Your net worth is one of the critical metrics in determining your financial success and where you currently are on your path to financial freedom.
Calculating net worth is not just for the millionaires and billionaires of the world like Elon Musk or Jeff Bezos; you need to know your net worth, no matter how few or how many assets you have.
If you don’t know where you are starting, how can you map where you need to go?
In this article we are going to look at how you can increase your net worth faster, build towards some long-term financial sustainability, and hit your financial goals for financial freedom.
How to Calculate Current Net Worth?
Simply put, your current net worth is calculated by looking at your current liabilities against your existing assets; subtracting your liabilities from your assets will determine your current net worth.
What do you mean by assets?
Assets are “items of property owned by a person or company, regarded as having value and available to meet debts, commitments or legacies” Basically, an asset is something that can be easily exchanged for money.
Some examples of assets include a home, gold and silver, stocks and shares, a car, jewelry, and art. There are many different types of assets, but these are some of the more common ones.
What is a liability?
A liability is “a contractual obligation to deliver cash or similar to another entity or a potentially unfavorable exchange of financial assets or liabilities with another entity.”
Some examples of financial liabilities include credit card debt, bank loans, car loans, or any other form of financial borrowing. A financial liability is basically any kind of debt.
Is there such thing as good debt?
There are, of course, other forms of debt considered “good debt” these are debts that are taken on with the intent of making money.
An example of good debt would be a mortgage loan by rental property; the rent payments would cover the mortgage cost and provide an income.
Good debt is a debt that results in an asset that is worth more than the liability taken on to acquire it.
So once you have determined your current net worth, you will know where you are financially at this moment in time.
Where are you on your financial journey?
A good rule of thumb for where you should be financially at any given age is to take your age, divide it by ten then multiply this by your gross annual income.
So, for example, if you are 36, and your gross annual income is $60,000, then your current net worth should be:
36 divided by 10 = 3.6
3.6 multiplied by $60,000 = $216,000
Therefore, in our example, if you calculate your assets against your liabilities, you should have a net worth of $216,000 to have an average net worth for your age.
Of course, not everyone wants an average net worth; they want more than this, but this gives you an idea and something to compare yourself to.
How can you increase your net worth faster?
Once you have all the base points for reference, we can look at how you can increase your net worth faster.
To increase your worth, you need to increase your assets and decrease your liabilities; let’s look at a few ways we can do this:
Increasing your net worth is something that can be done passively or actively. For example, if you have a home, it is likely to appreciate over time, and at the same time, you are paying down the mortgage.
So, your home increases in value while the amount of your mortgage is reducing means that your overall net worth is increasing.
The appreciation of assets in this way is increasing your net worth passively. This means that you aren’t doing a great deal to increase your net worth; you simply own an asset.
How to start an investment portfolio.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
When it comes to starting an investment portfolio, the first question is how much do you have to invest and how much risk are you willing to take?
If you have a small amount of capital and want to invest for retirement, then you can set up a target-date fund, which automatically adjusts your investments as you get closer to retirement age.
If you have a more significant sum of money or are willing to take on more risk, you might consider investing with a financial advisor or using a traditional brokerage firm like Fidelity Investments or TD Ameritrade.
These firms offer low-cost index funds that hold hundreds of stocks and bonds.
Another thing you can look at are savings accounts.
Ways to increase net worth.
Start investing in mutual funds.
A mutual fund is one of the best ways to invest in stocks and bonds. They’re a convenient way to get exposure to dozens of different companies and asset classes, and they offer several advantages over individual securities. But mutual fund investing can be confusing if you don’t know where to start.
Invest in property.
One way to capitalize on this to increase your net worth quicker is to buy more properties and rent them out, meaning that someone else is paying the mortgage while the underlying asset is rising in value.
This is one of the top ways people who have an ultra-high net worth have achieved this through real estate investing.
Invest in the stock market with retirement contributions
Another way to increase your net worth quickly is to invest using your retiurement account in the stock market but do so through a tax-efficient method.
For example, the fastest way to increase your net worth by gaining a 100% return is to invest as much of your salary as possible through your workplace retirement savings plan.
Anyone who works for an employer may have an employer-sponsored retirement plan; this means that for every dollar you put into this account, your employer will match it up to a certain amount. If you are not taking advantage of this, you should be.
This is a 100% return on investment accounts right away, not only that the money is invested before it’s taxed therefore meaning that you can take advantage of the entire capital without losing half of it to the tax man.
