Understanding your net worth may be the most important aspect of living a financially sustainable life. Far too often we are concerned with the amount of money we have available in our bank account, without fully understanding what makes us financially healthy. It’s not only about your liquid assets, but the intangible ones as well. Especially when you consider investments that earn you compound interest, which might be the greatest financial phenomena of all time.
To put it simply, your net worth is the summation of all of our assets less the summation of all of your liabilities. Think of it as your own personal balance sheet. Considering a good portion of the United States has a net worth in the negative territory, it’s fair to say that most could use some tips on how to improve their finances.
Focus on Your Liabilities
Reducing the amount of debt you carry means looking at cutting out any liabilities. A good option for reducing debt is refinancing high-interest loans or credit cards. A lower interest rate means you can pay off the commitment even faster. By saving money on student loans, the extra funds can be used to pay down credit card debt. When it comes to credit cards, take advantage of balance transfer 0% APR offer to pay off debt faster.
Review Your Assets
Once you’ve gotten a handle on your liabilities and debt, take a look at everything you own. Your primary residence, vacation home, rental property, investments, and collectibles should all be included. If you have a mortgage on your home, you are slowly building equity with each payment you make, as the home value continues to rise and the mortgage balance slowly falls. This might even provide motivation to increase your monthly mortgage payment.
Strive to Pay Off Your Mortgage
Making bi-weekly payments on your mortgage is one of the best ways to increase your net worth. It increases your mortgage pay-off rate, which means every two weeks, your equity is rising. Be careful with this, though — make sure a prepayment penalty will not apply. Some lenders can charge a steep fee if you repay the loan too much ahead of schedule. Consult your lender to see if any prepayment penalties are associated with your mortgage. If there are no penalties with paying it off early, pay as much as possible while still saving for your emergency fund.
Review Annual Costs
Are there any annual costs that could be bringing your net worth down? Insurance and healthcare premiums are two of the biggest culprits of fixed costs that are often on the rise. Call your insurance company to see about negotiating your rates, or discounts available for bundling premiums together. A 10 minute call could translate into significant monthly savings.
You could save money on your monthly bills by renegotiating rates in the same way. Cable and internet bills can often be renegotiated at a lower rate once the introductory period is up. Take advantage of the fact that many companies want to retain you as a customer, even at a lower price than you were paying. There are companies out there dedicated to saving consumers money from these types of traditional expenses. They typically take a cut of the savings, however, so it’s usually best to see what luck you have calling on your own.
Invest Wisely
Investing can be a great way to increase your net worth if you follow the market. Liquid investments should fall into four categories — cash, income, growth, and alternative income. Try to invest in opportunities that fall into one of these four categories. Increasing your net worth through investing requires a solid strategy. You should understand the inherent risks associated with an investment, too.
