Can you really turn your financial life around? If you are like most people, your…
What is Net Worth?
Net worth is assets minus liabilities. Simply put, it is what you owe subtracted from what you own. An asset is anything of value or a resource of value that can be converted into cash, while a liability is money you owe to another person or institution that must be paid. One is said to have a negative net worth when one’s liabilities exceed one’s assets. Financial experts explain that either the person’s liabilities increased over time as that person racks up more debts, or the person’s assets declined in value. Our goal on the path to financial freedom is to avoid a negative net worth and to keep increasing our net worth.
How Does One Increase Net Worth?
In simple terms, one increases one’s net worth by increasing what one owns and decreasing what one owes. Four major means of generating incomes (increasing what you own) is called ‘Cash Flow Quadrant’.
Cash Flow Quadrant
- Employee (E). You work at a job, earn salary and benefits that tend to be more secure than business income or investment income.
- Self-Employed (S). You work for yourself not for an organization; you are your own boss.
- Business System (B). You own a business that can run with and sometimes without you; it is a self-functioning entity.
- Financial Investments (I). Your money works for you through your investments that generate ongoing income.
- Kiyosaki puts the cash flow quadrant in simple terms: E = you have a job; S = you own a job; B = you own a system, and people work for you; I = money works for you.
The best part of the four income quadrants (ESBI) above is that you are not restricted to one source of income. For instance, you can generate income from employment and investments simultaneously by working at a job (E) and investing (I) part of your salary. By doing that, your money works for you even as you work for someone else. This is called ‘multiple streams of income’ (not putting your eggs in one basket).
Increasing Your Value
A powerful tool to increase your net worth is to increase your value by increasing how you exchange time for money. Yes, the money you earn on the job is in exchange for the value you add with your time. The more value attached to you, the higher you earn. The goal is to have a good income to afford a high standard of living and be the master of your economic destiny. Here are few strategies to increase your value:
- Contribution is the Key: To earn more on your job, you must increase your value and contribution to your employer.
- Add Value Every Day: Continue to find ways to either maintain or increase your value in the modern competitive marketplace.
- Make your Knowledge and Education Useful: Money spent on education is a sunk cost one cannot get back, unless one can use such knowledge and education to add value. No employer owes you any obligations for employment.
Six Simple Ways to Increase Your Net Worth
- Increase Your Assets: Since net worth is what you owe subtracted from what you own, a simple way to increase your net worth is by increasing what you own (your asset), such as houses or piece of real estate, investments such as stocks, bonds, mutual funds; collectibles such as Art, jewelry, antiques. Get a clear idea of your net worth and determine if your assets are appreciating or depreciating.
- Decrease Your Liabilities and Pay off Debts: Reducing debt means increasing your net worth. Review all your liabilities and try to reduce or eliminate them entirely. Your liabilities may include loans, credit card debts, mortgages, etc.
- Increase Your Income: Try getting multiple streams of income (active and passive incomes).
- Reduce Expenses: The less money you spend, the more you are accumulating in net worth. Review your current expenses and see if there are areas you can cut back.
- Invest Your Income: Invest your money, where it can grow by compound interest, such as real estates, stocks, bonds, mutual funds, commodities, cryptocurrencies, etc.
- Maximize Retirement Contributions. Retirement contributions can defer your taxable income because they are deducted before taxes. It also boosts your available assets. If your employer offers a retirement plan, start contributing towards one, else you can open one on your own.
The Bottom Line
There’s no one strategy to increasing one’s net worth. Depending on your situation and circumstances, it can be a combination of various strategies. However, by employing the right strategies, you can put yourself firmly on the path to financial freedom through a higher net worth.