The richest person in the world – Jeff Bezos – has a net worth of $161 billion. Following him are Bill Gates (108 billion) and Bernard Arnault (105 billion).
However, none of these people have billions in their bank accounts. In fact, most people don’t understand the actual meaning of the net worth. And how can you build a house if you don’t know how it looks like?
Today, you’ll learn about net worth – what is it, and how to build it gradually even if you don’t make millions.
What is net worth?
Net worth is a collective term used for any and everything you possess that has value. It is the difference between the value of what you own minus your liabilities. What you own can be anything ranging from your house and cars to bank balance, stock shares, and investments.
Apart from indicating how rich or poor you are, net worth is an important metric to determine how much your debt can affect your future wealth. Besides, it also helps you highlight the areas you should focus on before retirement.
How to calculate your net worth?
As discussed, calculating your net worth is simple. Create two lists, one with everything that you own (property, investments, stocks, account balance), and the other with your outstanding balances and debt. Then, subtract the sum of your outstanding balances from the sum of everything you own. What’s left is your net worth.
Now that you know what net worth actually means, let’s discuss how you can start building and growing your net worth today.
Evaluate your liabilities
Determine your liabilities by figuring out how much debt you owe each month or year. It can be your mortgage, credit card debt, insurance premium, loan payment, and more. Once you have all your debts on paper, it’s time to reduce them. Reducing your debt is the first step towards growing your net worth.
For instance, you could refinance your credit cards or high-interest loans to accelerate the debt payoff process. If you finance a lower interest rate, more of your payment goes to the principal you owe each month. Thus, you’ll be able to get rid of your liabilities faster. You can also change your payment plan and make weekly or biweekly payments instead of monthly payments. This way, you can reduce your principal faster and reduce the amount of interest you pay.
Review your assets
Your assets determine your net worth. While it might not be possible to know how much your assets are exactly worth, you can get an estimated figure. Following are the main asset classes:
- Primary residence: This simply means what your home is worth, minus the mortgage you owe. The more equity you have in your home, the greater your net worth would be.
- Rental property/vacation: If you have a rental or vacation property, don’t forget to count it. And similar to the primary residence, your net worth will be proportional to the quite you have in your rental or vacation property.
- Investments: All your investments – stocks, mutual funds, requirement plans – are a part of your net worth. However, be sure to calculate the taxes on these assets.
- Collectibles: Any cars, antique pieces, jewelry, or art that have value will also make a part of your net worth.
- Bank balance: Of course, how much money you have in your bank account will also go in the count.
Reduce your expenses
The less you spend, the more you can save and increase your net worth. Make a list of your expenses and see how you can reduce them. This might include some changes to your lifestyle, both small and big.
For example, if you’re a smoker who smokes two packs a day, reducing it to one pack a day can save you some money. The average cost of a pack of cigarettes is $6. So, by reducing to one pack a day, you can save $6 a day, which translates to $180 per month, and $2,160 per year. Saving and investing this amount every year for the next 10 or 15 years can help you build a fortune for yourself.
If you drive a car to your office every day, switching to public transport can also help. An average American spends $380 on Gasoline. On the other hand, the average monthly public transport cost in the U.S. is around $130. So, by switching to public transport, you can save $250 per month, which is $3,000 per year.
And you can make these changes in every place where you spend money. Not having a Starbucks coffee every day can save you 5 bucks. This might not seem like a big amount, but saving a few dollars here and there can add up to a lot of money in the long term.
Payoff your mortgage
Mortgage payments are the biggest devils in your journey of building net worth. So, look for ways to speed up your mortgage payoff. You can do it by making biweekly payments. However, paying mortgage ahead of your schedule can invite penalty. Thus, make sure to consult your lender before making any changes to your payment plan.
You’ve probably heard it a million times – investing is an excellent way to increase your net worth. But make sure you do it right. One strategy is to use the bucket system. In this approach, you divide your liquid investments into four buckets: cash, income, growth, and alternative income. You can fund different buckets, and by the time you retire, you’ll have enough worth to supplement other retirement income sources, like pension and annuity.
Buy a house
Renting might seem cheap on paper, but it’s not helping your net worth. In fact, it’s an unnecessary expense. If you invest in purchasing a home, all your mortgage payments will go directly towards building equity. And properties get appreciation in value, the value of what you’ve invested will increase. You can also sell your house in the future for a higher price and earn healthy profits.
Marriage has a lot of financial benefits and tax advantages. And if you have a dual-income household, you can combine your assets, which can increase your overall net worth. When you get married, what’s yours is your partner’s, and what’s theirs is yours. Thus, you get more buying power, which can come in handy in paying off loans and mortgages or buying a home.
Create multiple streams of income
You’ll have a hard time building your net worth if you rely on only your day job. There are various ways in which you can earn more money. You can get a second job, take on freelance work, or start a side business. Money-making opportunities in today’s digital world are endless, so think of ways of adding a few hundred dollars per month to your income.
Increasing net worth is not just about earning more money. There’ve been people who earned in millions and went bankrupt. The key to building net worth is creating and implementing a financial strategy. Look for ways to pay off your debt and reduce payment, along with increasing your income and investing more. All of this combined will help you grow your net worth.