Let’s cut straight to the chase. The only way to achieve financial freedom is to increase your net worth progressively. But sadly, most people lack a clear understanding of what net worth is, let alone how to increase it. Most people think that a net worth refers to how much money one has in their bank account, which is misleading.
In the real sense, net worth refers to an individual’s total assets minus their liabilities. In simple terms, your net worth is the difference between everything you own (including homes and cars) and the outstanding balances that you owe other people. (e.g., mortgage and credit card debt) and the more significant this difference is, the wealthier you’ll become. If you ask me, here are 5 extremely impactful ways to increase your net worth!
Method #1: Focus On Growing Your Income, Not On Investment Returns
The first practical way to boost your net worth is to focus on growing your income. I know this can be mystifying because most of us believe that accumulating investment returns is the golden ticket to creating wealth. While investing is critical to building wealth, it should only be a secondary priority, and you’re about to see why.
Now, let’s revisit the definition of a net worth one more time. As mentioned, your net worth is what remains after subtracting what you owe from what you own. This implies that your net worth entirely depends on shrinking your debts as you escalate your cash inflows. When you grow your income, you increase the possibilities of your economic net worth hitting the roof. And here’s why. See, growing your income can offer many tangible rewards to your finances.
For one, boosting your income will help you pay off your debts faster, especially those with high-interest rates. Don’t forget that being a liability, debts such as mortgages, credit card loans, and student loans can trim your net worth exponentially. Racking up debts is the sole reason why most people have a negative net worth. Negative net worth refers to a situation where your total debts exceed your total assets-and in the financial world; this spells doom. If, for example, you have $700 in short-term savings, $5,000 in retirement accounts, and $8,000 in credit card debt, you’ll have a negative net worth of $2,300. From this example, you can see that regardless of the amount one has in terms of investments and savings, it remains difficult to cross over to the other side.
But suppose you can raise your income by diversifying your income sources or asking for a salary raise. In that case, you’ll be able to double your efforts towards eradicating debt. If you have a mortgage, you’ll be able to trim it so that you can acquire more equity in your home. It’s like a double-edged sword. You’re freeing yourself from the shackles of debt and ballooning your net worth while at it.
Method #2: Follow Opportunities and Not Passion
At some point in your life, you’ve probably stumbled on this popular piece of advice: Follow your passion. But while we hear this often, it turns out that this narrative is dead. Instead, financial experts have changed gears and are now embracing a more practical approach. An approach that emphasizes the importance of following opportunity instead of following a passion, and I can’t agree more.
So, why the change of heart?
Well, the thing is, increasing your net worth is only possible if you can spot valuable opportunities on a whim; Opportunities that can potentially increase your income, expand your networking base, or become explosive in the near future. If you can find something you’re good at, yet the skill is scarce in the market, go for it. Because compared to passion, opportunity will open doors to tremendous success.
The thing is, you can find yourself being passionate about the wrong things. Maybe you have a burning desire to pursue a field with a shrinking earning potential or worse, one whose demand is likely to be phased out in the future. As an example, you could be passionate about teaching historical art, yet there’s an influx of Art college professors. Instead, you can identify the lack of a well-functioning university website and put your coding knowledge into good use. In the end, you’ll be better placed because web developers have a higher income than college professors.
This is why some experts counter the advice of following your passion. They argue that you should instead develop your passion. First, identify an existing gap that needs to be filled, transform it into a profitable venture, then work around enjoying what you do.
Experts also argue that passion isn’t necessarily inherent; it can be learned. Also, better-paying careers tend to be more fulfilling. So this means that you don’t have to be passionate about something to pursue it. It would be best if you were a clever opportunist. If you want to increase your net worth, you must transform your passion into a job, and a well-paying one or that matter.
Method #3: Acquire Knowledge In High Demand Subjects and Markets
Moving on, the third way of increasing your net worth is by being savvy in high demand subjects. While the job market is rapidly evolving, only a few people can keep up. Those who can’t keep up often end up stagnating in their careers or spouting out altogether. Strive to fall in the former category.
Because the truth is, your individual growth contributes significantly to your overall net worth. Usually, this individual growth is more noticeable in the form of human capital. Human capital refers to the financial value attached to your skills, knowledge and expertise. In simpler terms, it refers to your financial worth in the job market.
