One way to protect yourself against a bad economy is to grow your net worth. In this article, we’ll go over what your net worth is and seven different ways to increase it.
What is your net worth?
Net worth is a measure of your financial health. The higher your net worth, the better off you are.
You calculate your net worth by subtracting all your liabilities from all your assets. Assets could include real estate, retirement funds, cash, collectibles, and other investments. Liabilities could be a mortgage, auto loan, credit card loans, or any other kind of debt.
So if your total assets equal $30,000 and your total liabilities equal $10,000, your net worth would be $20,000.
But whatever your net worth currently is, there are ways to increase it. Here’s how:
This is the first step. No matter how many assets you have, your net worth will suffer as long as you are carrying debt.
Start by tackling high-interest debt like credit cards. If you have a lot of it, consider refinancing the debt into a loan with a lower interest rate. That way, more of your payments will go toward the principal instead of just paying off interest.
Then work on paying off other debts like auto loans and mortgages. Start with the smallest debt and work your way through bigger ones. This is often called the “snowball method.”
Next, contribute as much as you can toward your retirement accounts. This is a great way to grow your wealth long-term while taking advantage of tax benefits.
For instance, you’re allowed to contribute up to $6,000 per year to a Roth individual retirement account (IRA) or $7,000 per year if you’re 50 or older. Let it grow in the stock market, and then once you’re 59 and a half, you can pull it out tax-free.
The same goes for Roth 401(k) accounts, except that you can contribute up to $20,500 per year or $27,000 if you’re 50 or older, and many employers will match your contributions up to a certain salary percentage, too.
If you’re not actively contributing to your retirement through these methods, you’re leaving money on the table.
You don’t want to accumulate a high net worth without an asset protection strategy. Otherwise, you leave your wealth unnecessarily exposed to creditors and the IRS.
There are many ways to protect your assets. You can create a domestic or offshore asset protection trust (APT), jointly own property, leverage homestead laws, establish a family limited partnership (FLP), and more.
Consult an experienced asset protection attorney to develop a custom asset protection plan tailored to your situation. You won’t regret it.
Budget—everyone says it, yet few do it. But if you really want to grow your net worth, you need to become aware of your spending habits to cut down on expenses.
Spending money to eat out or go to the movies is fine. But when you do it a lot, it can add up fast. The same goes for your daily coffee or soda. Try to limit unnecessary expenses like these so you can save. And definitely don’t carry a credit card balance, which hurts your net worth even more.
Try the envelope budgeting method. Label envelopes for each spending category and fill them with the budgeted amount in cash at the start of each month. Force yourself to only spend in cash, so that when the money runs out, you can’t go over.
If that’s too old school for you, try a budgeting app. Many let you connect your bank account to track your spending for you, which can be more convenient.
Of course, increasing your net worth requires saving and investing. Create an emergency fund first. For this, you’ll want to open a high-yield savings account (one with a high interest rate). Start by saving up $1,000, then enough to cover 3-6 months of living expenses.
This way, you’re not only saving money but you’re lowering the risk of being forced to go into debt. For example, if you experience a terrible accident that takes you to the ER and totals your car, an emergency fund can help pay the expenses so you don’t have to take out a loan.
Once you have an emergency fund (and you’re maxing out your retirement account contributions), consider investing extra income. You could invest in the stock market, real estate, or even a business. This way, your money will start working for you to create even more money. Just be careful with how much risk you take on.
Unlike some assets like real estate that appreciate with time, cars depreciate. In fact, a new car’s value sinks as soon as you drive it off the lot. And by the end of the first year, you can expect it to have depreciated by 20% to 30%!
So don’t get into the bad habit of buying a new car every few years. It’ll only eat away at your net worth. To limit your losses from car depreciation, it’s best to drive your car until it gives out. That is, unless you’re constantly having to pay for repairs. Then it might be time to find a new car. But even then, buy used instead of new.
Lastly, you can also increase your net worth by increasing your income. In fact, it’s often easier to find ways to make more money than it is to save more money.
For example, you could ask for a raise at your job. If you work hard and demonstrate your value to the company, they’re more likely to grant your request. If they don’t, you could try switching to a higher-paying job.
Another way to boost your income is to start a side hustle. These days, there are tons of opportunities in the sharing economy. You could drive for Uber or Lyft, deliver food with DoorDash, sell stuff on eBay or Etsy, teach English on VIPKID, rent out a room on Airbnb, or rent out storage space on Neighbor. The possibilities are endless.
And if you’d rather not rely on a platform, you can always start your own side business as a freelance writer, consultant, music teacher, landscaper, tutor, window washer, pet sitter, and the list goes on. Identify your unique skills and leverage them.
Adding it all up
At the end of the day, there are many ways to increase your net worth—even in bad times. The key is to experiment with several and choose those that work for you. You probably can’t do all seven at once. But with a little diligence, your efforts will make a great impact over time. So don’t be afraid to start increasing your net worth now!
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