So, if you put, say, $8,000 a year into your employer-sponsored retirement plan, your employer will match it with $8,000, and if you get a 10% return per year for an initial investment of $8000, you are gaining an additional $9,600 on top in a year!
This is a fast way to increase your net worth; the only disadvantage is that you can only invest up to a certain amount per year.
If you run a business, you can still take advantage of this by investing your profits before you pay company tax; you won’t get the 100% uplift as you don’t have an employer, but you are saving the tax being taken from the your retirement contributions.
Increase your salary
Another method to increase your net worth quickly, and one which is often overlooked, is to just increase your salary.
Approach your employer for a pay rise; more often than not, you will be able to negotiate something; even if it is a small amount, it’s better than nothing.
You can then use this money to invest and increase your net worth passively. The most helpful way to approach asking for a pay rise is not to just walk into your boss’s workplace and ask for one.
You need to research the pay band for your skills and see what the upper limit is in reality for your role.
You need to write down a list of reasons why you deserve more money, and these need to be good reasons with facts and figures to support the argument.
For example, you may work an average of 50 hours a month unpaid overtime; if your salary is $60,000 a year, that equates to about $31.91 based on a 40-hour week with five weeks of holiday a year.
So, 50 hours of overtime a month equates to an extra $19,146 a year of value you are providing to your employer.
If you only ask for an $ 8,000-a-year pay rise, your employer is still getting good value.
If you take on extra roles for no more pay, or you have a specific skill set that the business would have to employ another staff member to do, you do it as part of your job. This is all ammunition for getting a pay rise.
When you have negotiated this pay rise, use this entire amount you negotiate from the pay rise to invest, don’t be a victim of lifestyle inflation, always use your pay rises to make you more money by investing. You will increase your net worth exponentially.
Renegotiate or consolidate any debts you have.
Increasing your net worth means decreasing your liabilities. Any liabilities you have, you should try to get paid down to zero as soon as possible.
So another way to quickly increase your net worth is to renegotiate or consolidate any debts.
This is essential for high-interest bad debt. Try to consolidate loans into one payment and pay as much as you can until it is paid off, sell things you don’t use, and sell what you can to get this debt paid off.
If you have a high-interest debt burden, one method to use is to obtain interest-free credit cards and do a transfer.
Credit cards have an introductory offer of 18 months interest-free; if you can transfer a balance to one of these cards, you can get this paid off a lot quicker, as the interest every month isn’t wiping out the payments you are making against the balance.
Another way to consolidate debt could be to use a home equity loan against the value of your house to pay down high interest debt.
What is a home equity loan
Home equity loans are generally easier to qualify for than a refinance. The interest rate on a home equity loan is lower than that of a credit card or student loan and offers tax advantages.
Homeowners can use the loan proceeds to pay off credit card debt and other high-interest debts at a lower cost.
If you have substandard credit, you might not qualify for a mortgage refinance or other types of loans.
However, if you have equity in your home and good credit, you may be able to get a home equity line of credit or loan from your bank or credit union to allow you to use this to pay off your high-interest debt, thus saving you a lot of money in interest payments.
Learn a high value skill.
Another way to increase your net worth quickly is to improve yourself and learn a high-value skill that permits you to command a higher salary, or start a side hustle where you can make more money on top of your current salary.
In today’s age, where many high-value skills are internet based, you can learn a new skill and work as a freelancer from the comfort of your own home, either on weekends or nights when you have finished at your main place of work.
The other benefits to this are that you have a tax-efficient business machine through which you can make all your business or living expenses.
How do freelancers charge for work?
Freelancers can often charge more for the same services as their employed counterparts as they don’t have the job security or benefits they get.
Many businesses prefer to work with freelancers rather than taking employees on to do the same job as they don’t have to train and provide benefits for the freelancers.
They can pick them up and put them down whenever they choose, so it works better for all involved. This means being a freelancer is a great way to increase your net worth quickly.
At the most basic level, a positive net worth is better than negative net worth, and most importantly, a higher net worth is better than a lower net worth.
If your net worth is small, you can use the tips in this article to help increase it faster. Focus on maximizing the amount you save and invest and minimize the amount you spend.
If you currently have a high net worth, keep on building the momentum, and you will look forward to living well in your retirement years.
Take a look at some of the other articles to keep building your financial knowledge, and please share this blog post with your friends who are interested in becoming financially free.
If you have any questions about this topic, reach out and I will do my best to help you.