“Net worth” is an oft-misunderstood term — we tend to think of net worth as it relates to billionaires and celebrities, but not to ourselves. However, we all have a net worth, and understanding your own can be a powerful tool to help guide your current and future financial decisions.
While our own net worth might be less impressive than those of the celebrities we’ve all Googled at one time or another, there are a few simple steps that anyone can take to increase their wealth.
Do You Know Your Net Worth?
Your net worth is relatively simple to calculate. Simply put — it’s your assets minus your liabilities.
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.
You can easily track your net worth with Personal Capital’s free financial tools — simply aggregate all of your investment, bank, credit card, and other financial accounts, (or manually input the values) and your net worth will be displayed in the upper left hand corner of your personalized dashboard.
How Do You Increase Your Net Worth?
The short answer is—spend less than you make. Then invest those resources in appreciating assets.
Here are five easy steps that anyone can take to increase their net worth.
- Take Advantage of Any Employer Match & Max Out Your Retirement: The most effective, readily available investment option for most people are 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, and tax-deferred savings are a great way to increase your net worth. Many workers also have an added incentive, an employer match. That’s free money so don’t miss out.
- Pay Down High Interest Debt: If you have a credit card or other high-interest debt, you need to eliminate it as quickly as you can, as high-interest debt is the #1 threat to building your net worth. Practice some extra frugality and put the money you save toward eliminating any credit card or other high interest debt — it will save you hundreds or thousands in interest payments. Then vow to use your credit cards for convenience only, paying the entire balance off each month.
- Earn More On Your Cash: Traditional savings and checking accounts pay next to nothing in interest, which means you could be missing out on some significant money. Instead of parking your cash in a traditional savings account that is probably paying you pennies in interest, we generally recommend that our clients consider a high yield account. 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.
At Personal Capital, we’ve seen firsthand how much unrealized interest payments can impact people’s net worth: as of June 6th, 2019, our 2 million dashboard users have over $41 billion in cash languishing in savings, checking, or money market accounts. If they’re earning the national rate* on those accounts, that means they’re losing out on hundreds of millions annually that they could be earning in interest by keeping their cash in a high-yield account.
We couldn’t just sit by and let people lose out on all that interest, so we recently introduced Personal Capital Cash™ offering a new high yield account with rates starting at 2.05% APY**. Personal Capital Cash is a great way to earn more on your savings – with an APY that is 23x the national rate, up to an aggregate of $1.25 million in FDIC insurance***, no minimum, and flexible deposits and transfers, it’s the perfect way to put your cash to work.
- Build an Emergency Fund: Emergency funds are an important part of your financial plan designed to cover the curveballs that life can sometimes throw our way. We recommend that most people should have an emergency fund covering three to six months of expenses. Having enough in your emergency fund is an important part of protecting your net worth so you don’t have to rely on credit cards or loans if an emergency should occur. A high yield account that offers flexibility for withdrawals is a great place to keep your emergency fund. Your cash can grow with higher APY than a traditional savings account yet, you can feel confident that you have access to your money when you might need it.
- 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 has historically been a way to increase your overall wealth. However, be sure to scrutinize fees for both advice and investment products. You can increase the amount you earn over the long-term if you shave even a small amount 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.
Personal Capital Cash is offered through Personal Capital Services Corporation (Personal Capital), which is not a bank. To participate in the program, you must open an account at UMB Bank, n.a., Member FDIC, through which your funds will be placed in accounts at participating program banks. The advertised interest rates are paid by participating program banks, not by UMB. Your funds will be FDIC insured up to applicable limits while in transit through UMB Bank. Personal Capital receives a fee from each Program Bank in connection with the Program that is based on the aggregate daily closing balance of deposits held in Program Accounts by such Program Bank. The fee may vary from Program Bank to Program Bank and will generally increase as the aggregate amount of funds held in Program Accounts with the Program Bank increases. See additional disclosures here.
*The national rate is calculated by the FDIC as of June 11, 2019 based on a simple average of rates paid (uses annual percentage yield) by all insured depository institutions and branches for which data are available. Savings account rates are based on the $2,500 product tier. Account types included in the FDIC calculation are those most commonly offered by the banks and branches for which they have data – no fewer than 45,000 locations and as many as 81,000 locations reported. The deposit rates of credit unions are not included in the calculation. Visit www.FDIC.gov for details. In this calculation, we are using the current national rate of 0.01%. Hundreds of millions in lost interest assumes the Personal Capital Cash interest rate of 2.05%.
** The Personal Capital Cash Annual Percentage Yield (APY) as of August 1, 2019 is 2.05% APY 2.03% interest rate. The calculation for APY is rounded to the nearest basis point. For Personal Capital advisory clients, the APY is 2.10% (2.08% interest rate). Both the interest rate and APY are variable and subject to change at our discretion at any time without notice.
***FDIC insurance up to $250,000 (including principal & interest) per depositor per program bank. The cash balance you place through the program is swept to one or more program banks where it earns a variable rate of interest and is eligible for FDIC insurance. If the number of program banks changes, the aggregate amount of available FDIC insurance could be higher or lower. If you have deposits at a program bank, you should consider electing not to use that bank by following the opt out instructions we provide. If you do so, the aggregate amount of FDIC insurance available to you will be lower. If you do not do so, your existing deposits and deposits through Personal Capital Cash at that program bank will be combined for the purposes of FDIC coverage, which could result in some of your funds at that program bank being uninsured.For more information on FDIC insurance coverage, please visit www.FDIC.gov. Customers are responsible for monitoring their total assets at each of the program banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. Funds you place through Personal Capital Cash are not covered by SIPC.
Any reference to advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital Corporation. Personal Capital Advisors Corporation is a registered investment advisor with the Securities Exchange Commission (“SEC”). SEC registration does not imply a certain level of skill or training. Past performance is not a guarantee of future results, nor is it indicative of future performance. All investments involve risk, including the potential for loss of principal.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.