Net worth is one of the most common ways of measuring your overall financial situation. If you’re looking to build wealth, you should be tracking your net worth.
Contrary to what you might think, net worth tracking isn’t just for millionaires. Your net worth is a good overall gauge of your financial health and it can be useful for measuring your progress and determining if you are on track to meet your goals, especially goals related to retirement.
Here are some steps that you can follow if you’re looking to increase your net worth.
Calculate and Track Your Net Worth Easily with Personal Capital
Personal Capital is a free app that syncs with your bank accounts, investment accounts, and credit cards to automatically calculate and track your net worth. It’s easy to set up and very powerful. Right now, Personal Capital is also offering a free $20 Amazon gift card just to try it. To get the gift card, sign up here, and after you’ve linked your first account, you will get an email with the code for the $20 gift card.
Step 1. Pay Down Your Debt
Monthly payments on debt are a big part of the budget for many people. If you’re able to pay off your debts, that frees up a lot of money each month that can be used for saving and investing to grow your net worth.
Your monthly budget may currently include:
- Student loan payments
- Car payments
- Credit card debt and interest payments
- Personal loans and other types of debts
If so, getting these paid off can make a huge impact on your ability to quickly increase your net worth.
The best way to go about paying off debt is to attack it aggressively. Commit to paying it off as quickly as possible, even if it means making some sacrifices.
Both the debt snowball and debt avalanche approaches allow you to focus your efforts and pay off debts quickly. I won’t go into a comparison of the two methods here, but if you want more information you can see this article: debt snowball vs. debt avalanche.
Once you have your consumer debt paid off, you’ll have extra money that you can use each month to grow your net worth.
→ Related reading: How to Calculate Your Net Worth
Action Step: Create a list of all of your debts. Choose the debt snowball or the debt avalanche as your approach to pay off the debt and commit to eliminating that debt. You can use our debt snowball worksheet to help.
Step 2. Track Your Expenses
Reducing your expenses will obviously free up more money that you can save or invest. If you want to spend less, you should be tracking your expenses. Creating a budget is common financial advice, but a having budget won’t do you any good if you’re not actually sticking to it. There’s no way to know if you’re sticking to your budget unless you are also tracking your expenses.
Even if you don’t currently live off of a budget, tracking your expenses can be well worth the small amount of time and effort required. When you see how you are really spending your money, you can easily identify areas where you’re spending more than you expected and you can adjust your habits accordingly.
Tracking your expenses doesn’t have to be difficult. You can use an app, a simple spreadsheet, or print out a spending log and keep track of it with pen and paper.
Action Step: Decide on a method for tracking your expenses (use an app, create a simple spreadsheet, or use our printable spending log). Record your expenses at the end of each day. Also check your credit card and checking account statements at the end of each month to make sure you didn’t miss anything. Categorize the expenses and add them up to see how much you are spending in each category. Adjust your spending for any areas that are too high.
Step 3. Maximize Your Retirement Contributions
If you have access to a 401(k) plan through your employer, this should be one of your first saving/investing priorities, for a few reasons:
- You can set up automated contributions, which makes it easier and eliminates the risk of forgetting to contribute.
- Your contributions can lower your taxable income and decrease the amount that you pay in taxes.
- You may get a matching contribution from your employer, which is free money.
Most employers that offer a 401(k) plan will offer some sort of matching contribution, although the amount and details will vary. You should be contributing enough to get the full match offered by your employer.
For example, if your employer will match your contributions up to 4% of your salary, you should be contributing that 4% so you can get the full match. Contributing more will help your investment to grow faster and can reduce your taxable income further.
After your 401(k), the next priority should be to contribute to an IRA (Traditional or Roth), if you are eligible for the tax benefits. Like a 401(k), contributions to a traditional IRA can reduce your taxable income. While anyone can contribute to a Traditional IRA, contributions will not be tax deductible if your income is over a certain limit. The limits below are based on modified adjusted gross income (MAGI):
- Single individuals with income over $137,000 cannot make tax-deductible contributions.
- Single individuals with income between $122,000 and $137,000 can make a partial contribution that is deductible.
- Married couples filing jointly with income over $203,000 cannot make tax-deductible contributions.
- Married couples filing jointly with income between $193,00 and $203,000 can make a partial contribution that is deductible.
