In the fall of 2014, I made a really dumb financial decision…
My girlfriend (now wife) was finishing up her Doctorate in Physical Therapy, I was a brand new Assistant Athletic Director and in my mind – life couldn't get much better.
It was at the pivotal point that I decided purchasing a brand new $40,000 truck would be a great idea…
Little did I know that my already struggling finances would be put in jeopardy considering I now had:
- A $40,000 truck
- Mortgage on townhome
- Soon to be, another mortgage on a property
- Over $12,000 in student loans
- A personal loan
- No money for a ring
- I was less than 24 months from being married
- A soon to be wife with close to $300,000 in student loans
All this to say that when we tied the knot in the summer of 2016 because of some of my financial decisions and Lauren's massive student loan balance – our combined net worth was negative.
Like a negative $100,000+ net worth!
But why am I sharing this with you?
Well, as of today, I can say we now have a net worth that is over $200,000. And after increasing our net worth over $300,000 in under five years, we have learned a few things.
Here is how you can increase your net worth this year!
First, what is your net worth?
I won't lie, I had heard the term net worth before, but I really didn't know much about it, nor was I even concerned about it until around 2016/2017.
By definition, your net worth is what you own (assets) compared to what you owe (debt). So if you owe $50,000 in debt, and you have $60,000 in cash/investments, you would have a net worth of $10,000.
Typical assets include:
- Home (Market Value)
- Investments (Retirement, 401k, Stocks, etc)
- Insurance Policies
- Cash in accounts
- Personal property like jewelry or art
Typical liabilities include:
- Mortgage debt
- Auto debt
- Student debt
- Credit card debt
- Other debts (Lines of credit, anything financed)
For us, in 2015 our biggest issue was student loan debt and mortgage debt. Granted our house value exceeded what we owed, aka we had some equity, overall our net worth was negative.
With close to half a million in total debt and only around $300,000 in assets (Primarily from our Zillow home value estimate), we knew the student loans had to go.
So we just started attacking our student loan principal, adjusted our lifestyle and started focusing on getting out of debt. We managed to pay off $180,000 worth of student loans in a three year period.
But the coolest thing was all along… we were increasing our net worth!
We didn't really even know it, but our two main goals;
- To be worth zero
- To pay off all student loans
Were going to eventually help us increase our net worth $300,000.
Here are some of the steps we took to increase our net worth and ideas to help you do the same!
Related: What is the Net Worth of the Average American Family?
How to Increase Your Net Worth in 5 Steps
Listed below you will find some of the steps we took, readers took, or what financial experts highly recommend to increase your net worth. At the end I will share my feelings on each, but here is what I will say in general:
Whatever you decide to do, increasing your net worth is important, so congrats to you for caring enough to make things happen!
On another note, be sure use apps like Personal Capital to accurately track your net worth! They offer a free net worth tracking tool that tracks your assets, investments, liabilities and even your home's value!
1. Pay off bad debt, actually all debt.
The first step to increase your net worth is to either increase your assets or decrease your liabilities. In most cases, I go with the latter first.
Reason being is you can notch some quick wins on your belt and really get your net worth moving in the right direction by knocking out some small debts.
This has been go-to for over four years now – Pay Off Debt! We started by taking baby steps:
- Pay off Josh's car – $200 cash freed up
- Pay off two of Lauren's student loans – $650 cash freed up
- Pay off Josh's student loan – $350 freed up each month
- Pay off Lauren's car – $300 freed up each month
- Pay off all of Lauren's undergrad loans – $600 freed up
- Refinance grad school loans – new payment only $650.
As you can see, each time we paid off some debt we freed up more discretionary income to place where we wanted… but we also increased our net worth by decreasing our liabilities!
(Keep in mind some of these steps took months to complete and over a span of four years we dropped our debt down over $200,000)
[Investopedia – How to Pay Off Your Student Loans – See #6]
Debt or Invest?
This question stumps many people looking to increase their net worth and grow their wealth.
There is no easy answer – it really does depend!
Depending on where you're at with your debt, I would start by rapidly decreasing consumer debt. Once you decrease any consumer debt, then reasses to increase you net worth the most efficent way which may or may not mean foucsing on debt.
Based on rates, if your debt isn't too high, investing might be the best move.
As a rule of thumb, if your debt to income ratio is not under 25% you should really be focusing on your debt first!
