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.

My 5-Part Plan for Extra Money

Whether it’s stimulus checks, tax refunds, friendly donations, or work bonuses many of may receive unexpected money in our bank accounts from time to time. Although this money is greatly appreciated, without a plan, we may inadvertently spend it all in haste. As money savvy young professionals, we should have a plan for unexpected money and use it to meet some of our financial goals. Here is my 5-part plan for any extra money I receive:

1. Allocate a percentage to building wealth. As someone who has a goal of building generation wealth, a percentage of all the money I get goes towards increasing my net worth. I increase my net worth in two main ways: 1) by investing in assets (like stocks and real estate) that will increase in value overtime, and 2) by paying off liabilities (aka minimizing debt) that take away from my wealth. In other words, when I get extra money, I invest a portion of it and pay down debt with another portion. In fact, one of the first things I did with my first few paychecks as a resident doctor was allocate about 10% of each check to paying off the credit card debt I accumulated in grad school and invest another 10% in index mutual funds within my work retirement plan. My goal is to use a percentage of every dollar I get to build wealth by increasing my net worth.

2. Reserve money for taxes. Unless the money I receive is a tax refund or an untaxed gift, most of the time, when I get extra money, I will have to pay taxes on it. This is true for you as well. It doesn’t matter if you did all the work in your job, or took all the risk in that investment or business idea that has finally paid off, when you make money, Uncle Sam wants a cut. Since I don’t like having to scramble to pay extra money in taxes each April, I plan for my taxes throughout the year. Anytime I get extra money that I know will be taxed, I set aside a certain percentage for taxes and place it in a savings account.

3. Pay tithes and give to charity. As a Christian who goes to church and believes in giving back to those who are less fortunate, I set aside money for giving. One of things first things I do with extra money is give 10% to the church, as part of my tithes. I then allocate additional money for giving to charities or people outside of church. Sometimes, I invest in my friends’ businesses. Other times I donate to a non-profit or bless someone I know with an expected gift. As a successful young professional who is actively building wealth, I recognize that despite my hard work and dedication, I have several advantages and blessings that other people do not have. Because of this realization, I try to be a good steward of my resources by giving money away and making a difference in the lives of others.

4. Save money for future expenses. As someone in her early 30s who hates surprise expenses and loathes credit card debt, one of the things I do with unexpected money is save some of it, in cash, for future large expenses. I try to always have money in a savings account to pay for what I call “friendship expenses” like weddings, birthday parties, and baby showers. Between bridesmaid dresses, bachelorette parties, bridal showers, and wedding gifts these expenses are not cheap so I have to plan ahead. Along with these “friendship expenses,” I also reserve money in my savings account for vacations. I also have an emergency fund for unexpected expenses or changes in income and plan to start saving money in a “housing fund” to cover the down payment on a future home. My point? There are always large expenses I have coming up and as someone who likes to plan ahead, I like to have money set aside for these things.

5. Give myself a spending allowance. Although I prioritize building wealth, I also like to live in the moment. So although I may not treat myself all of the time, I do reserve some money to spend from time to time. I love to invest and I understand the importance of being responsible with money, but I am realistic. I know I can only delay gratification for so long without completely going insane. Thus, I find ways to “treat myself” and reserve a portion of the unexpected money I receive as a spending allowance. Sometimes I’ve gone shopping, other times I’ve booked a trip to see a friend. Sometimes I treat myself to a fancy restaurant and other times I’ve bought some new gadget or electronic device. Finding ways to enjoy a portion of your money is key.

5 Ways to Increase Your Net Worth

As a young professional who is trying to become financially stable and build wealth, there are a few things you can do to increase our net worth even sooner.

1. Contribute to employer sponsored retirement accounts. Allocating a certain percentage of your income (like 5-10%) to your work 401K or 403b allows you invest money each month. Investing in this consistent way will help you increase your net worth over time. Contributing to your work retirement plan may also help you get even more money to invest with especially if your employer offers a retirement match (in which they put extra free money into your investment accounts on top of what you already put in there). Since the contributions you make are pre-tax, investing money in your work retirement plan decreases your taxable income which can lower your taxes each year and decrease your student loan payments.

2. Open a Roth IRA. Contributing to a Roth IRA also allows you to invest money for retirement. Some of the perks of a Roth IRA are that you have more options in what you want to invest in, whether that’s stocks and bonds, real estate, or other alternative investments. You can also choose to invest at any time since contributing money to a Roth IRA does not have to be associated with the paycheck you get from your job. One of the best things about a Roth IRA is that your money grows tax free (so you never have to pay taxes on the profits you make). Plus, you can take the money you contributed out of the account at any time, if you needed it for an emergency.