Contributions to a Roth IRA will not reduce your taxable income, however, the growth and future withdrawals will not be taxed. There are also some income requirements that restrict who is eligible to contribute to a Roth IRA. The restrictions below apply based on modified adjusted gross income (MAGI):
- Single individuals with income over $137,000 are not eligible.
- Single individuals with income between $122,000 and $137,000 can contribute a reduced amount.
- Married couples filing jointly with income over $203,000 are not eligible.
- Married couples filing jointly with income between $193,00 and $203,000 can contribute a reduced amount.
- Married couples filing separately are less likely to be able to contribute to a Roth IRA. See this page for details.
The IRA contribution limits for 2019 are $6,000 (if you’re under 50) or $7,000 (if you’re 50 or over), and that applies to both Traditional and Roth IRAs. That is a total amount that you can contribute to either type of IRA, or a combination of both types.
Maximizing your retirement savings is one of the best things you can do to grow your net worth.
→ Related reading: 5 Steps to Get Your Retirement Savings on Track
Action Step: Check with the human resources department at your employer to get the details of your 401(k) plan and any match from the employer. Set up automatic contributions so that you’re getting the full match. For any extra retirement savings above and beyond the 401(k), decide whether you want to use a Traditional IRA or a Roth IRA. You can easily open an IRA with Vanguard or Fidelity. Set aside a percentage of each paycheck to be contributed to the IRA.
Step 4. Increase Your Savings Rate
Your savings rate is an important number that can play a big role in your journey to financial independence. Your savings rate is simply the percentage of your disposable income that you save. Obviously, increasing savings allows your net worth to grow faster.
Increasing your savings rate and reducing expenses go hand-in-hand. As you spend less, you’ll have more to save.
The previous point covered retirement savings, but you should also work to grow other savings and investments outside of retirement accounts. The retirement accounts give some nice tax benefits, which is the main reason why you’ll want to prioritize these accounts. But if you improve your savings rate and max out your contributions to retirement accounts, you can continue to save and invest that money in other ways.
Here at Vital Dollar, we have a number of articles that cover different ways to save money, including:
- 101 Practical and Realistic Ways to Save Money
- 15 Brilliant Ways to Save Money in 1 Hour or Less
- 40 Smart Ways to Reduce Your Monthly Bills
Action Step: Calculate your savings rate (your monthly savings divided by your monthly after-tax income). Work to increase your savings rate by applying some of the tips covered in the articles linked above.
Step 5: Invest
Once you’re saving more money, you may wonder what you should do with it. Of course, you could keep it in low-risk investments like savings accounts or CDs, but if you want to maximize your net worth, you should invest in other ways.
Investing your money into income-generating assets is one of the best ways to grow your net worth over a period of time. Here are several different options:
One of the most proven ways to grow net worth and wealth is to accumulate rental properties. As a property owner, you can make money from the rent payments each month, as well as from the appreciation of the property values over a period of time.
→ Related reading: How to Generate Income from Rental Property
Real Estate Crowdfunding
If you like the idea of investing in real estate, but you don’t want to be a landlord, real estate crowdfunding can be a great option. You can invest and get many of the benefits, without the need to do will properties or tenants.
There are many different real estate crowdfunding platforms, with some of the best options for new investors including:
Crowdfunding also makes it possible to get started with real estate investing on a small scale. The minimum investment will vary on each platform, but Groundfloor, American Homeowner Preservation, and Fundrise are ideal for smaller investments.
→ Related reading: Real Estate Crowdfunding for Non-Accredited Investors
Mutual Funds and ETFs
One of the easiest ways to invest your money is with mutual funds and ETFs. You can create an account with Vanguard or Fidelity and invest in low-cost (or free) index funds, target date funds, and others. These types of investments are great for a long-term buy and hold approach.
Some people love dividend stocks and others avoid dividends at all costs. There are pros and cons on both sides of the argument.
If you want to get started, you can do your own research to find companies that consistently pay dividends and pick the ones that you want to invest in. A more hands-free approach is to use Emperor Investments. They will create a custom stock portfolio for you, made up of companies with a solid history of paying dividends. It’s a great hands-free approach to investing in stocks. Your read more in our review of Emperor Investments.