So, what’s the take-away here? If you want to boost your net worth, never stop learning. Attend seminars, read books, watch the news, and go back to school. This kind of aggressiveness will put you in good books with your employer-and put you in the spotlight when great opportunities arise.
Method #4: Focus On Acquiring Cash-Producing Assets
The term investing has become common on the lips of many people. Everyone seems obsessed with putting their money into investment ventures, yet only a handful of them are becoming rich. And this begs the question, what could the unsuccessful investor be doing wrong?
Well, it’s simple. See, there’s no shortcut to increasing your net worth if you don’t let your money work for you. And this is what draws the line between successful investors and the unsuccessful ones. The smart investors focus on ensuring that the money they invest is bringing in more- and with minimal effort from their side. Ever heard of the phrase, “use money to make money”? That, is precisely what the smart investor does.
If you want to join this camp, then you should look into buying cash-producing assets. These refer to assets whose value appreciates over time and produce a regular cash inflow. A perfect example is real estate. One reason why rich people invest in real estate is that it significantly contributes to passive income. Assuming you buy property today and convert it into rental units, for example, you’ll forever have money flowing into your bank account, and without spending anything. Once you set aside capital to buy the property, you sit back and watch your money make more money. Interesting, isn’t it? If you decide to sell it in, let say five years, you will sell it for much more than you bought it for.
Other examples of cash-producing assets include government bonds, Certificate of Deposits, Dividend producing Stocks, Peer to peer lending platforms, and high-interest savings accounts.
Here’s the best part; you can maintain a diversified investment portfolio that hems in two or more cash-producing assets. This way, you’ll have more income, hence an increased ability to clear your debts and give your net worth a leg up. Sadly, while many people are acquiring assets, most of them acquire depreciating assets — things like cars with fast-depreciation rates. These are assets that don’t bring in any cash inflow, hence don’t contribute to increasing your net worth.
Method #5: Build Spending Willpower and Avoid Lifestyle Inflation
Lastly, you can increase your net worth significantly by streamlining your expenditures. This refers to trimming your expenses to save money, usually through budgeting. Leaving your expenses unchecked can translate into lifestyle creep, which is the biggest threat to an individual’s net worth.
You’re probably wondering what lifestyle inflation is. It refers to a situation where an individual elevates their lifestyle after an income increase. Usually, lifestyle inflation manifests in the form of moving to an expensive neighborhood, buying a new luxury car, or eating out more often than you used to.
From a distance, lifestyle inflation looks harmless. I mean, why should you maintain your old lifestyle yet you’re earning more money.
But here is the catch. When you elevate your lifestyle after an income raise, you’re not making any strides towards financial freedom. Because even though you’re earning more money, your increased expenses are eating into the extra money that you would otherwise save if you maintain your old lifestyle. Inflating your lifestyle only creates an illusion of financial stability, even though it doesn’t exist.
And the worst part is that lifestyle inflation can go downhill very fast. It could begin as buying one luxury car; then, it escalates into needing a lush car interior or expensive car accessories to match your car. Before you know it, you’re living paycheck to paycheck with no income security and zero savings.
Let’s take a practical example. Steve and Jeff are both data clerks at a top brokerage firm, each earning a monthly salary of $4,000. When they both get $2,000 worth of salary raise, Steve opts to move into a posh neighborhood and ramp up his monthly expenses. On the other hand, Jeff remains living in the same neighborhood, and even though he needs a newer car badly, he resorts to saving his extra money. Actually, despite his raise, Jeff still tracks his expenses and even removes the things he feels he can do without.
In three years, Jeff is able to clear all his debts and increase his stock portfolio by 30%. On the other hand, Steve is still living paycheck to paycheck and now has additional credit card debt. See, Jeff could save more than $2,000 a month, which is one year amounts to over $20,000. If invested, this money has the potential to increase one’s net worth, unlike when it is spent immediately. In essence, whether you make wise or poor spending choices, it will reflect in your overall net worth.
Therefore, if you’re serious about significantly increasing your net worth, feel free to up these methods into practice!