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.
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.
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 keep track of it with pen and paper.
Action Step: Decide on a method for tracking your expenses (use a budgeting 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.
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.
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. Eventually, you may be able to live off dividends. 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.
Real Estate Crowdfunding
If you like the idea of alternative investments and 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: