100,000, then these three contributions alone will reduce your taxable income to $76,900. Do you know how much tax you would have saved? If you said a lot, you are right.

There are other tax-advantaged options you can consider. Just educate yourself and learn how to play the game.

After having your paycheck, figure out a way to keep it. Always remember that the money you make is yours to keep. So, save a percentage of your money and spend what is left. Stick to this culture and increase your net worth one step at a time.

Do not let your moneylender or car dealership decides how much you keep. How do you do this? The answer is simple: Do not buy new cars or borrow money to buy cars. Next, do not buy a house without a significant down payment. A 20% down payment is basic for a conventional mortgage. I recommend a much higher percentage. The more you put down, the lower your monthly payment will be due to a lower interest and no mortgage insurance.

Next, avoid spending extravagantly. Just because you have money in your account, it does not mean you need to spend it. Also, just because something looks nice and flashy such as a new iPhone, etc., does not mean you need to own it. That is how you pay yourself first. Rember, the money you make is yours to keep.

Clever ways to increase your net worth — Photo by Priscilla Du Preez on Unsplash

One of the things that are holding you back or preventing you from increasing your net worth is most likely debt. Everywhere you go, people are talking about debt. Some people have no idea how they got into debt or how to get out of it.

These are tough questions to be answered. The truth of the matter is that you must pay off yours if you really want to increase your net worth.

Debt is actually not bad as long as you got it for the right reason. That is debt is only good if you have it for investments. Every other reason is not good. Sadly, most people accumulate debt for the wrong reasons.

They borrow to go to school and graduate with hundreds of thousands of dollars in student loans. Then, they borrow dozens of thousands to buy brand new cars because they have a job offer in their career of dreams. With that job, they can’t live in apartments if they qualify for an $880,000 mortgage. After running low on cash, they turn to credit cards.

This is a road map that almost everyone follows. By the moment they learn about these mistakes, it is already too late.

If you have not accumulated too much debt, do not get started. Do not follow the same path as millions of people out there did. Do something different. Forge your own path that protects you from these traps, but also, helps you increase your net worth.

If you are in this trap already, find a way to pay off your debt. The sooner you pay off your debts, the easier and much faster you will increase your net worth.

Why is it difficult to increase your net worth with debt on your shoulder?

The problem with debt is that it comes with interest. Most of these interests are simple interests. However, others are compounded such as most credit cards interest. Compound interest grows your debt exponentially if it is not paid off fast. Everyone would want to be in debt if there were no interest charges.

The thing is that you will pay the principal for every debt you have, but also, you have to pay interest. That is why the interests you pay on all your debts make it difficult for you to get ahead. You can’t have successful investments if what you are gaining can only cover half of your interest charges.

For this reason, you need to pay off your debts or make a significant decrease in your debt. Only then, you can move forward toward increasing your net worth.

What will help you increase your net worth is not just one magic thing. Instead, it is a series of steps you must take simultaneously for a common goal.

What goal? Increase your net worth which leads to financial independence.

One of these steps, you must take is to maximize your tax-advantaged retirement accounts. There are two important tax-advantaged accounts you should consider and they are listed below.

(1) 401K: This is a retirement account offered by your employer to help you save for your retirement. The money you put in your 401k is pre-tax money which will help you reduce your taxable income.

At the same time, your employer will match your contributions 100% or up to a particular percentage. Not only that you will be paying less tax, but also, you will be getting free money from your employer.

According to SHRM.org, the IRS has a maximum of $19,500 contributions to your 401K and $6,500 extra for those who are 50 years or older to catch up. You can see that this contribution will automatically reduce your taxable income. Hence paying less tax.

So, if you really want to increase your net worth, take advantage of your employer-sponsored retirement accounts.

Having money in your retirement account will be good but not enough. What you can do at the same time is to invest the money in high-yield investments. Some investments you can consider include but are not limited to mutual funds, index funds, stocks, and bonds. This is how you increase your net worth with little to no work.

