Wealth can be measured in many different ways. One of those ways is your net worth, so let's first establish and advance the idea that your net worth is not a measure of your worth to people, or of your worth to society, or a measure of your worth to your family and friends. Net worth simply applies to your monetary wealth, and it's a matter of following the basic formula: Assets - Liabilities = Net Worth. It's not rocket science, arbitrary, or something that people pull out of the sky. It's telling yourself what is the worth of all of the stuff your name is tied to. It's what you own minus what you owe, and the hope is that it's a positive number.
What I want to challenge you to do in this blog post is to really take a hard look at YOUR OWN NET WORTH, and give you 7 quick principles in the process that hopefully will encourage you to build!!!
So here are 7 things you can do, today, to build your net worth.
1. Buy a house and put it on a 15-year mortgage OR refinance your current mortgage on a 15-year mortgage. Here is a quick illustration to show you the power of a 15-year mortgage. We purchased our home in 2005 and put in on a 30-year mortgage. From 2005 to 2014 the principle that we owe went down only $13,000 in 9 years. In 2014 we refinanced our home on to a 15-year mortgage. From 2014 to 2019 the principle that we owe went down $36,000 in 5 years. We gained nearly 3 times the equity in the house in a little over half the time. So essentially, if we had originally had the home on a 15-year mortgage, we'd be less than a year from paying it off. However, we weren't smart for the first 9 years of the mortgage, and we are paying for that mistake now. If you don't do anything on this list, do this! In fact, if you want even more growth, put it on a 10-year note. Yes, the payments are more, but you will reap the benefits on the back end, trust me. Put your house on a 15-year mortgage TODAY and thank me later!
2. Invest in your jobs 401(k) or 403(b), at least up to the match, and pursue other investments tied to the stock market. Whether it's mutual funds, ETF's, or Index funds, you need to be doing it. I always advise people to stay away from single stocks, unless you are a professional, but one way or the other, you need to be in the market. Stock market participation is easiest if its automatic and you don't see the money, so having it come directly out of your checks is perfect. Secondly, the company match is "FREE MONEY". Never leave free money on the table. If you just invest in the match, you are doing a whole lot more than most people. Next to home ownership, participating in the stock market is by far one of the primary things that separate the haves from the have nots.
3. Reduce your debt and other liabilities. If you want to really have a tremendous effect on your sanity, your peace and joy, and your liabilities side of the equation, then you need to strongly consider a plan to pay off your debt. You don't have to pay off debt to reduce your liabilities. Perhaps you can sell some things, cut up the credit cards and don't accrue new credit card debt, or simply decide to never get another car payment again in your life. But somehow, some way, you need to seriously take a long hard look at your debt and attack it instead of ignoring it a hoping it will magically disappear. IT WON'T! Your debt kills your net worth. Yes, it's possible to pay off your debt. Yes it's possible to live debt free. Most people I run into really don't believe this. Here is couple of novel ideas to help you....DON'T GET THAT LOAN TO FUND YOUR BUSINESS IDEA and DON'T TAKE OUT THOSE STUDENT LOANS TO PAY FOR COLLEGE!! Seriously, I'm getting a little tired of seeing people pushing the idea of loans to people that already have no net worth as it is. Loans destroy your net worth faster than anything you can imagine. Personally, we've learned our lesson and we've been on a debt free journey for quite some time, and I'm glad to say that we are getting close. There will be a blog post coming about that journey soon! wink wink.
4. Take care of your health. What good is money if you are in poor health and can't enjoy it. You net worth takes time to grow, and you get time by taking care of yourself. Exercise, eat better, stretch regularly, take walks consistently, manage stress, and value your physical, mental and spiritual well-being. Again, net worth is not just about the money, but it's also about your overall well-being. If it means eating less, changing your grocery shopping habits, or utilizing the gym that you paid the membership for and never use, you've got to do something constructive about your health and your body. Yes, your children and grandchildren will benefit from all of your hard work, but it's also nice for you to be able to be here to enjoy some of it too! Much of your wealth is predicated on your health!
5. Have an Emergency Fund and be prepared for emergencies. The more you have aside to manage emergencies, the less you ever have to slow down or stop your investing. Emergencies will happen. Ok, I hope you are getting this....I said "emergencies will happen". That is automatic and there is absolutely nothing you can do about it, regardless of how hard you pray, how good you look, how much money you make, or how nice you are to other people. Just keep in mind that emergencies happen to everybody, anytime, and at any costs, so you have to be prepared. There is no way around it. If you aren't prepared for an emergency, it will rock your foundation. If you are prepared to deal with an emergency from a net worth standpoint, then you will be rocked, but your foundation will remain intact. People borrow from their 401(k) when there is an emergency. People go out and get a loan from a Payday lender when there is an emergency. People just simply panic and don't think straight when there is an emergency. Be prepared cause it's coming, and it can rob your assets side of the equation, or attack your liabilities like gangbusters, when it happens. But if you are properly prepared, then you can withstand it!
6. When you make more, spend the same. This sounds like a very easy principle, but if it was that easy, everyone would be doing it. Sad to say, but those Jones's seem to sing a little louder when we get a little extra money or a raise on our job. If you managed this one correctly, it would regularly give you more disposable income to invest with and increase the asset side of your net worth equation. The next time you get a raise, increase your amount you put towards your investments. Or how about the next time you make more money, put the extra in an emergency funds. The point here is just because you make more does not mean you have to spend more. Try to keep your expenses the same over the course of 5 years. Yes, there is inflation, but inflation is not the only thing eating up your assets side of the equation. Your decisions matter. Be conscientious with your spending as your salary, or money in general, goes up.
7. FOCUS ON NET WORTH. Today, take out a piece of paper and make a list of all of your assets and write next to each one what you think it is worth based on current market value. Be careful here because it's easy to over value an asset. If anything, UNDER estimate it. Secondly, write down all of your liabilities. It's much easier to assign a value to your liabilities because this is not speculation. You know what you owe on your liabilities, and if you don't know, call your creditor and find out. That is all you have to do. For some of you reading this, you have a negative net worth. If you follow these 6 steps, and every 6 months, re-visit your Net Worth equation, you will be surprised at how you can increase your net worth. If you want to be fancy, put it in a spreadsheet. The point here is to FOCUS ON IT!!! Make it a point to look at it a few times a year, and apply some energy, some time, some thought, and some intensity in this area of your finances. Stop worrying so much about your salary and start putting the the work into making sure you are being a good steward over what God is giving you to work with first! This takes COURAGE and EFFORT!
These are things you can do today to really make a dent in your net worth. Don't think you are too old or that you may be in the negative right now, so "why bother". It's understandable, but there is no better time than now to change your situation, climb out of the hole, and make a difference. Remember, whatever you focus on and give energy to, WILL GROW!!
For questions, advice, or just to talk....feel free to subscribe to my blog and visit me at www.smartmoneybro.com.