We have a lot of numbers to focus on when managing our money: retirement accounts, bank accounts, debt-related accounts. This can provide great guidance — or be very overwhelming.
It’s hard to know which numbers to prioritize as most important. While each is significant, one stands out above the rest and should be the guiding principal of managing your money: your net worth.
Why is net worth so important?
Net worth works quite simply. It allows you to see exactly where you stand financially. In short, net worth is all of your assets minus your liabilities.
Assets are anything that has value or can be sold for cash. They include:
- The value of your home
- The value of your car(s)
- All bank accounts
- All retirement accounts
Liabilities are anything you owe to someone else. They include:
- Your mortgage
- Any outstanding loans for cars or college tuition
- Any outstanding credit card debt
Add up your assets and subtract your total liabilities to find your net worth. That’s how net worth provides such a great snapshot of where you stand financially.
“Your net worth is the ‘30,000-foot view’ of your finances,” says Matt Hylland, registered investment advisor and founder of Hylland Capital. “Your net worth can tell you how well you’re doing financially and whether you’ve improved your financial shape over time. It also gives you an absolute number of assets at your disposal for retirement or other goals.”
Now that you know your net worth and why it’s important, how can you increase it? Here are five ways to build your net worth today:
1. Cut down your big expenses.
Increasing your net worth can involve saving more, but it can also include cutting down your expenses — your largest expenses in particular. These usually include your house and your car.
The more you spend on both, the more you drag down your net worth. For example, experts suggest you spend no more than 28% of your monthly income on a mortgage.
If you spend more than that, look for ways to trim it. This can involve buying a smaller house, refinancing to a lower interest rate or even getting a roommate. The more you save on a mortgage, the more you can throw at other assets.
The same holds true with buying a car. Look for ways to save on your next car purchase or pay the loan off quicker. Either will result in improving your net worth.
2. Increase your retirement savings.
Retirement savings in an IRA or a 401(k) plan make up a significant part of your net worth. Saving more each month can be painful, but there are simple ways to make it hurt less.
“The simplest way to increase your net worth is to gradually increase your retirement plan contributions,” says Cal Cook, consumer finance investigator with ConsumerSafety.Org. “Consider increasing your contribution by 1% every quarter. The 1% difference between paychecks is so small you won’t even notice it, but after a couple of years you’re contributing 10% more of your income into your tax-advantaged accounts. Many 401(k) plans allow you to auto-increase savings quarterly or annually — a great way to save more in small increments.”
If you’re able to invest outside of your 401(k) plan, focus on low-cost investments. This allows more of your money to work for you, helping increase your net worth.
And most banks allow you to automate savings, which ensures it’s done and easily increases your net worth.
3. Kill your debt.
Often, the simplest way to increase your net worth is to kill your debt. As Hylland points out, “In terms of the immediate increase in your net worth, paying down a dollar in debt has the same effect as saving a dollar.”
This can be a challenge when operating on a limited budget, but even small extra amounts thrown at your debt will have a positive impact on your net worth. It’s also important to remember that not all debt is the same.
“The real decision for allocating any dollar should be the long-term impact to your net worth,” Hyland says. “If you have the choice of investing with a 7% gain or paying down debt at 2%, investing is likely going to have a larger impact on your net worth over the long-term.” Focus on the higher-interest debt first as that will have greater impact on your net worth in the long run.
4. Grow your income.
Making extra money is one of the best ways to increase your net worth. This additional income can be funneled toward killing debt or increasing retirement savings, both of which have a direct impact on your net worth.
An additional benefit of making extra money is income diversification. Diversifying your income allows you to not only make money from your day job but also from a side hustle or through a passive income strategy. This will help you weather financial storms, and better prepare for your long-term needs.
5. Track your finances.
Tracking your finances is a classic way to increase your net worth. It might sound difficult, but it’s quite simple. Write down everything you spend over a certain period. This reveals where your money goes and opportunities to cut back and save.
There are many apps that make this exercise easier, such as Mint, Personal Capital or Tiller. Find a tool that works for you and identify ways to save money.
You can use these savings to pay off debt, invest or even save for a large upcoming expense — all of which will help increase your net worth.
Managing your money often feels overwhelming. By following this simple method, you can improve your finances today and prepare yourself for the future.