Calculate your net worth and increase it

When it comes to personal finance, the ultimate goal for many people is financial independence. Financial independence is when you have enough money to do whatever you want in life and have control over your time. You can stop working if you want or cut back to part time. You can travel as you desire and afford to have incredible experiences with the people you love. In order to get to this state of financial independence you must be diligent with your finances and save/invest money in a smart way. Before you start investing money or begin your journey to financial independence, you must first figure out your starting point and calculate your net worth. Here’s how:

Step 1: Understand what net worth is

Your net worth is a number that tells you how much money you have. It takes into account the cash in your account and the things you own that you could sell for money. It subtracts any debts or loans you owe to others. In other words, your net worth is your assets (the things you have that are worth money) minus your liabilities (your debts).

Contrary to popular belief, your net worth is not how much money you make. Many people who make a lot of money assume they are “rich” but that may not be the case. There are those who make a lot of money but still have a low net worth (because they spend most of what they make and have a lot of debt). In contrast, there are those who make a “small” amount of money but have a high net worth (because they keep their expenses low and save/invest most of the money they earn). Knowing your net worth helps you know where you are starting from as you begin your financial independence journey.

Step 2: Make a list of your assets

The first thing to do to determine your net worth is to make a list of your assets. Assets are things that you have or own that are worth money. They usually fall into these 3 categories: Cash you have on hand (in a checking or savings account), investments you have (in stocks, real estate, or other currencies), and possessions you own that you can sell for money. In order to calculate your net worth, get out a sheet of paper (or open a file on your computer or phone). Write down all of your assets on one side of the paper and write down the value of each asset on the other side of the paper.

Some examples of things that can go on your list of assets are: the amount of cash you have on hand and in a checking/savings account. You also want to list investments you have in the stock market along with any investment money you have in your work retirement accounts (like a 401K or an IRA). If you have a home (or homes), write it down along with its estimated value. If you have a business, write down it down along with its approximate value. If you have expensive jewelry, a car that you own (leases do not count), or other things like furniture and equipment you can sell, then add those things to your list along with the estimated value of each of them.

Step 3: Make a list of your liabilities

Now that you have your list of assets you need to make a list of your liabilities. Remember, liabilities are things that take away your money. They are the debts you owe and loans you have. Things like credit card debt, car loans, house mortgages, student loans, business loans, medical bills, and other outstanding debts/bills are all examples of liabilities. As you make this list, be sure you are clear on what truly counts as a liability vs an asset, keeping in mind that some things like a car or a home may be examples of both.

If you have a home, the total value of your home will be listed under the asset column along with the amount of how much money the home is worth. If you do not own your home outright and are still making mortgage payments, then you would list your home again in the liability section and write down the total amount of the mortgage you have left to repay. For example, let’s say you bought a home last year. The purchase price was $180,000, you paid $20,000 as a down payment, took out a $160,000 mortgage to cover the rest of the cost, and that the value of your home has now increased to $200,000. In this example, you’d list the home in the asset column for its current value of $200,000 (because that is how much you could get for the home if you were to sell it). You’d then list your house mortgage in the liability column and write down the total amount of the mortgage you have left, which may be around $160,000. My point? Your liabilities column should list all of your current debts and loans (including your mortgage).

Step 4: Subtract your liabilities from your assets to determine your net worth

In order to calculate your current net worth, add up the total value of your assets and the total value of your liabilities. Then, subtract the total amount of your liabilities from the total amount of your assets. The number you get is your net worth. For example, if all of your assets equal $200,000 and all of your liabilities equal $150,000, then your net worth is assets ($200,000) minus liabilities ($150,000) which equals $50,000. For some people, doing that calculation may be quite surprising.

Don’t be alarmed if your net worth is negative. Many young professionals have a high amount of student loans or a large mortgage on their home that adds a substantial amount to the liabilities’ column. If the total amount of your liabilities is bigger than the total amount of your assets, then you have a negative net worth and a much longer road to travel to become financially independent. But don’t be discouraged. Calculating your net worth is good to get a baseline of where you are. Now that you know where you are you can determine how to move forward.

