Before we dive in, let’s get one very important point across: Increasing your net worth doesn’t necessarily mean increasing your job income. In fact, there are a variety of ways you can increase your net worth and build a better financial future for you and your family. Here are 3 simple ways to grow your net worth.
It’s great that you want to know how to increase your net worth. But before we do, we need to understand what net worth is and what it entails. Finance professionals often speak of wealth generation as a means to a better life. But unless you can distinguish between income and net worth, you might be getting this all wrong. So, let’s first unpack the concept ‘net worth’ and what it means:
What is net worth?
Net worth is equivalent to all the assets owned by an individual, discounted by the liabilities of that same person. (In human terms, it’s the value of everything you own minus expenses.) Net worth helps to get a holistic picture of all your finances while taking into account everything possible. The calculation for net worth should include all your assets and liabilities. Some common forms of these include:
Once you have listed all your assets and liabilities, the calculation for net worth is simple:
Net Worth = Assets – Liabilities
For many people, assets are limited to cash and small investments. This is especially the case for those that have a net worth that is heavily weighed down by their liabilities, like personal loans and credit card debt. And that’s okay. Everyone’s financial situation is going to be different. You’re working on improving yours, and that’s all that matters.
Increasing your net worth
Now that we know what determines net worth, we can look at how to increase your overall net worth. We can either increase assets, decrease liabilities, or earn capital through investments. Let’s look at all 3 options in detail:
1. Increase your assets via cash
The first thing most people think of when attempting to increase their net worth is to increase their assets. The most common of these is to add more cash through taking on another job or finding a side hustle to make some extra money. This might be the most straightforward way to increase net worth, but that doesn’t mean it’s the easiest. Most of the ways to add more cash to your net worth do require a significant time investment.
2. Decrease your liabilities
Some may find that increasing assets is not so easy. Taking on another job or investing successfully, while a good choice for some people, won’t be so easy for others. If you fall into this category, decreasing liabilities might be more suited for you.
As we can see in our chart above, liabilities most often take on the form of debt. Debt can weigh heavily on net worth as it does not only represent outstanding payments due to a lender but also comes with interest, which increases debt over time, if not paid off. A great way to mitigate these interest payments and the debt weighing down your financial status is to not only pay off your liabilities on time, but even to pay them off early. Paying off debt early will also allow you to use the cash you’ve saved to invest and grow your assets even further.
It might be a good idea to prioritize your debt by interest rate. Paying off debt with the highest interest rate first will save you money in the long run. An alternative could also be debt consolidation, by which you take out a lower interest loan to pay off other debt with higher interest rates.
3. Generate capital through investments
The last way to increase net worth is through investments. This avenue is a way for you to use your already existing assets to grow your wealth. And unlike taking a second job or operating a side hustle, this is oftentimes a passive way of growing wealth that doesn’t require you to invest a lot of time.
There are a variety of investment avenues to consider:
- Stocks – Probably the best-known form of investment that anyone can invest in.
- Real estate – Buying and renting a real estate property can generate stable returns, although it costs a lot of money to get started.
- Peer-to-peer loans – Investing in p2p loans, like Bondora’s Go & Grow, provide high portfolio diversification and attractive risk-adjusted returns.
There are many more investment options, but always do your homework and make sure you’re comfortable with the investment you’re making.
The great thing about investing is that you don’t necessarily need to start with large sums of money. With Bondora, you can start with as little as €1! And the sooner you start investing, the better. That’s because time is a key factor in compound interest, which helps your investment, and therefore net worth, grow exponentially over time.
Watch your net worth grow
Are you happy with your net worth today? If not, consider one of these avenues to grow your net worth over time, and put yourself in the driver’s seat of your financial future. You can increase your cash by adding a side hustle, reduce your liabilities by paying off more debt, or grow your capital through investing. Or, if you’re ambitious enough, why not try all three!