Are you in debt? Are you just breaking even? Or are you growing your wealth? Here is how to increase your net worth: 7 steps to build wealth.
If you are looking to build long-term wealth, your net worth will provide valuable insights on the overall “big picture” of your financial health.
What is net worth? Basically, it is your assets (what you own) minus your liabilities (what you owe).
I believe that tracking your net worth is very important.
With basic addition and subtraction, the numbers will not lie. This could be the shock and motivation you need to get you finances in order.
With that in mind, here is a guide on how to increase your net worth in 7 steps to build wealth!
Phase 1: Surveying the Land
Like Sun Tzu famously states in The Art of War: “Every battle is won before it’s ever fought.”
If you want to increase your net worth and build your wealth, then you need to have a plan.
And to produce a great plan, you need to take stock of the resources you have to work it and analyze where you are deficient and where you are strong.
You need to take stock of what you have (or don’t have), so you can plan where to go.
Step 1) List Your Assets and Liabilities
The first step is to list your assets and liabilities on a spreadsheet (or software designed to track net worth).
Assets include:
Cash, bank accounts, CD’s, real estate, retirement accounts (401K’s, IRA’s, etc.), 529 plans, investments such as stocks and bonds, precious metals, and/or anything of value you can reasonably sell (like jewelry or valuable artwork, etc.)
Liabilities include:
Mortgage debt, student loans, auto loans, credit card debt, personal loans, consumer financing, and/or anything you owe money on.
If your assets are greater than your liabilities, you have a positive net worth. Thus, you are in the green!
If your liabilities are greater than your assets, you have a negative net worth. Therefore, you are in the red.
Try tracking your net worth and see the results as a measurement of your financial health.
Step 2) Track Your Monthly Expenses and Income
The next step is to track and log your monthly expenses versus your monthly income.
First, make a list of your monthly expenses and your income. Calculate how much you are spending each month right down to the penny.
I have an excel sheet in which I track all my monthly expenses (which I post here each month).
Next compare your expenses with the income you make each month.
Are you spending more on expenses then money you take in? Or are you the happy few who have more money coming in then going out for expenses?
Phase 2: Laying the Foundation
A house built on a weak foundation will crumble.
Going into battle without equipment; no amour, no shield, and no sword, will only end in defeat.
It is best to lay a solid foundation to built up upon. This will make building your net worth and achieving great wealth much easier.
Step 3) Building the Mindset
Much of personal finance comes down to mentality. Much is mental discipline.
The key to building great wealth, hence increasing your net worth, is to spend less then you make and wisely invest the difference.
You have to build resistance to the noise you hear all around you.
You need a disciplined mind that is prepared for the long haul (and the ups and downs on the journey).
For example, from the moment you are born you are bombarded with products you are told you need to consume in order to be happy. This comes from television, from the internet, to posters on bus stops.
Hence, most people will consume those products regardless of the costs because they are told those things will make them truly happy.
It is far worse today in the age of social media and instant gratification culture.
From rampant mindless consumerism to “keeping up with the Jones’s”, finance discipline has all but evaporated across much of society.
The average American household had an average of $5,221 in credit card debt in 2022 (nearly $850 billion in total US credit card debt).
Don’t be the average American household! Become disciplined and learn to resist.
Step 4) Reduce Expenses and/or Raise Your Income
Now comes the fun (or not so fun) part.
Start looking for ways you can cut expenses and save money. It may be as small as cutting the extra order of coffee each morning or has large as ditching your vehicle.
For example, if you are spending $5.50 on a cup of coffee each morning (let’s say a 5-day work week), that means you are spending $110 per month. Thus, spending $1,320 per year on a cup of coffee.
Take a larger example: your car! According to AAA, the average cost of owning a car is nearly $10,000 per year ($833 per month) as of 2021.
If you could do without the vehicle alone, you could be saving nearly $1K per month (or more).
In addition to reducing expenses, you can find ways to increase your salary to more than cover expenses. Ideally, it would be nice if you could do both simultaneously.
However, for most people salary is not something they can easily change and is outside their control. The employer decides the salary.
Often it is easier to focus on what you can control (your expenses) rather then what you can’t control (your employer).
When you take stock of all the thing you spend on, you’ll be surprised at how much you can save once those expenses are trimmed.
Step 5) Build an Emergency Fund
With you cutting down expenses and committing to a healthy budget (a budget with a nice surplus of cash), you are now ready for the next step.
