How do you measure your wealth—or lack thereof? Most of us look at the number in our bank account or the stack of bills on the counter to get a sense of how we’re doing financially. But for a more accurate picture, take a minute to determine your net worth. Although it may sound like a fancy term, your net worth is simply the difference between your assets and liabilities. Instead of just considering cash in hand or your annual income, this number is the actual monetary value of where you are in life.
To calculate your current net worth, add up the value of all the money you have in both cash and any kind of account, plus the value of items you own such as a home or vehicles, then subtract your debt. Then, to increase your net worth, consider the following options. If you’re willing to be in it for the long haul, these ideas will help you maximize that number over time.
Get real—real estate
Unlike so many things we buy, from new cars to the latest technology, houses tend to hold onto their value. In most economies, you can buy a home for $200k one year and then sell it for at least $200k five years later. If you’ve made a few improvements, or if local home values have increased, you may even be able to sell it for more.
The ideal would be to pay cash for a home and then reap nothing but profits when you sell, but if that isn’t realistic for your budget, don’t worry. You can start building your net worth with a down payment. The bigger the down payment, the better—less than 20% down usually means you’ll be paying PMI (private mortgage insurance), and most of your monthly payment will be going to interest instead of the principal of the loan.
Keep this in mind when you start house hunting, especially if you’re not likely to spend more than 30 years (the most common mortgage term) in one location. If the goal is to build your net worth, putting $20,000 down on a $100k property will yield a higher return than sinking your $20k nest egg into a $400,000 dream home where you’ll be paying more interest than principal for many years. And look for a house with land in a desirable location, which will hold its value over time.
Once you’ve purchased a piece of affordable real estate, you can continue to increase your net worth by improving it—remodeling the kitchen, putting on an addition, or installing a new roof will make your home more valuable. If you have a mortgage, you can make additional payments on the principal of your loan, increasing your equity. You may even decide to purchase a second property and rent out the first one, giving you a steady source of income while you add to your net worth.
Be business savvy
In fact, renting out your property is one of the many possibilities in the world of business ventures. Although starting a business is more risky than some investments, it also puts YOU in control. When you’re the landlord, you decide how you advertise, how you handle issues with tenants, and what kind of property you’re going to develop.
You can invest in a business by buying an established business, starting a franchise, or opening a business of your own. For most business owners, the goal is to make a profit (ideally, doing something you enjoy or have interest in) and eventually sell the business for a large chunk of cash.
If you’re interested in a business venture, be willing to think outside the box—you may be able to cash in on your creativity. At the same time, be sure to keep careful records of your income and expenses, both for tax purposes and so that you can show prospective investors or buyers that your business has a track record of making money. Business assets include physical property, such as property (and everything in it, including tables and chairs), and intangibles like your client list and good reputation; all of these things can increase the payout when you’re ready to sell.
Collect more than dust
In the late ’90s, thousands of Americans collected Beanie Babies, those adorable PVC pellet-stuffed animals that came with their name and a catchy poem inscribed on their tag. Sure, they made great gifts for kids, but as they grew in popularity, more and more buyers started keeping their Beanie Babies on the shelf. Rumors warned that only mint-condition, “new with tags” animals would be worth hundreds of dollars on eBay. The problem was, only owners of certain rare, discontinued Beanie Babies were ever able to reap a payout. For the rest of us and our run-of-the-mill animals, that $5 investment at the local toy store never yielded any financial rewards.
That said, there are plenty of people who make money selling their collectibles. If you have a family heirloom or a rare item that is legitimately worth money, you can include it among your assets. But before you invest in a new purchase with the hopes of selling it for 10 times as much someday, do some research on the current and projected values for similar items. Make sure that out-of-print book really IS a collector’s item before you hand over top dollar for it—unless you just happen to love the book.
That brings us to some personal advice on collectibles: Invest in items that would interest you even if they never turn out to be worth money. Whether you like art, comic books, antiques, stamps, coins, china dolls, or baseball cards, build a collection that does more than take up space on your shelf. Choose something that adds value to your life right now, and hopefully it will add value to your net worth in the future.
Plan for long-term wealth
It sounds simple, but one of the easiest ways to increase your lifetime wealth is to spend less than you earn. Many of us are focused on increasing our income, but your net worth isn’t about the gross or net paycheck—it’s about how much of that income you keep. You may not be able to talk your boss into giving you a raise, but you can decide to cut out unnecessary expenses that are eating away at your paycheck. By living within your means, you can put more of your paycheck into a savings account, where it will earn interest and raise your net worth.
Since net worth is determined by subtracting your liabilities from your assets, it makes sense to pay off debt as soon as possible. Eliminate the debt, and that’s one less thing you have to subtract from your assets when calculating your net worth. For the greatest yields, pay off high-interest debt first, whether it’s a first-time mortgage or old credit card bills.
And talk to a financial adviser about your options for investment. Many experts recommend index funds, which allow you to keep more of your money because you pay less in fees and taxes than you would with traditional stocks and mutual funds. A retirement account like a 401(k) or IRA can increase your tax savings, and many employers will match your contributions to help invest in a happy future.
Add it all up
By making smart choices about saving and investing, you can grow your net worth. You may not see anything obviously different in your everyday life, but knowing that your assets outweigh your debts gives a feeling of satisfaction that can’t be bought. And thanks to the savvy investments you make today, it won’t be long before your net worth isn’t just a fancy term on financial websites—it’s the label you can confidently put on the personal wealth you’ve built.
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