Step 5: Find ways to increase your net worth

Regardless of where you are starting from you can always get better. You can increase your net worth by buying more assets (or increasing the current value of the assets you already have). You can also increase your net worth by lowering your liabilities and paying off the debt/loans that you have. Take a look at your spending plan or monthly budget to identify ways you can increase your net worth. Perhaps you can start investing a larger amount from each check into your work retirement account? Maybe you can open a Roth IRA and start investing additional money on your own? You can decide to save more money from each check into your checking account by spending less or purchase other investments like real estates that increase in value. If you have debt and loans, you can try to make extra payments or larger payments each month to decrease the amount of money you owe at a faster rate. Regardless of which method you choose, make it a goal to increase your net worth. Choose one strategy to focus on over the next few months then recalculate your net worth after that time to see how much progress you’ve made.

My point? Calculate your net worth so you have a starting place on your journey to financial independence. One you have a starting point, identify a couple ways you can increase your net worth over the next few months.

5 Habits That Can Make You a Millionaire

1. Setting up automatic investments. The vast majority of young millionaires achieved their financial status by investing money. Unless they are a celebrity or were born into a wealthy family, they had to be diligent about investing money either in the stock market, a business venture, or real estate. You must do the same. One way to do this is by making your investments automatic. Have a certain amount of money (aim for 10-20% of your salary) automatically deposited into your work retirement account, Roth IRA, or brokerage account. Invest the money inside of the accounts in index mutual funds, which make a profit of around 10% each year. Making these investments automatically prevents you from having to put money in the account each month. When you don’t rely on yourself to make the investment and instead make it automatic you increase the chance that you will meet your investment goals and accumulate wealth faster.
 
2. Having a separate account for savings. Along with investing 10-20% of their income, many young millionaires also have a certain amount of money they save. While most people start off with a goal of having $1,000 in a savings account for emergencies, many young millionaires and financially savvy folks exceed this amount. The general rule of thumb is to have 3-6 months of living expenses in a savings account just in case your income changes or you happen to lose your job. Aside from having money in a savings account, many financially savvy young professionals also save money for other things like yearly vacations, home purchases/renovations, holiday gifts, or car repairs. Consider setting up savings accounts for those things as well.
 
3. Living a modest lifestyle. Aside from saving and investing money, many financially savvy folks who achieve millionaire status also live a modest lifestyle. Instead of spending money on numerous expensive things, they tend to live below their means. In fact, there’s a saying that you can either look rich or be rich, but most people can’t do both. In order to ensure that you have enough money to save or invest 20% of your income you have to decrease the amount of money you are spending on other things. This means, you will probably not be able to lease expensive cars or buy a large home. Becoming a millionaire requires that you prioritize building wealth by investing a large chunk of your income. For most people, living a modest lifestyle is the sacrifice they make to invest the amount of money needed to build wealth.
 
4. Pre-planning large expenses/vacations. Most people don’t just wake up rich. Becoming financially successful at a young age requires a great deal of planning. Instead of being surprised by unexpected expenses or accumulating lots of credit card debt after each vacation many financially savvy folks plan ahead. They save in advance for large purchases and vacations. They create a budget for how much they will and won’t spend. Then they stick to it. A large factor in who does and does not accumulate wealth, depends on how disciplined you are and how well you plan ahead. Start doing so now.
 
5. Paying down [personal] debt aggressively. Lastly many financially savvy folks who end up becoming millionaires for the first time at a young age try to minimize personal debt. They try to avoid taking out huge car loans or mortgages and tend to pay back any money charged on the credit card within a short time frame. They understand that accumulating debt and keeping it for long periods of time costs them more money in the long run since they end up paying a great deal in interest. Most financially savvy people seek to make interest by investing money instead of paying interest by accumulating debt.
 
Tell me, do you want to be a millionaire at a young age? If so, what are some things you can start doing to put yourself in a good position to reach that goal?