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How to increase your net worth in 12 months

Posted by Jeff Goodnow on January 7, 2019
Jeff Goodnow
How to increase net worth

How do you increase your net worth in the next 12 months? This is a straight forward question. Yet, it is one that many people can’t or don’t want to answer. The truth is, it is not their fault.

There’s a lot of pieces to this puzzle, so let’s be clear about what we are going to discuss:

  • Assets and Liabilities (components of Net Worth)
  • How to calculate your net worth
  • Why your net worth is important
  • The five things that hurt your net worth, and
  • The five things that help your net worth

As we begin to learn about net worth, let’s address some common mistakes that distract people from growing real wealth and achieving financial freedom.

Unfortunately, most people see “things” and assume they equate to wealth. Merriam-Webster defines “wealth”, as an abundance of valuable possessions or money.

Experts sell us their systems to create wealth, and another “Top 10 richest” list is released every other day. The problem is that all these messages pertaining to wealth are only telling us half of the story.

We are exposed to between 4,000 and 10,000 ads each day according to a recent study. Marketers bombard us with messages and images telling us how rich we would look if we buy their products.

When we borrow money to buy something such as real estate, cars, or investments, lenders actually buy the asset on our behalf while we make payments to them for making our purchase.

Therefore, only the portion of the asset we have paid for adds to our wealth.

Much of the advertising and messaging that we are bombarded with each day show us images of wealth, but not the obligations that come with taking on debt or the consequences to our credit.

This is dangerous!!!

To understand why, we need to examine the relationship between wealth and net worth.

Wealth Explained

As previously mentioned, the oversimplified definition of wealth is an abundance of valuable possessions or money.

Wealth = Assets

Assets are made up of 2 primary categories:

  1. Cash & investments – Your retirement account, bank accounts, savings, and other investment accounts.

  2. Stuff – Cars, houses, horses and other things we buy.

Shouldn’t there be more to the equation?

A liability is an obligation payable to another entity. From an individual’s standpoint, this is debt to be paid back using our cash flow (paycheck). Money borrowed can be used to buy real estate, cars, investments, or whatever is outlined in the loan documents or promissory note.

A possession such as a home or a car can be an asset, a liability, or both if you are actively making payments on that item. The value is considered an asset. The amount owed is a liability. If the value is higher than the amount you owe, it has a net positive effect on your net worth. Once the entire loan is paid off, the full current value of the asset contributes to your wealth.

In a developed economy or where credit is in abundance, a better definition for wealth is an abundance of valuable possessions or money under your ownership or control. This can be stated mathematically as:

Wealth = Assets – Liabilities

This is also the definition of net worth! Net worth is a measure of value or worth of an individual, a company, or a government. It is the correct measure of wealth.

Wealth = Net Worth

How to increase net worth

Your net worth is an important number. Tracking it over time can be a real eye opener to uncover whether you are creating a money mess or building wealth.

Now we know the relationship between wealth, your net worth, and the math behind it. The question is why should you care?

“Financial freedom is not being worried about when you get paid next.” – Jeff Goodnow

Why does your net worth matter?

Your net worth is a snapshot of your financial health. It is used by many institutions for many different things. Not being in good financial health is guaranteed to keep you paying more throughout your entire life and keep you from achieving financial freedom!

The system is rigged against those who don’t understand it!

Building wealth is about having more assets than liabilities, owning more than you owe. This is the one time you don’t want “balance”.

You want to tilt the scale as best you can towards assets (cash and investments, paid off property such as home and cars).

Your net worth is what you would receive if you sold everything you owned – would you still owe somebody money? Would you have enough money to live on?

Your stage in life will often determine your initial net worth when you are young. Did you just finish college? If you are like most – you’ll have school loans and a BIG NEGATIVE NET WORTH.

If this describes your situation or the situation of one of your loved ones, there is more cause for concern. Young adults just starting out are just not saving much. Additionally, they’ve accumulated just half of the wealth of what their parents had amassed at the same age.

If you are a little older, working hard and building a family, that new home purchase just made your net worth shoot craps. You have a big asset, but own very little, if anything. Focus on making decisions that eliminate debt or at least minimize debt while increasing your assets to be more financially fit and build wealth quicker.

Fortunately, there are things you can do to take control of your financial situation so that it does not control you.

The 5 things that hurt your net worth

Building wealth is not easy and it takes time. Making poor financial decisions increases the money mess and financial stress. You can start by avoiding these things when possible.

How to increase net worth

  1. Not investing to create more assets – When you are young, time is on your side. Use it. Improving your financial fitness by growing assets takes time and money. Start now!

    Tip: Debt is the side of the net worth equation that can be
    addressed much faster than increasing your income and investments.

  2. School loans – Many students have no other choice than school loans to fund their education. Because of the large amounts of tiered debt, school loans can be the second biggest form of debt for many behind a mortgage for an individual or family.

    We get it! School loans may have been the only way to afford college. However, just because you aren’t required to pay these off quickly (sometimes decades) doesn’t mean you shouldn’t have a plan and process to pay them off early and save thousands of dollars!

