Monday, October 3, 2016

Tips for improving your personal net worth

Net worth is simply the total value of all your significant assets minus all your debts. Assets include cash and investments, your home and real estate, and cars -- along with anything else of value that your own. Debts include all the amounts that you owe on these assets and other debts, such as credit cards. 

To improve personal net worth you must first determine where you currently stand. So let’s get started. Write down all your assets, including those items mentioned above, your retirement savings, and anything else of value. Next to each of these assets write down an honest estimated value. After determining the total value of your assets, write down all your debts/liabilities and the amounts you owe on each of them. There are several free online calculators to help you aggregate all your bank accounts/investments and credit cards, which may make this process a little easier. These calculators will also keep up with these accounts in real time so you can perform this calculation more quickly next time.  Two of the most popular are and Personal Capital.

Now that you know your current net worth, here are some tips to improve it. Keep in mind that these tips will help improve your net worth over time. Remember to set reasonable monthly and annual goals. Think of it like losing weight: losing 20 pounds overnight is an unreasonable expectation... so is doubling your net worth by tomorrow.

Tip 1:   Setup an emergency fund
The general rule of thumb for an initial emergency fund is about $1,000. Depending on your personal situation, you may need a larger amount. This fund is a good idea for several reasons. The cash is there for unexpected expenses and unforeseen events -- rather than having to use a credit card. Remember that using a credit card lowers your net worth, which is counterproductive. If you can’t put away $1,000 immediately, set up automatic transfers to a savings or money market account of whatever amount you can afford each pay period.

Tip 2:   Payoff debt
Begin by paying off the debt account with the highest interest rate and then move on down the line. Credit cards, student loans and car/truck loans (in that order) tend to have higher interest rates. Consolidating debt under a lower interest rate is often a good idea. The will be fewer accounts to keep up with and you will pay less in interest over time.

Tip 3:   Trim down monthly expenses
There are two ways to increase monthly available cash. You can make more money or you can reduce how much you spend. Generally, you have more direct control over how much you spend while you have less direct control over your salary. Evaluate your monthly expenses and determine what conveniences you can reduce  or even eliminate. Start small, such as ordering take-out one less time per week. Again, small adjustments make large improvements.  

Tip 4:   Start investing
One of the easiest ways to invest your money is a retirement plan. Employers often have a 401(k) retirement plan or some equivalent; and most will even match a percentage of whatever amount you contribute to that plan. A best practice is to contribute at least the amount that will max out your employer’s match.  If your employer does not have a retirement plan, open an IRA account with a brokerage firm of your choosing. Generally, you can open an account with small automatic transfers to the account, rather than contributing the large initial amount often required by financial institutions.

These tips will only get you started down the right path for increasing your overall net worth. Please consult with your financial advisor for a more personalized plan to suit your individual/family needs.

Eric Tydings, CPA