When it comes to financial freedom and independence, you’ll find that there’s a lot of different numbers that can determine just how well you’re doing. The money in your checking account could dictate your lifestyle, while your savings figures determine how well you sleep at night. One of the most important numbers that many people forget to consider, however, is their overall net worth.
Your net worth is the difference between the value of the items that you own, and your debts or liabilities. The items you own that add to your value include things like your house, your retirement and investment accounts, your checking account, and other balances. On the other hand, the things that detract from your worth might include your mortgage, credit card and automobile debts. If you recently took the time to sit down and calculate your net worth, you might have discovered that you’re not doing as well as you had hoped. Fortunately, there are things you can do to make a difference.
Consider Your Liabilities
If you want to change your financial standing, the first thing you need to do is look at what’s detracting from your overall value. Look at how much debt you currently owe each month, and where that debt comes from. Some things, like your mortgage, might be difficult to reduce unless you’re ready to remortgage, or move to a smaller house. However, there will be liabilities that you have more control over.
Make a list of the debts and expenses you might be able to get rid of entirely by having more control over your budget. Then make a separate list of loans you might be able to improve. For instance, you can save significant cash each month by refinancing your auto loan online from WithClutch.com. It takes seconds to get a quote on the web, and you don’t have to put your credit score at risk. Refinancing can help you to chip away at the balance you owe a lot faster. You can also look at changing up your payment plans. For instance, instead of making a single payment towards the amount you owe every month, you could make biweekly or weekly payments instead, to reduce your principal faster.
Review Your Available Assets
Once you’re familiar with your liabilities, and you have a plan in place for what you’re going to do with them, the next step is considering your assets. A lot of people aren’t sure how much they have in their back pocket thanks to things their home, car, or even retirement savings. Your main asset classes will fall into a few different sections and knowing how all of these segments add up helps you to create a better plan for the future. Look at:
- Residences and Real Estate: Look at the equity in your home – or how much it’s currently worth less what the amount is that you owe on your mortgage. The greater your equity in your home, the greater the net worth for your property will be. Don’t forget to consider rental and vacation properties too.
- Investments and Accounts: Retirement accounts that will give you cash to tap into in the future are crucial assets that you should never overlook. Don’t forget to think about other investments too, such as mutual funds, stocks, and bonds. You will need to think about taxes as a liability for these assets, however.
- Collectibles and Other Items: Finally, consider any other belongings that you might have which have a significant monetary value. Some people collect art and jewelry, others have classic cars and gold. The market for these items might fluctuate, but they do add to your overall value.
Reduce Your Expenses
With a good insight into your liabilities and assets, you should know the basics of what your net worth currently is. The next step is improving that number. The less money you spend, the more you’ll be able to accumulate in the long term. If you haven’t conducted a review of your budget recently, then you might need to look at your current expenses and look for ways to cut back. Remember that a few dollars might not seem like much at first, but it can quickly add up to a lot of missing money in the long-term.
With that in mind, think about cutting back on little luxuries that you don’t really need – such as a coffee on the way to work, or lunch out with friends every week. You can always invite your friends over instead. Consider your budget carefully and ask yourself what costs are reducing your value, and whether you really need them. You can even think about changing certain expenses. For instance, if you think that you’re spending too much on your insurance, then you can compare different providers and switch to a more affordable premium.
Remember to Invest
Once you’ve done each of the three steps above, the next step towards strengthening your net worth is investing in opportunities that will increase your overall value. This can be a challenging process for some beginners, as it’s difficult to know where you should get started when you have a little money to place into your future. Sometimes it helps to speak to a professional so you can consider your risk profile and build a suitable strategy based on how much you’re willing to spend or lose. Although investing never gives you a guarantee of a massive income or overnight win, it’s the only way to consistently improve your network on a significant scale.
The key to success is learning how to use your money correctly. One option for people who are just getting started is to try the bucket system. This involves spreading your investments into four buckets – cash, income, growth, and alternative income. By dedicating a portion of the money that you back to different buckets, you give yourself different potential assets that you can pull from to maintain the lifestyle that’s right for you. Remember to pay attention to how your opportunities develop overtime so you can adjust your plan accordingly.