When it comes to increasing wealth, it's integral for millennials to be equipped with the right set of skills and advice to adeptly navigate the changing economic landscape. Understanding your Net Worth is an important step to building wealth. Evaluating your income or the value of your investments isn’t enough. Your Net Worth is an accurate depiction of where you are financially at a specific point in time, it is like taking your temperature when you are sick. Once you calculate your Net Worth and start to track it, you can see changes, positive or negative, and take action steps to improve.
Net Worth is calculated as Assets minus liabilities. Or in other words, what you OWN subtracted by what you OWE. A person earning $1,000,000 a year, living in a multimillion-dollar house, can have a lower net worth than someone with a fraction of that income and assets. Because Net Worth factors in debt.
If you have a $900,000 mortgage on your $1,000,000 home, your home is only worth $100,000 as far as net worth is concerned. Therefore, if you want to truly grow your net worth, it’s important to keep debt at bay while you’re increasing your assets.
Here are a few steps that can aid you in increasing your net worth and set you securely on your financial journey.
How to Grow Your Net Worth
1. Pay Yourself First
Always set aside a certain amount of your income for savings before you start spending on other things. This is one of the most effective ways to increase your net worth over time. If you’re the type of person that spends everything that they have in their checking account, consider automatic transfers that direct a part of your income into a savings account. If you want to make it even more difficult for you to access this money, send the savings to an online bank, that way it is a few extra steps you have to take in order to move the money to your checking account and since the online savings account isn’t linked to your checking via an app, the money will be out of sight, out of mind.
2. Have a Plan for Where Your Money Goes
Knowing your income and where your money goes is key to growing your net worth. Understand how much you pay in taxes, where and when you spend frivolously, and what your necessities cost. Identify ways to free up money.
For most people, the income we earn is a set number. We know how much we have coming in. The only way to create more money is to spend less. Are you tracking where it is going? This doesn't mean giving up all luxuries and living on a strict budget; instead, it's about creating a practical spending strategy that takes into account your current income and expenses and forces you to save or reduce debt. . If you earn $4000 per month, strive to live on $3500, thereby saving $500 each month. This fortifies your financial standing and opens room for increasing your net worth.
3. Consistently Pay Off Debts
Becoming debt-free should be a priority. Once you have an emergency fund fully funded, you should direct any extra funds to your debt. Try to pay more than the minimum balance on your loans to manage the total interest over the loan tenure. Reducing debt increases your net worth, in a more powerful way than putting money in a savings account. Reason being, if you are getting rid of high interest debt, your dollar is working harder as it will no longer be subject to a high interest rate. Where in a savings account, it is only earning a small percentage.
For example, if you have a credit card at 28% interest and a savings account at 1% interest. A dollar going toward your credit card is really worth $1.28 as you are no longer paying interest on the money, versus a dollar going into your savings account is worth $1.01. Directing your energy to reducing debt can significantly help in boosting your net worth.
4. Invest Wisely
Investing can be a worthy avenue for boosting one's net worth. While it involves some risk, once mastered, it can yield handsome returns. Consider long-term investments such as stocks, bonds, and real estate. The stock market historically gains an average of 7% a year. Of course, some years are better than others, but average out to 7%. As long as you’re able to handle the ups and downs, investing is a great way to insure you are growing your Net Worth. Being well-informed on your investment choices is crucial, so consider learning about these opportunities or seek advice from financial professionals.
5. Diversify Your Income
Relying on one income stream can limit your debt-paying abilities and saving potential. Developing multiple income streams can enhance your net worth. Consider freelancing, side jobs, or turning your hobby into a business. If you go this route, be sure to have a plan for your money. Don’t let it hit your checking account and be available to spend. The additional income can be channeled into savings, reducing debt or investments, further growing your net worth
6. Regularly Review Your Financial Health
It’s essential to check your financial health regularly. There’s a fine line, though, watching your investments every day proves to be an emotional roller coaster. Set a cadence on when you will review your accounts and track them. Also, having your money spread out in different places makes this task difficult. If you have old 401ks and random IRA accounts at different investment companies, work with a Financial Advisor to consolidate them. You may end up paying less in fees and have a better investment strategy compared to having many different accounts. If you have multiple checking and savings accounts at different banks, consolidate. Take the steps to make reviewing your net worth as easy as possible. Once you are organized, create a Net Worth tracker. This can be done on an Excel sheet. This will allow you to see your Net Worth fluctuate and then you can identify causes to the increase or decrease in your Net Worth. This will allow you to make adjustments as needed to stay on track to your goals.
7. Seek Professional Help
Navigating the financial world can seem complex and intimidating. Don't hesitate to seek professional financial advice to manage your assets, liabilities, investments, taxes, and retirement.
As millennials, your financial goals may differ from the generations before you, given your knowledge or experience and challenges. However, understanding your net worth and setting appropriate goals for growth based on your age can bring long-lasting financial freedom. Implementing these strategies, proactively, can provide a strong foundation in wealth accumulation and a head start in financial prosperity for millennials.
An experienced wealth management advisor, like Greenway Wealth Advisory, is what you need to guide you along this path. To start this life-changing journey, feel free to reach out anytime. We’re here to help you pursue and exceed your financial goals!
Remember, Rome wasn’t built in a day, and neither is your net worth. It's about the choices you make and the consistency with which you make them that may ultimately contribute to your path to financial independence.