3. Pay down your debt. Your net worth is the income you make and assets you own minus any debt you owe or liabilities you have. By lowering your debt, or paying it off completely, you automatically increase your net worth. If you happen to have high-interest debt, like a credit card or car loan, considering paying it off as soon as possible. Doing so will increase your net worth and leave more money in your pocket each month.

4. Reduce your largest expenses. Another way to increase your net worth is to decrease some of your monthly expenses. While some people focus on saving a few bucks each week on coffee, you can instead get a bigger boost in your net worth by lowering your largest expenses, like housing. Whether you rent an apartment or pay a mortgage on a home, there’s a good chance a large chunk of your income is spent on housing. One of the best ways to lower your monthly expenses and increase the amount of money you invest each month is to decrease your housing costs. Consider getting a roommate, renting out a section of your home, putting your place on AirBnB, or relocating to a cheaper area. Saving money on housing costs can have a drastic impact on how much money you have available to invest each month.

5. Set up automatic savings and withdrawals. Another way to build your net worth faster is to set up automatic payments for any credit cards, student loans, or car payments you owe. Doing so will ensure that you make these payments on time and will even give you the option of paying more than the minimum each month (automatically) which can help you pay off any debt you have sooner. You should also consider automatic savings. Having automatic withdraws of money from your checking account to your savings account can help ensure you are saving a certain amount each month which will help you stack more money overtime.

3 Ways I Increase my net worth each month

Our net worth is an important financial number. It’s the value of our assets (things that increase in value) subtracted from our liabilities (expenses and debts we owe). The higher our net worth, the more financial security we have. Increasing our financial security gives us more freedom to do the things we love and live the life we desire. It means we can retire from our jobs early or work fewer hours if we want. We can spend each day doing what we love and can easily sell our assets to generate more revenue and money if needed. Because I want this level of freedom in my life, increasing my net worth is a continuous goal. Here are the 3 ways I’m doing that:

1. Investing money in my retirement account. As a physician who is employed by a large academic institution, I have the option to invest in employer-sponsored retirement accounts. Since I work for a non-profit hospital, I have access to a 403b which is quite similar to a 401K. Through this type of retirement account, I can invest money for the future which increases my net worth. Each month I put 10% of my income into my work 403b and invest the money in this account in index mutual funds, which are low cost funds that purchase a variety of stocks and bonds. Money in these index funds earn an average return of 8% per year. This means that each year I invest money, I earn about an 8% profit on my investment and that interest compounds each year as I continue to contribute money in the account. With an average interest rate of 8% per year, my money increases in value annually and doubles every 9 years. Putting pre-tax money from my salary into retirement accounts that are invested in low cost index mutual funds is one of the best ways I increase my net worth each year. The fact that these investment contributions also save me money in taxes each year is a bonus.

2. Paying down debt, early. Most adults have some form of debt, whether it’s a credit card balance, car loan, or home mortgage. This debt is a liability that subtracts from our net worth. Although many of us are fiscally responsible and pay a portion of the debt down each month, one of the things that has increased my net worth even more over recent years is paying the debt down sooner than required. In other words, instead of making the minimum payment, I pay more than what is required each month. Simply paying the minimum will cause me to pay extra fees in the form of interest and takes away money I could be using to invest or spend on other things. Paying more than the minimum each month, and eventually paying off the debt early, decreases my liabilities. As I mentioned earlier, decreasing liabilities increases my net worth.

3. Saving money in a separate account. One of the major ways I increase my net worth is by saving money. Although it’s sounds simple, it’s easier said than done. I’ve learned that unless I’m intentional about saving money, I’ll inevitably buy extra clothes or shoes I don’t need and find myself wondering why my bank account balance is near zero at the end of the month. One way I avoid overspending, is by saving money in a separate banking account. I have a certain “savings goal” each month and to ensure that I achieve that goal, I have a certain percentage of my paycheck that is automatically deposited into a separate account on the first of each month. Since this account isn’t connected to my debit card or credit card, it’s almost impossible for me to spend. Since I can’t spend it, I save it, and as a result, the value of my savings increases each month. As my savings increases, my net worth increases.

Although each person is different and may have various other financial priorities, we can all increase our net worth through at least one of these ways. Tell me, which method have you chosen to focus on to increase your net worth?