Our net worth is an important financial number. It’s the value of our assets (things that increase in value) subtracted from our liabilities (expenses and debts we owe). The higher our net worth, the more financial security we have. Increasing our financial security gives us more freedom to do the things we love and live the life we desire. It means we can retire from our jobs early or work fewer hours if we want. We can spend each day doing what we love and can easily sell our assets to generate more revenue and money if needed. Because I want this level of freedom in my life, increasing my net worth is a continuous goal. Here are the 3 ways I’m doing that:
1. Investing money in my retirement account. As a physician who is employed by a large academic institution, I have the option to invest in employer-sponsored retirement accounts. Since I work for a non-profit hospital, I have access to a 403b which is quite similar to a 401K. Through this type of retirement account, I can invest money for the future which increases my net worth. Each month I put 10% of my income into my work 403b and invest the money in this account in index mutual funds, which are low cost funds that purchase a variety of stocks and bonds. Money in these index funds earn an average return of 8% per year. This means that each year I invest money, I earn about an 8% profit on my investment and that interest compounds each year as I continue to contribute money in the account. With an average interest rate of 8% per year, my money increases in value annually and doubles every 9 years. Putting pre-tax money from my salary into retirement accounts that are invested in low cost index mutual funds is one of the best ways I increase my net worth each year. The fact that these investment contributions also save me money in taxes each year is a bonus.
2. Paying down debt, early. Most adults have some form of debt, whether it’s a credit card balance, car loan, or home mortgage. This debt is a liability that subtracts from our net worth. Although many of us are fiscally responsible and pay a portion of the debt down each month, one of the things that has increased my net worth even more over recent years is paying the debt down sooner than required. In other words, instead of making the minimum payment, I pay more than what is required each month. Simply paying the minimum will cause me to pay extra fees in the form of interest and takes away money I could be using to invest or spend on other things. Paying more than the minimum each month, and eventually paying off the debt early, decreases my liabilities. As I mentioned earlier, decreasing liabilities increases my net worth.
3. Saving money in a separate account. One of the major ways I increase my net worth is by saving money. Although it’s sounds simple, it’s easier said than done. I’ve learned that unless I’m intentional about saving money, I’ll inevitably buy extra clothes or shoes I don’t need and find myself wondering why my bank account balance is near zero at the end of the month. One way I avoid overspending, is by saving money in a separate banking account. I have a certain “savings goal” each month and to ensure that I achieve that goal, I have a certain percentage of my paycheck that is automatically deposited into a separate account on the first of each month. Since this account isn’t connected to my debit card or credit card, it’s almost impossible for me to spend. Since I can’t spend it, I save it, and as a result, the value of my savings increases each month. As my savings increases, my net worth increases.
Although each person is different and may have various other financial priorities, we can all increase our net worth through at least one of these ways. Tell me, which method have you chosen to focus on to increase your net worth?