You need to build an emergency fund. Why? Because shit happens. That is life.
It is strongly advised by many that you have 3-6 months of money in your savings account to cover all expenses in the event of job loss, medical emergency, and repair.
With a solid emergency fund established you are prepared to weather any blows life may give you and continue on your journey to financial excellence.
In addition, make sure your emergency fund is easily accessible and liquid. A savings or money market account at your bank (preferably with a higher interest rate if available) will suffice.
Phase 3: Building Your Castle and Expanding Your Empire
So now you cut expenses, have a healthy budget, and an emergency fund in place.
At this point you are financially better than most people.
You will have noticed an improvement in your net worth as your asset’s column has increased in value due to savings while your liability column has either slowed, stagnated, or even decreased.
In other words, you stalled the bleeding out of money and are accumulating wealth via savings.
Now let’s grow your wealth and dramatically increase your net worth!
Step 6) Reduce/Eliminate Your Debt
Now on to the next step which will tip the scales in favor of positive net worth: the reduction of liabilities.
This step can be done in conjunction with the final Step 7.
Imagine how much better your life with be without debt. No mortgage, no student loans, no auto loans, and no credit card debt.
Time to make this a reality. There are two main methods of paying off your debt (both are good): the debt avalanche and the debt snowball.
The debt avalanche method involves paying off the debt with the highest interest rate first before moving on to lesser debts.
The debt snowball method involves paying off the smallest debts first before moving on to bigger debts.
Let’s use this example: say you have a $10,000 in credit card debt at 18% interest rate, a $15,000 student loan at 6% interest rate, and a $8,000 car loan at 3.5% interest rate.
Using the debt avalanche method, you would pay off the credit card first.
Using the debt snowball method, you would pay off the car loan first.
(All the while you make the minimum payments on all your debts, using your extra funds to make extra payments on the targeted debt)
While the debt avalanche method will be saving you more money on interest payments in the long-term, which ever method you decide is best is up to you. Know yourself and your level of discipline.
If you are the type that needs to build a momentum, then the debt snowball is better for you as it lets you win those small victories first to build your momentum and drive.
Either way, your liabilities will start to decrease greatly. As a result, your wealth grows and your net worth increases.
Step 7) Build up Your Investments
Paying down debt is amazing. Your liabilities column of your net worth is decreasing. Your net worth will likely be positive at this point.
But there is more to do. Now it is time to build your assets column and really grow your wealth!
The best assets (in my opinion) are assets that can appreciate in value and produce a cash flow of money each month.
Two of such assets are dividend paying stocks and real estate that you can rent out.
While nothing is 100% guaranteed to go up in value, stocks and real estate have historically been hugely successful vehicles of growing one’s wealth.
In fact, since 1926, the average annual stock market return has been a little bit over 10%. Real estate (depending on the type) has shown similar average returns.
You can collect dividends from stocks and rent from real estate each month. That cash flow can be used to further build up your assets or even retire early.
Your retirement accounts are also an asset that can be built up over time, often with tax advantages.
For example, in most cases, contributions to traditional IRA’s are tax deductible and allowed to grow on a tax-deferred basis. Thus, you pay taxes only when you withdraw at a later time.
However, in a Roth-IRA, contributions are not tax deductible, but qualified distributions are tax free which means you can withdraw money later on without paying income taxes on those withdrawals.
Depending on your employer, there are even companies that will match contributions to your retirement account up to a specific percentage. That is essentially free money that you should take advantage of!
Keep building up your assets and watch your net worth /wealth grow!
Conclusion
And there is a guide on how to increase your net worth: 7 steps to build real wealth!
With so much of personal finance being personal, how fast you can increase your net worth is going to depend on your personal situation and circumstances.
Obviously, my major investment vehicle has been dividend growth stocks.
I happily have no debt and the bulk of my net worth is in assets that produce a cash flow each month.
Over the past 7 years, I’ve built a six-figure portfolio that generates a yearly average of over $1,200 per month in dividend income!
That is passive income that I earn while I sleep!
If you are interested in beginning your own journey into dividend growth investing, personal finance, and financial freedom, check out my Getting Started page.
Also, don’t forget to Subscribe for more great content and updates on my financial journey! 🙂
So, what do you think? Do you track your net worth? Also, any other tips for growing your net worth?
Let me know in the comments below!
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