Robo advisors can be a great option if you want to invest but you don’t have the time to research on your own, or if you lack the confidence for a DIY approach. A robo advisor will create a customized portfolio based on things like your timeframe and your tolerance for risk. All you need to do is provide the money and the robo advisor will do the investing for you.
Betterment and Wealthfront are two of the most popular robo advisors right now. Betterment charges 0.25% per year and there is no minimum balance, which makes it perfect for new investors. Wealthfront also charges 0.25%, with a minimum balance of $500.
Emperor Investments, mentioned in the previous point, is a robo advisor that specializes exclusively in stocks. Their fee is 0.6%, but since all of your investments will be in stocks, there are no hidden fees like mutual fund or ETF management fees. The minimum to get started with Emperor Investments is $500.
Your Own Business
Alternatively, you can also invest your money into your own business. It could be a business that you already own, or it could be a business that you’ve always wanted to start. Of all of the investment options listed here, this one has the potential for the biggest upside.
The time and money that I’ve invested into my business since 2007 has been by far the biggest factor in my own pursuit of increasing net worth.
A few possibilities for flexible online businesses include:
Action Step: Choose an investment approach that is a good fit for you. If you’re new to investing or unsure, a robo advisor like Betterment, Wealthfront, or Emperor Investments can be a great approach. They’ll customize your portfolio to your own situation.
Step 6: Buy a Car for the Long-Term
In the first step, we looked at the need to pay off debt. Car payments can have a huge impact on your overall debt, your monthly budget, and your ability to quickly increase your net worth.
One of the worst things you can do is buy or lease a new car every couple of years. You’ll never get away from high car payments and your ability to save and invest will always be impacted.
If you hold on to your car for a long time and don’t buy another car until yours needs to be replaced, you’ll put yourself in a much better financial position. You’ll be able to pay off your car and save up before buying another one.
When you buy a car, plan to own it for the long-term. Make sure that you buy a car that will suit your needs for several years to come.
Action Step: You don’t need to take any action on this one until it is time to buy a car. When that time comes, choose a car that you won’t need to replace for a long time (and preferably one that won’t need constant repairs).
Step 7: Increase Your Income
If you’ve followed all of the steps so far, you’ve done a lot to improve your financial situation and you’re now able to save and invest more money to build your net worth. But the other way to speed up the growth of your net worth is to increase your income.
Increasing your income without increasing your living expenses will allow you to save and invest even more each month, and you can drastically speed up your progress.
It’s easy to talk about increasing income, but actually doing it may take some work. Here are your options:
Get a Raise
The ideal way to increase your income is to get a raise. It’s ideal because you’ll be making more money for the same amount of work. Of course, getting a raise may be out of your control, but if you take the right approach, you may be able to prove to your employer that you’re worth more than you’re currently being paid.
Get a Higher-Paying Job
This could be a promotion, a higher-paying job in another department at your current employer, or a job with a different employer.
Unfortunately, it seems like in a lot of cases the best way to get a higher-paying job is to find an opportunity with a different employer. This may or may not be something that you are willing to do at this point in time, but you should consider the possible impact of being able to increase your net worth faster.
If overtime pay is available to you in your current job, this can be another excellent option. Getting paid time and a half can really increase your income significantly and will open up more opportunities to save and invest.
Start a Side Hustle
If you don’t have the option to increase your income through your job, starting a side hustle is another option. The side hustle could be something that you do temporarily just to save up some extra money, it could be something that you plan to do long-term, or it could be a business that you hope to grow to a full-time income.
There are all kinds of possibilities for side hustles, and the resources below can help you to find a good fit for your own situation and get started:
Action Step: Evaluate your current work situation to see if there is a way to increase your income through a raise, promotion, or overtime. If not, consider looking for a higher-paying job with another employer. If that’s not an option, start a side hustle. Take our free side hustle quiz, which will help you to find a side hustle that is ideal for your own schedule and your needs.
If you follow these 7 steps, you are sure to see your net worth improve. If you’re not already using Personal Capital to track your net worth, be sure to sign up for a free account and get started. It makes your net worth calculation and tracking a breeze (get a $20 Amazon gift card when you sign up for Personal Capital through this link).
READ NEXT: 7 Different Paths to Financial Independence