Three Easy Habits that Will Improve Your Net Worth
Connecting our finances to our purpose isn’t all that murky. We all have an idea of how much financing we’d need to live the fulfilling life we envision for ourselves. But just because we know what we want to accomplish doesn’t mean we know how to make it happen. There are steps that lead us to the financial goals we yearn for. Taking steps today to build your financial wealth will only lead to more opportunities to build wealth tomorrow.
Those first steps to realizing that goal can be boiled down into three key actions and habits:
- Determining what our net worth is
- Tracking our net worth on a monthly basis
- Setting a goal around our net worth
1. Determine Your Net Worth
Calculating your net worth is a critical first step to knowing where you stand on the journey toward achieving your financial goals.
A resource published by Kiplinger explains that your net worth is the amount of money you’d have if you sold all your assets and paid all your debts.
To calculate your net worth, first, collect information on your assets. Determine the amounts you currently have in all your accounts. Consider checking accounts, savings accounts, CDs, and retirement funds like IRAs, 401Ks, and pensions. You’ll also need to count things like the current market value of your home, cars, antiques, and jewelry, as well as the cash value of any life insurance policies you may have. A general rule of thumb is if it’s worth something today, you should include it as an asset.
On the liability side of the equation, you’ll tally up the balances due on the debts you may have. Again, anything you owe should be included in this category. For instance, if you have a mortgage, student loan debt or any other loans, credit card balances, or any taxes due, you’ll want to count them as liabilities. Even household utilities owed are considered liabilities when you’re calculating your net worth.
Once you’ve compiled your assets owned and liabilities owed, take a moment to pat yourself on the back. You’ve made it through the hard part and have created a comprehensive list that you’ll maintain for the rest of your life. With the list in hand, you can calculate your net worth by subtracting the liabilities from the assets.
(If you need a basic form to start imputing these numbers into, consider using a net worth calculator like this one.)
2. Track Your Net Worth on a Monthly Basis
Keeping track of our net worth is a positive financial habit worth building. Knowing where that number sits now is just as important as knowing where it sits tomorrow.
At the very least, keep track of your net worth on a monthly basis. It’s how we see the impact of the financial decisions we make and holds us accountable to doing better. If you purchase a new car, for instance, you can expect a hit to your net worth. On the contrary, if you just made that last student loan payment, you can expect an increase to your net worth. You’ll only know how your bottom line is faring if you are tracking it.
Once you start keeping track of your net worth, you’ll know whether you are living within your means or inadvertently sabotaging your net worth journey.
Live on Less than You Earn
A simple yet effective way to increase our assets is to live on less than you earn. In other words, live within a budget.
Major expenses such as housing and transportation are the first line-items to look at. While the median American household earns around $80,000 pre-tax, each household spend almost 40 percent of its income on housing and transportation costs alone. Add in other monthly expenses like food, healthcare, and costs like insurance and social security, and it doesn’t leave a lot to dedicate toward assets to improve our bottom line.
But there are things that you can do to help accumulate wealth and offset some of these expenses. For starters, consider turning your housing into a money-making asset with house-hacking. It’s also important to cut expenses where possible. As Scott Trench describes in Set for Life:
“Side jobs, side hustles, freelance work, and weekend work may expedite this accumulation phase. But the real determinate of how long this will take is your spending. Cut back on everything that doesn’t bring you happiness. Don’t’ forget to enjoy life, but understand that wasteful spending can eliminate hours or weeks of hard work. Save your way to your first real opportunities.”
When it comes to our expenses, it’s not just the big-ticket items like mortgage, rent, or car payments we need to consider. It’s the little things like the weekly pizza take-out, or the impulse pints of ice cream that make their way into our shopping carts.
Like small steps lead to knocking down big goals, small expenses can quickly lead to financial burdens. You can always use the Your First Home Personal Budget worksheet to help.
Good habits are always worthwhile to commit to building. When we focus on improving the habits that influence our personal finances, we are taking steps to help us add to our personal bottom line and build our net worth.
3. Set a Goal Around Your Net Worth
Once you know your net worth and track it on an ongoing basis, you can put it to work. In other words, take what you know and set educated goals for your future based on it. For instance, maybe you set an annual goal to grow your net worth by 5 percent. Whatever your goal may be, once you know your net worth number, you’ll be forced to ask different questions around it.
Your net worth can grow based on actions you take at each level of financial wealth. Beginners, for instance, may improve their net worth by taking a look at their top costs and reducing them or finding ways to make income off of them. Maybe you have a house payment that’s accounting for the majority of your expenses. After all, the average American spends 32.9 percent of their annual income on housing expenses. To decrease the amount you spend on housing, maybe you’d consider renting out a room or even letting other people stay in it, for a fee, when you’re vacationing elsewhere.
At higher levels of net worth, increasing net worth can be more complex. In these cases, perhaps investing in a business is the way to add to your bottom line. Those who have grown their net worth to large numbers require large additions to their asset column to increase their net worth further. Wherever your net worth may be, it takes an honest look at the questions you ask around it to grow it to its full potential.
Good habits are always worthwhile to commit to building. When we focus on improving the core habits that influence our personal wealth, we are taking the steps to improve behaviors that ultimately help us to build our net worth.
Do you track your net worth? Do you have any advice for habits that can add up over time to help with growing it? Let us know on our Facebook page and don’t forget to sign up for our newsletter for more research and resources.