2. Invest in retirement accounts & stock index funds.
Go ahead and start maxing out those retirement accounts… letting your money grow for you! Which is one of the quickest ways to increase your networth!!
Start by taking advantage of your employer's retirement programs, especially if they match! As we got our student loan debt in order, we were able to roll our raises into retirement accounts to help increase our net worth.
Here are the contribution limits for the different types of employer-sponsored retirement accounts:
|Account Type (Individual):||Max Contribution (2020):|
|401K, 403B, 457 Plan||$19,500|
|Stock Index Funds||Whatever you want 🙂|
Hypothetically, if you're able to max out your IRA, 401K, and HSA, you're investing $29,000 per year or over $2,000 per month.
At that rate you would hit a net worth of $100,000 in less than three years, not factoring any growth from interest!
Another option is to put money in the market, which requires a great deal of expertise. Stock market investing in individual companies can be considered legal gambling, depending on your expertise.
However, a safe and low-cost bet is to invest in mutual funds. Start with a simple Vanguard account and invest in their S&P 500 ETF. You can also use some of the options below!
Investment tools worth considering for your use:
If you happen to be the person who wants to increase their net worth but isn't so sure about investments just yet, simply start by saving some cash!
3. Save some cash.
Your goal for saving money should be at least 15% of your net income.
Ideally, you should hope to get to a 25% savings rate in the near future, but all this depends on where you're at currently.
If you're saving 1% of your net income, then jumping to 15%, let alone 25%, is a stretch. However, you can set a goal to save more each month.
[See: How Much Should You Have Saved by Age?]
For starters, one option is to simply create an emergency fund if you don't have one already that houses 3-6 months' worth of fixed expenses. You never know when you might need some money!
Like when you're dog decides to eat chocolate and you get a $4,000 vet bill – well you have an emergency fund for that! But not only is your emergency fund handy for emergency situations, it will also increase your net worth.
Simply stashing your cash will help increase your net worth! Set a goal to set aside at least $10,000 in cash in a savings account and work to increase your savings goal (or investing) 1% each month for a year straight!
4. Create additional income streams
So far we have established three key ways to increase your net worth (Which we have personally used):
- Pay off debt
- Invest in your retirement accounts or stock index funds
- Save some cash
If you invest $12,000 per year, pay off $12,000 in debt and save just $1,000 – you can increase your overall net worth $100,000 in four years (Give or take accounting for interest).
That being said, what is the quickest way to increase your net worth?
Do more of each! Which also means making more money!
Something the “Experts” forget to mention when talking about money is the whole making more part.
Conventional wisdom says work harder or get a part-time job, but the list of ways to make money on the side is growing.
Here are some ideas to help you make more money and simultaneously increase your net worth!
5. Pay extra on your mortgage.
A little known fact we all forget is that that amortization on our mortgage is a killer! Like $300,000 houses end up costing $550,000ish over 30 years killer!
On the other hand, the #1 asset for most people is…. THEIR HOME!
So since our houses are typically are the biggest assets, one way to effectively increase your net worth is to actually pay extra on your home!
And it doesn't have to be much either…
Simply divide your monthly payment by 12. Take that number and pay it towards your principal as extra each month.
For example, a monthly payment of $1,200 would mean you make an extra payment each month towards principal of $100.
Paying an extra payment each year can shave a few yeards of your 30 year term and save you $1,000's in interest!
Just paying a few hundred dollars extra each year will help increase the equity in your home, which in turn, increases your net worth!
Final word on increasing your net worth:
At the end of the day, whether you're the person who wants to pay off your debt or the person who wants to invest, it doesn't matter.
Both will help you increase your net worth. By decreasing your debt (liabilities) you're inherently increasing your networth. Just like if you increase your savings or investments, you are increasing your assets.
While there are many debates as to which way is best to increase your net worth:
- Pay off debt, then invest
- Invest, pay minimums on debt
- Do a little of both
What I personally believe is do what is right for your situation. For us, decreasing the debilitating student loan debt we owed was going to help us both short term, long term, and with our financial stress.
However, there are countless net worth winners out there who paid minimums on their debt and dropped every extra dollar into making more money (investing).
Ultimately, the choice is yours, just be sure to track using an app like Personal Capital and stay steady! You got this, my friend!
Final Question on Net Worth: How much has your net worth grown over the last two years?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $200,000 in student loans with his wife in less than four years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post and more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their chocolate lab named Morgan, working out, helping others with their debt and recommend using Personal Capital to track your finances.