When it comes to our finances, there are lot of different numbers that we’re all concerned about.
Net worth is simply the difference between the value of what you own—your house, retirement funds, investment accounts, checking account balance, etc.—minus such liabilities as the mortgage, credit card debt and so forth. Net worth is an important number to keep it mind as it can help you determine just how much your debt can affect your future wealth, as well as highlight the areas you should focus on before retirement.
Calculating your net worth is as simple as its definition. Take a look at everything you own, including assets that will be part of your retirement plan, such as your 401(k), stocks and investments. Make a separate list of your outstanding balances and debt and subtract that amount from the sum of everything you own, and what’s left is your net worth.
Review Your Liabilities
Take a detailed look at your liabilities. This should be an easy number to figure out as it’s simply how much debt you owe each month and in what form, such as your mortgage, credit card debt, and loan payment. Are there liabilities that you can eliminate or reduce? Reducing your debt is a big step in helping your net worth number increase!
Review Your Assets
You may not know exactly how much all your assets are worth, or how that value is going to change, but you can get an estimated figure. Try not to leave any assets out. Remember, here are your main asset classes:
- Primary residence: The more equity you have in your home, the greater your net worth has the potential to be.
- Vacation home and rental property: Usually paid for with cash, so this is definitely an asset you’ll want to count!
- Investments: Stocks, bonds, mutual funds and tax-deferred retirement plans. Just remember to add the taxes on these assets to your liabilities.
- Collectibles: Art and antiques—the market for these items will fluctuate, but you can always have an appraiser come help you.
The less money you spend, the more you can accumulate in net worth. If you haven't done a budget review lately, look at your current expenses and see if there are places that you can cut back. That includes bigger things, such as getting rid of one of your vehicles if you have multiple car payments, to smaller things, such as skipping lunches out or canceling subscriptions for magazines you don't read.
Pay Off Your Mortgage
Consider paying off your mortgage and get the biggest lump sum off your books. Making biweekly paymentsis a good way to accelerate your mortgage payoff. Just remember to consult your lender to determine whether a prepayment penalty will apply. This penalty can be steep, depending on how much of your mortgage balance is paid off ahead of schedule.
Review Annual Costs
What annual costs are bringing your net worth number down—and which ones don’t you need? Take a look at things like your insurance and healthcare premiums each year. Compare interest rates and see if any of these annual costs can be trimmed or eliminated altogether. Then, commit to saving and/or investing the difference to add to your net worth.
Income investing is a great way to increase your net worth—if done right. Read here for details on an approach that I have been using with clients for years called “The Bucket System.” The main premise of this approach is that you’ll divide your liquid investments into four buckets: the cash bucket, the income bucket, the growth bucket, and the alternative income bucket.
Disclosure: The Balance does not provide tax, investment, or financial services advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
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