What does attaining financial wealth mean to you? There’s a difference between having financial riches and having financial wealth. To have riches is to have money. You can work a 9-5 job each and every day of your life and earn a lot of money. Do this, and sure, you’ll be considered “rich.” But what happens to money coming in when you stop working?
On our journey toward financial freedom, one essential question to ask ourselves is why we want more money. If we don’t have enough money to finance our calling in life, then we haven’t achieved financial wealth. That’s why having “wealth” is different from having “riches”. Financial wealth means owning assets that generate money for you, and in doing so, leverages your time to allow you to live out your purpose.
Connecting our finances to our purpose isn’t all that murky on a conceptual level. We all have an idea of how much financing we’d need to live the fulfilling life we envision for ourselves. But just because we know what we want to accomplish doesn’t mean we know how to make it happen. There are steps that lead us to that financial freedom we yearn for. We must learn how to walk before we can learn how to run, after all. Taking steps today to build your financial wealth will only lead to more opportunities to build wealth tomorrow, which in turn will compound into independence and freedom.
Those first steps to realizing that goal can be boiled down into three key actions and habits:
- Determining what our net worth is
- Tracking our net worth on a monthly basis
- Setting a goal around our net worth
1. Determine your Net Worth
Calculating your net worth is a critical first step to knowing where you stand on the journey toward achieving your financial goals.
When we think of net worth, we can drill it down to what we are worth when we take all our holdings into account. Like Kiplinger explains, your net worth is the amount of money you’d have if you sold all your assets and paid all your debts.
Calculating your net worth for the first time can take a little work. After all, there are a lot of moving parts that need to come together into one spot to get the most accurate view of your financial situation. But just like going to the dentist after a few years’ hiatus, scrubbing and grinding through the process is worth the financial health it will lead to.
First, collect information on your assets. Determine the amounts you currently have in all of your accounts. You’ll need to consider checking accounts, savings accounts, CDs, and retirement funds like IRAs, 401Ks, and pensions. You’ll also need to count in things like the current market value of your home, cars, antiques, and jewelry, as well as the cash value of any life insurance policies you may have. A general rule of thumb is if it’s worth something today, you should include it as an asset.
On the liability side of the equation, you’ll tally up the balances due on the debts you may have. Again, anything you owe should be included in this category. For instance, if you have a mortgage or any other loans, credit card balances, or any taxes due, you’ll want to count them as liabilities. Even household utilities owed are considered liabilities when you’re calculating your net worth.
Once you’ve compiled your assets owned and liabilities owed, take a moment to pat yourself on the back. You’ve made it through the hard part and have created a comprehensive list that you’ll maintain for the rest of your life. With the list in hand, you can calculate your net worth by subtracting the liabilities from the assets. If you need a basic form to start imputing these numbers into, consider using a net worth calculator like this one.
2. Track your Net Worth on a Monthly Basis
Keeping track of our net worth is a positive financial habit worth building. Knowing where that number sits now is just as important as knowing where it sits tomorrow.
At the very least, keep track of your net worth on a monthly basis. It’s how we see the impact of the financial decisions we make and holds us accountable to doing better. If you purchase a new car, for instance, you can expect a hit to your net worth. On the contrary, if you just made that last student loan payment, you can expect an increase to your net worth. You’ll only know how your bottom line is faring if you are tracking it.
But accountability doesn’t have to end there.
The One Thing co-author Jay Papasan is part of a group where everyone meets on a monthly basis to discuss their financial goals. A requirement of this group is to know and share your net worth at every meeting. What they’ve found is that the group’s participants, on average, grow their net worth by 4.3 percent each month. This accomplishment can be attributed to the fact that their net worth is at the fore-front of their minds, coming into consideration for every decision they make. And no one wants to share that they’ve gone backwards since the previous meeting
Once you start keeping track of your net worth, you’ll know whether you are living within your means or inadvertently sabotaging your net worth journey.
Live on Less than You Earn
A simple yet effective way to increase our assets is to live on less than you earn. In other words, live within a budget.
Major expenses such as housing and transportation are the first line-items to take a look at. While the average household earns almost $75,000 pre-tax, they spend almost 40 percent of their income on housing and transportation costs alone. Add in other monthly expenses like food, healthcare, and costs like insurance and social security, and it doesn’t leave a whole lot to spare to dedicate toward assets to improve our bottom line.
But there are things that you can do to help you accumulate more wealth and offset some of these large expenses. For starters, consider turning your housing into a money-making asset. There are ways to do this, like purchasing a duplex to convert and live in or rent out a portion of. However, while doing things to decrease the size of our biggest payments, it’s also important to cut expenses where possible is essential to accumulating more net worth. As Scott Trench describes in Set for Life:
“Side jobs, side hustles, freelance work, and weekend work may expedite this accumulation phase. But the real determinate of how long this will take is your spending. Cut back on everything that doesn’t bring you happiness. Don’t’ forget to enjoy life, but understand that wasteful spending can eliminate hours or weeks of hard work. Save your way to your first real opportunities.”
When it comes to our expenses, it’s not just the big ticket items like mortgage, rent or car payments we need to consider. It’s the little things like our morning trip to the coffee shop, the weekly pizza take-out, or the impulse pints of ice cream that make their way into our shopping carts.
Like small steps lead to knocking down big goals, small expenses can quickly lead to financial burdens.
Making the effort to change simple spending habits are worth thousands of dollars. And giving up a fancy coffee in order to pay down your debt faster, decrease the interest you owe, and watch your net worth rise is a no brainer. Think about it. The typical coffee-drinker can spend as much as $1,100 a year on their habit. If you made smart choices, you could use those savings to make smarter investments in assets that actually appreciate in value.
Good habits are always worthwhile to commit to building. When we focus on improving the habits that influence our personal finances, we are taking the steps to improve behaviors that ultimately help us add to our personal bottom line and build our net worth. Don’t delay – get started on the net worth journey today.
3. Set a Goal Around your Net Worth
Once you know your net worth and track it on an ongoing basis, you can put it to work. In other words, take what you know and set educated goals for your future based on it. For instance, maybe you want to increase your net worth on a monthly basis, like Jay Papasan’s group. Or maybe you set an annual goal to grow your net worth by 5 percent. Whatever your goal may be, once you know your net worth number, you’ll be forced to ask different questions around it.
Your net worth can grow based on actions you take at each level of financial wealth. Beginners, for instance, may improve their net worth by taking a look at their top costs and reducing them or finding ways to make income off of them. Maybe you have a house payment that’s accounting for the majority of your expenses. After all, the average American spends 25 percent of their annual income on housing expenses. To decrease the amount you spend on housing, maybe you’d consider renting out a room or even letting other people stay in it, for a fee, when you’re vacationing elsewhere.
At higher levels of net worth, increasing it can be more complex. In these cases, perhaps investing in a business is the way to add to your bottom line. While this may seem almost extreme, think about it. Those who have grown their net worth to large numbers require large additions to their asset column to increase their net worth further. Wherever your net worth may be, it takes an honest look at the questions you ask around it to grow it to its full potential.
Good habits are always worthwhile to commit to building. When we focus on improving the core habits that influence our personal wealth, we are taking the steps to improve behaviors that ultimately help us to build our net worth. Don’t delay – get started on the net worth journey today.