  3. Credit cards – Duh! Stop buying stupid things. Instead of going out with friends to grab an $8 specialty craft brew at a pub, have a beer at home with your buddies until you can get your finances under control.
    We know it is not you, it’s other people, but consider the facts below from Experian:

    How to increase net worth
  4. Multiple car loans – It is smart to avoid having more than one car loan at a time. What if you lost your job? One car loan is much easier to handle than two. Commit to only one car loan, or better yet pay cash.

    If the family needs another car, buy it after the first one is paid off. Of course, buy used if possible. A vehicle loses more value the first 2 years than nearly any other possession.

  5. An oversized mortgage – Just because you are approved for a larger loan amount (or the monthly payments that the broker pitches you), doesn’t mean you have to buy a house that size.

    Additionally, consider the number of payments with a 15-year mortgage vs. a 30-year mortgage. We’ll write a future article to discuss the numbers, but this can be the biggest financial impact in your investing career. 

The 5 best ways to improve your net worth

It is time to stop being stressed about money. We like to say, “It’s time to clean up the money mess.” Take control and simplify your finances with automation backed by good financial decisions. When you calculate your net worth, you have a starting place from which to build wealth from.

  1. Automate – Set up automatic transfers to move your money to savings accounts so that you don’t have to remember to do it.

    The more you can set up automatic transfers from your checking account (where your paycheck is deposited) to various savings, IRA, and other investment accounts. This strategy leaves you with less money in your checking account to spend frivolously.

    How to increase net worth

    We are all guilty of “impulse” purchases. Just look at the local checkout counter at the grocery store and how much cookies, candy, pop, and cheap magazines are waiting for you while you are stuck in line.

  2. InvestForbes reported that “on average, employees leave $1,336 in matching funds on the table each year by not saving enough into their retirement accounts”.

    Investing over time allows for compounding and increasing the “asset” part of the net worth equation.

  3. Build up an emergency fund – This keeps you from using your credit cards (debt) every time “life happens”. This is not a quick or permanent way to improve your net worth, but it keeps you from going further into debt.

    Additionally, your emergency fund should be a few months of living expenses and not be a big bucket relative to your overall net worth. Here is a great article from Bankrate.com with suggestions about how much you should have saved at different ages.

  4. Live below your means – Don’t squeeze into a house you can’t really afford. Saving for a larger down payment increases your net worth and avoids the PMI expense.

    A smaller house may also enable you to afford that 15-year mortgage (instead of a 30-year) saving you thousands of dollars and putting money back in your pocket in the long run.

  5. Eliminate debt, or at least as much is possible – You are probably seeing the big picture by now that debt is not bad if you are able to use it as tool rather than as a crutch for not having enough money.

    As you get paid, focusing on paying off debt will drastically improve your financial fitness and increase your net worth. There are processes and methods to do this effectively without hurting your credit score.

How can I track changes to my net worth?

Tracking your net worth on an ongoing basis has been a very powerful motivational tool for many people. Seeing your wealth increase over time has kept many people focused on their long-term financial goals rather than being caught up in the throes of daily life.

How do you track your changes to your net worth? Basically, this is where ‘simplification’ and ‘organization’ come together.

You can track your net worth by using an online calculator or create an Excel spreadsheet. The math is pretty simple:

Net Worth = Assets - Liabilities

Make a list of assets and liabilities, then subtract the two. You can make different tables for quarterly reviews (monthly may be better when you are starting out to get excited about positive change).

There are also apps available that can track this for you such as Mint, Personal Capital, and others.

However, they may bombard you with ads or a constant push to manage all of your investible assets with their cute ‘robo’ solutions.

TIP: Be wary of ‘robo’ solutions as most use bonds as their risk control. We have only recently started seeing interest rates rise. The last time we saw significant rising rates was 30+ years ago. Read more about “the risk of rising rates now or suffer the consequences later”.

Any good financial coach should have a solution for you that will track your net worth automatically. They will also be able to help you with additional tools that get you on the path to achieving financial freedom.

Keep it simple…

We have established that the media and society are only telling us half the story when it comes to wealth. They are not talking about liabilities and the consequences of debt.

So far, we’ve discussed:

  • Assets and Liabilities (components of Net Worth)
  • How to calculate your net worth
  • Why your net worth is important
  • The five things that hurt your net worth, and
  • The five things that help your net worth

This is a lot of information to keep on top of, especially if you are working on your career, raising a family and living life.

A financial coach can help by visually combining all your accounts for banks, investments, loans, credit cards, mortgage, etc., so that your net worth is automatically calculated every day.

Watching your net worth grow can be the motivation you need to keep working hard paying off debt, filling your emergency bucket and investing for your financial goals.

Better yet, if you have children, realize they are watching. You are teaching them one of the best lessons - how to build wealth.

Are you ready to increase your net worth in the next 12 months on your own?

This is a ton of information and frankly is overwhelming to many people. That’s exactly why most people don’t take these steps on their own and why it can hold them back from their financial dreams.

If the idea of a financial coach to simplify, plan, and support you sounds like a reasonable decision, take the first step and schedule a time to discuss your specific situation.

Schedule a time to talk

Topics: Financial Planning

Jeff Goodnow

Written by Jeff Goodnow

Director of Client Education

Check Out The Author's Bio

Ultimately we like to say that we are "More than a Money Manager. This is a small business run by people not robots. We talk, we plan, we execute together, as partners working to achieve the same goal."

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