(2) HSA: The second account that you should look into is your HSA account. HSA stands for Health Saving Account. An HSA account is an account where you put in pre-tax money for medical-related spendings. Again this helps you reduce your taxable income. According to Optumbank, you can contribute up to $3,600 for single coverage or $7,200 for family.

Keep in mind that you must be enrolled in a High Deductible Health Plan (HDHP) to qualify for HSA benefits.

The good benefit of HSA accounts is that the money you did not spend on medical-related expenses, can be used toward your retirements.

There are other tax-advantaged benefits offered by either your company or IRS. Make sure you take advantage of these benefits. In the end, you will end up keeping most of the money you make. Then, use that money toward generating more revenues through investments. That is how you will increase your net worth.

Many people are poor not because they don’t make enough money. Instead, it is due to their spending habits.

So, the money you are taking home is yours to keep. One of the greatest ways to increase your net worth is to reduce your expenses.

Change the way you think and your approach toward money. Start treating your money differently and keep most of it. Do you like good-looking clothes, electronics, furniture, etc? Have a strong mindset to resist the urge of buying these things. The truth is that companies will always make good-looking things. You can always buy them later.

Reduce your expenses and put your money to work. You don’t need to subscribe to every streaming service, buy music, buy movies, buy video games, pay for news, etc. All these will always be there and there are ways to get most of them for free. Without changing your spending habits, it will be difficult to increase your net worth.

6. Save for emergency fund

One of the most important things you must do is to save for your emergency fund. The emergency fund will become your savior when you encounter unplanned expenses.

What is an emergency fund?

An emergency fund is budgeted money designed specifically for one purpose: For emergencies.

You cannot decide when or how emergencies happen. The only thing you can do is to get ready for them.

How do you get ready for emergencies?

By saving enough money to cover all your expenses, in case something happens to you. What do you think will happen if you lose your job and can’t find another job for 6 months. You are not working but all your expenses (rent, mortgage payment, food, phone, entertainment, etc) are still there.

This is why the money you saved in an emergency account will help cover all these expenses until you secure another job.

How much should you save in your emergency fund?

There is no specific amount you must have in your emergency fund. This is because the size of your fund will depend on your lifestyle. That is your spending habits will determine how much to put in your emergency fund.

According to Wells Fargo, you should save between 3 to 6 months worth of expenses in your emergency fund. I recommend saving at least 6 months. There are times something big can happen in your life to a level where you might not afford to make money for six months. Also, six months is enough for you to figure out something.

If you want to save for your emergency fund fast, check the following article for useful tips.

7. Focus on buying assets and other investments

Everything you have done so far was to prepare you for this moment. This step is one of the most important steps you must master if you want to increase your net worth.

Investing all the money you have saved in high-return investments. Your wealth is defined not by how much cash you have. Rather, how much income you can generate from that cash.

So, start looking for investments that will help you build wealth and offer you a chance to retire. That is the deal here.

Good investments are those that secure your principal and ensure a form of return. So, during your research for proper investments, you should focus on income-generating assets and similar investments.

For example, you can choose dividend stocks because you want to pocket dividends and benefit from stock growth. Or choose bonds because you want to secure your principal and pocket that fixed 6% or more in interest rate.

Whatever investments you choose, build a portfolio that matches the lifestyle you want to live. This is the only way you will increase your net worth with low risks.

A great tip is to always diversify your portfolio. There is a chance that one investment or more could fail. If that happens, you will still be ok because all your eggs are not in the same basket.

If you want more tips on where and how to invest your hard-earned money, refer to the following articles.

8. Adjust your portfolio when needed

This is the final tip in your journey to increase your net worth. There are times when you will buy assets and later change your mind because of many reasons. For example, if your lifestyle has changed, you will need to adjust your portfolio as well. Or if you have been relocated to a different country, you must adjust your investments in a way that allows you to increase your net worth and do your job at the same time.

It is also possible that some investments you have chosen are in a sector that is bound to slow down for a very long time. If this is the case for you, it could make sense to buy different investments and move on.