Increase Your Net Worth With This Simple Strategy
Updated: Feb 27, 2020
Big picture, you can improve your net worth in three ways:
1. Spend less
2. Earn more
3. Invest what's left
It's that simple. In the coming months, I plan to go into more detail on specific tactics for each of the 3 ways on this blog.
However, none of that matters until you have an easy system in place to track what your real-time net worth is.
“You can’t manage what you don’t measure” — Peter Drucker
If I asked you right now what your net worth is, could you tell me in less than 2 minutes? If not, you're missing out. It's completely free and easy to set up real-time net worth tracking with Mint.com. I'll explain how in a bit, but first I want to go over the two common mistakes people make with personal finance...
Two Common Mistakes with Personal Finance
Mistake #1: Getting stuck in the weeds with anal-retentive detailed budgets
This is the person who treats his personal finance like a corporate finance department. He has a line item budget for every single expense type in his life. This person tends to get stuck in the weeds so much that he misses the forest for the trees. His line items budgets leave no room for spontaneity in his life for fun or investing in himself.
For example, maybe he is so concerned about reducing his eating out cost that he neglects building relationships that could help him earn more income. Or maybe he is so focussed on keeping his health membership cost down he stays out of shape and unable to generate the energy to acquire mass wealth.
Mistake #2: Winging it
This is the person who just wings their personal finance and relies on a salary and gut instinct. This person has no wealth goals, or even knowledge of where they stand. This person is a true wage slave. Even if he’s earning $1,000,000 a year, he will figure out a way to self-destruct and blow the money on stupid things.
Put first things, first. Track your real-time net worth.
Tracking Your Net Worth allows you to have one simple, clear measurement to focus on.
After you set this up with Mint.com for free (see below), it requires virtually zero work to track besides fixing the occasional bank feed. You don’t need to worry about spending painful hours categorizing expenses and guilting yourself out over your spending history.
There’s no guilt in your Net Worth metric because you can improve it by boosting your income, reducing your expenses or investing in assets.
Once you know “your number," you can then come up with a goal. Once you have a goal, you will get addicted to watching it go up on graphs. You will figure out specific ways how to boost "your number" instead of short-sighted ways like forgoing that vacation you've wanted to go on or refusing to eat out.
Step 1: Track Your Real Time Net Worth
Mint.com allows you to track your net worth for free in real-time.
Step 1: Sign up for Mint.com
Step 2: Connect every single asset you own including a Zestimate for your house, your car’s blue book value, your boat, bank accounts, crypto, REITs, stock accounts, etc.
Step 3: Connect every debt account you own including college loans, credit cards, and real estate loans.
Step 4: Go to the trends tab and click on the “Net Worth” graph.
Step 5: Revisit Mint.com on the same day each month to reduce fluctuations due to timing of your big expenses and paycheck deposits.
Step 2: Set a Monthly Net Worth Goal
One you actually know your net worth, you can set a goal for what you want it to be each month. From there you can come up with a plan on how to get there: Earn more, spend less, or invest more. Of course, the investing side isn't directly within your control, but you can make a conservative estimate.
Bonus Step: Track Your Liquid Net Worth
After you’ve gotten into a good rhythm of checking your net worth, now its time to focus on your liquid net worth.
Liquid Net Worth = Your bank account balances minus Your credit card balances.
This metric allows you to see the Net worth that is directly within your control by income generation and expense reduction. For example, if much of your net worth is in the stock market (which you can’t control) you don’t want to rely on your net worth metric to judge progress.
Once you are advanced, you should focus more on this metric since it accounts for the investment side which you don't have control over.
"You can't change the waves, but you can learn to control your board." - Unknown