Grow Your Net Worth
Net worth is a financial metric that represents the total value of an individual’s assets minus their liabilities. In other words, it is the measure of what you own (assets) versus what you owe (liabilities). Assets include cash, savings, investments, real estate, and any other valuable items. Liabilities encompass debts such as mortgages, loans, and credit card balances.
To calculate net worth, the formula is straightforward:
Net Worth = Total Assets - Total Liabilities
For example, if you own a house valued at $300,000, have $50,000 in savings, and your investments are worth $100,000, your total assets would be $450,000. If your mortgage is $200,000 and you have $30,000 in other debts, your total liabilities are $230,000. Your net worth would then be:
$450,000 - $230,000 = $220,000
Why Net Worth is Important
Net worth is an important indicator of financial health. Unlike income, which is how much money you earn, net worth provides a comprehensive picture of your financial standing. Here’s why net worth matters:
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Financial Stability: A positive and growing net worth indicates that you are building wealth and are financially stable.
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Retirement Planning: Understanding your net worth helps in planning for retirement. It shows whether you have enough assets to sustain your desired lifestyle.
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Debt Management: Tracking your net worth can highlight the impact of debt and motivate you to reduce liabilities.
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Goal Setting: It aids in setting realistic financial goals and monitoring progress towards achieving them.
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Emergency Preparedness: A strong net worth implies you have a safety net to fall back on during financial emergencies.
How to Grow Your Net Worth
Growing your net worth involves increasing your assets and/or reducing your liabilities. Here are some strategies to consider:
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Increase Savings and Investments:
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Save Consistently: Set aside a portion of your income regularly. We recommend saving at least 10% to 20% of your net income. High-yield savings accounts and money market accounts can help grow your savings.
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Invest Wisely: Diversify investments in stocks, bonds, mutual funds, and real estate. Consider long-term investments for compounding growth.
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Reduce Debt:
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Pay Off High-Interest Debt: Focus on paying off
high-interest debts such as credit card balances to
reduce liabilities faster. -
Refinance Loans: Look for better interest rates to
refinance mortgages or student loans, lowering
monthly payments and overall debt.
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Increase Income:
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Career Advancement: Seek promotions, raises, or new job opportunities to increase your income.
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Side Hustles: Explore side gigs or freelance work to supplement your primary income.
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Manage Expenses:
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Budgeting: Create and stick to a budget to control spending and save more.
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Cut Unnecessary Costs: Identify and eliminate non-essential expenses.
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Asset Appreciation:
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Real Estate: Invest in property that will grow in value over time.
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Maintain Assets: Keep up with maintenance on vehicles, homes, and other valuable items to preserve their value.
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Reminder: Money Isn't Everything
While growing your net worth is important for financial security and achieving life goals, it's crucial to remember that money isn't everything. True wealth includes good health, strong relationships, and personal fulfillment.
Here’s a gentle reminder:
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Balance: Strive for a balance between financial goals and other aspects of life. Don’t sacrifice your well-being or relationships for the sake of accumulating wealth.
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Generosity: Use your financial success to give back. Helping others can provide a sense of purpose and fulfillment that money alone cannot offer.
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Enjoy Life: Use your resources to create memorable experiences and live a life that brings you joy and satisfaction.
Growing your net worth is a vital aspect of financial health, but it should be pursued in harmony with other life values. By focusing on increasing assets, reducing liabilities, and maintaining a balanced perspective, you can achieve both financial success and personal fulfillment.
Why Net Worth Skyrockets After $100k
Here’s a 10-minute video from Mark Tilbury on the snowball effect that can happen to your net worth after you reach $100k. The key is starting, even in a small way, and leveraging the power of compound growth.
This seven-minute video from YouTube influencer Nischa describes how net worth skyrockets after $100k. She talks about the power of compound interest and the leverage you get from increasing the amount you invest each month and the time you invest for.
Action Plan
Now that you’ve become familiar with the concept of Net Worth, here are some ways you can use it to help you build a stronger financial future.
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Calculate your current Net Worth. Put together a list of your significant assets and liabilities and calculate your Net Worth using the formula above. How healthy is your financial situation? What would you like your financial situation to be a year from now?
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Set a goal for your Net Worth. If you’re just getting started, you may not yet have a positive net worth, which is a common situation for most people in their twenties. A good starting point can be creating a plan to get your net worth to $10,000 within a certain amount of time. Is that something you can achieve within a year or two? Once you get to that milestone, then you can work on reaching a goal of $25,000, and then from there aim for $100,000. The $100k mark is often a tipping point for many people (see videos above) beyond which they have a very good chance of growing their net worth to more than a million dollars.
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Create a plan to grow your Net Worth. What are three ways you can grow your net worth in the coming year? Consider the levers above to identify ways to increase your savings, reduce your debt, grow your income, and manage your expenses. Identify three specific things you will work on, in what time frame, and write them down to create an action plan. Remember that small steps now can snowball into a big positive effect down the road. The key is to start now and figure out what levers work for you.