If your net worth is not what you hoped, make some simple changes starting today.
What is net worth?
Net worth is simply the difference between the value of what you own – your home, retirement accounts, investment accounts, your checking account balance, etc. – and liabilities such as mortgage and credit card debt, and so on. Net worth is an important number to keep in mind as it can help you determine how debt impacts your future wealth, and it can highlight areas to focus on before retirement.
1. Review your liabilities
Conduct a detailed review of your liabilities. This number should be easy to calculate as it pertains to how much debt you owe monthly and in what forms, such as mortgage, credit card debt, and loans. Are there any liabilities you can eliminate or reduce? Reducing debt is a big step toward helping your net worth number increase.
2. Review your assets
You may not know the exact value of all your assets or how their values fluctuate, but you can get a rough estimate. Try not to leave any assets out. Here are the main categories of your assets: Primary residence: “Equity” simply means the value of your home, minus what you owe on the mortgage. The more equity you have in your home, the higher your net worth. Vacation homes and rental properties: These assets are usually paid for in cash, so you should account for them. The same rule applies to rights in investments. Investments: These include stocks, bonds, mutual funds, and tax-deferred retirement plans. Just remember to add any taxes on these assets to your liabilities. Art, fine wine, jewelry, classic cars, and antiques – the market for these items can fluctuate, but you can always ask an appraiser to help you determine their value.
3. Cut expenses
The less money you spend, the higher your net worth will be. If you haven’t reviewed your budget recently, look at your current expenses and see if there’s room to cut back, including big things like getting rid of one of your vehicles if you have several car payments, or small things like skipping lunch out or canceling magazine subscriptions you don’t read. Remember, even a few dollars here and there can add up to a lot of money over a year or more. Look at your annual costs that you can downsize. What annual costs are reducing your net worth and which ones do you not need? Consider things like your insurance and annual healthcare payments. Compare interest rates and see if you can reduce or eliminate any of those annual expenses. Then, commit to saving and/or investing the difference to increase your net worth.
4. Pay off your mortgage
You may consider paying off your mortgage and eliminating your largest debt. Making bi-weekly payments is a good way to accelerate paying down your mortgage. Just remember to check with your bank to determine whether a prepayment penalty will apply. Penalties, if they exist, can be steep depending on how much of the mortgage balance is being paid off early.
5. Invest for income
Investing for income is a great way to grow your net worth if done correctly. You can use a bucket strategy. The main idea of this approach is to divide your liquid investments into three buckets: cash bucket, income bucket, and growth bucket. By funding different buckets, you provide yourself with different assets you can tap into to finance your lifestyle before and during retirement. This can help bolster other retirement income sources, such as a pension or retirement insurance or Social Security benefits.
Conclusion
Increasing your net worth…
Your net worth isn’t just about doing one thing or another; it’s about using a strategy designed to address all aspects of your financial plan. By making the different moving parts of your plan work together, you can strongly position yourself on the path to increasing your net worth.
Frequently Asked Questions (FAQs)
What is liquid net worth?
Liquid net worth calculates only the assets that can be quickly converted to cash. For example, stocks held in a brokerage account can be sold, and cash can be withdrawn. On the other hand, the value of your home is much harder to leverage. You can’t sell your home as quickly as you can sell a stock. Stocks held in retirement accounts would also be excluded from liquid net worth since you cannot withdraw funds from these accounts without paying a penalty.
What is a high-net-worth individual?
A person who has at least one million dollars in liquid assets is typically considered a high-net-worth individual. There is no specific definition for this term, even though it is commonly used by financial institutions. High-net-worth individuals may receive special benefits or exclusive services from institutions that want to compete for large accounts.
Source: https://www.thebalancemoney.com/increase-net-worth-1289573
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