When the federal government shut down in December/January, it only took a few days for journalists to begin reporting on the dire circumstances of some government workers. They turned to food banks, fell behind on their bills and, in some cases, didn’t have enough money to commute to work.
While nearly all these stories framed worker distress in terms of absent paychecks, in many cases the problem is much more profound. These workers are living paycheck-to-paycheck—and they are not alone. Many people focus on how much they make but not how much they are worth, so their financial health is precarious.
Do You Know Your Net Worth?
Your net worth is relatively simple to calculate. Just add up your assets and subtract your liabilities. The resulting number is your net worth.
Here is a highly simplified example: If your home is worth $200,000, your car $30,000 and your savings account $5,000, your assets total $235,000. If your mortgage is $180,000, your car loan is $25,000 and your credit card debt is $5,000, your liabilities are $210,000. Your current net worth is $25,000.
Congratulations, you are in the black. Many people are unpleasantly surprised to learn their net worth is a negative number. This can happen if you, for example, bought your home just before a market decline, have heavy credit card debt, or you spend all or most of what you make.
How Do You Increase Your Net Worth?
The short answer is—spend less than you make. Then invest those resources in appreciating assets.
- Take Advantage of Any Employer Match & Max Out Your Retirement: The most effective, readily available investment option for most people is tax-advantaged retirement accounts. Typically, workers can access these accounts (think 401k) through their employers; self-employed people have other similarly structured programs. The key advantage to all these programs is tax deferral. You can increase your net worth with money that is tax-deferred—don’t pass up that opportunity. Many workers also have an added incentive, an employer match. This is where your company matches all or some portion of the money you set aside to build your net worth. That’s free money so don’t miss out.
- Pay Down High Interest Debt: If you have credit card or other high-interest debt, you need to eliminate it as quickly as you can. Practice some extra frugality and put the money you save toward eliminating credit card debt, it will save you hundreds or thousands in interest payments. Then vow to use your credit cards for convenience only, paying them off each month. You can also save thousands in interest payments if you send a little extra on your mortgage each month.
- Build an Emergency Fund: Most people should have an emergency fund covering three to six months expenses. A high-yield account is generally a good place to park emergency funds. In addition to paying higher interest on your money, many high-yield accounts give you fast access to your money, are FDIC insured, typically have low or zero monthly fees and are easy to open. It’s a great place to put your emergency funds or idle cash. You’d be surprised by how much you could be losing in potential interest on your cash!
- Invest in the financial markets: In most cases, you cannot earn your way to wealth, so you will be short-changed if you focus solely on increasing your annual income. Instead, focus on putting your extra money (a bonus or a raise) to work by investing in stocks or other assets. Long-term investment in the stock market is a proven way to increase your overall wealth. However, be sure to scrutinize fees for both advice and investment products. You can accumulate a tidy sum over the long-term if you shave a few basis points off the cost of investing.
Increasing your net worth will take time, some financial discipline and sound investment planning, but the reward is financial security. The partial government shutdown lasted 35 days—your retirement will last much, much longer—every dollar you devote to building your net worth moves you closer to freedom from worry during a short-term difficulty or over the course of a long-term obligation.