How to increase your net worth – a short guide
Whilst gross domestic product, unemployment numbers, and inflation are key indicators of the state of a nation’s economy, your net worth is the key yardstick of your overall financial health.
So, do you know what your net worth is?
And how can you increase it?
This article provides valuable insights if you are seeking guidance on how to increase your net worth or simply want to improve your understanding of the topic.
Key points
Here is what you will learn in this article:
- Understanding and calculating your net worth
- Setting goals to increase it over time
- The different ways to grow your wealth
- Managing and reducing liabilities effectively
- How to measure and track your financial progress
Lets’s start by providing a quick definition of net worth.
What is net worth?
The simple definition is your assets minus your liabilities. Simply put, it is an accurate calculation of your true wealth.
Having a great salary, lots of assets, and an expensive home may sound appealing. Your net worth, however, is what you would have left if you were to sell everything and pay off all your debts.
What would be left?
Does that amount get larger every year?
And how does it look when you throw inflation into the mix?
How is it calculated?
The first thing to do when calculating your net worth is to add up all your assets.
This would include the value of any properties you may have, pensions, savings and investments, businesses, shares, vehicles, and anything else of value.
The next step would be to make a list of all your debts.
This would include:
- Mortgages
- Student loans
- Personal and car loans
- Taxes owed
- Credit cards
- Maintenance payments
Subtract your debts from your assets, and you will have your true figure.
Setting goals to help increase your net worth
If you had a good understanding of this figure today, you could set objectives for how you wanted it to grow over time. However, focusing solely on earnings and assets and how they may have grown over time is a flawed but common method of measuring financial progress.
If your liabilities were to grow at the same pace as your assets, your net worth would be static.
So what’s the solution?
Setting financial goals, and targets is a solid way of measuring your progress over time – whether that’s paying off debt, or making regular investments.
How do you increase it?
One way to help build wealth and increase your net worth is to purchase assets that are likely to grow in value and out-pace inflation.
Although all have associated risks, investing in stocks and shares, equities, commodities, and property is a good way to increase your wealth while hedging against inflation.
Avoid purchasing or investing in depreciating assets or assets that don’t keep pace with inflation, such as:
- Expensive clothes
- Designer shoes
- Vehicles
- Poor -return deposit accounts
These are surefire ways of taking you away from your goal of increasing your net worth.
Once you have a plan to increase it, it would be wise to look at ways to preserve your assets, property, and wealth.
The different ways to grow your net worth
Now that we are at the halfway point of this article, you should have a good understanding of:
- What net worth is
- How it is calculated
- Why setting goals matters
Now let’s take a look at the different ways to increase your net worth:
- Investing in long term appreciating assets
- Contributing to a pension & benefit from the tax incentives
- Prioritising paying off high-interest short term debt
- Diversifying your investment portfolio & managing risk
- Opening an ISA and investing regularly
- Using automated savings apps to save passively
- Considering starting a ‘side hustle’ from home
- Reducing unnecessary expenses and reviewing your budget
- Consistently reinvesting dividends and investment returns
- Investing for the long term and being patient
- Purchasing a buy to let property
- Working with a wealth planner to access expert advice
- Monitoring and adjusting your budget regularly
- Investing in personal development to improve your earning potential
- Investing in a VCT or EIS (higher risk investments require caution)
- Conducting careful tax and estate planning
- Taking out income protection and critical illness cover
As you can see, many ways to grow your net wealth exist.
But where do you start?
That’s why working with an expert wealth planner is a worthwhile investment.
They will develop an understanding of your goals, current income, assets, and liabilities and will formulate a wealth plan to help to achieve your objectives
Financial progress
A lot of us measure financial progress by the value of our home.
But a home needs maintenance, and maintenance means money.
Factor inflation and mortgage interest into this, and the value of your home may not be growing quite as quickly as imagined.
Homes aren’t bulletproof either, as the credit crunch of 2008 and subsequent slide in property values indicated.
This same principle applies to all the assets you may have.
Calculating your financial progress honestly and accurately is so important to thoroughly understand your overall net financial worth.
Measure your progress
Measuring progress lets you see whether you’ve made a dent, are at a standstill or have fallen behind.
This information is useful in helping you understand where you are versus where you need to be.
Working with a financial adviser may be the best option if you’re serious about making progress.
Ask them to help you increase your net worth and share the responsibility with them.
Looking to increase your net worth?
While you can use these tips to start building your wealth, you’re likely a busy individual with limited time available. At Sterling & Law, we offer a dedicated wealth management service.
For a complimentary consultation, call us today on 020 3740 5856 to start the process.
Article FAQs
Please find below some questions and answers covering the topics raised in this article.
At what net worth do I need a wealth manager?
It is very much a personal choice. Those with significant wealth will benefit from working with a wealth manager as they can advise on reducing tax, and maintaining their financial position. On the other hand, if you are at the start of your wealth-building journey, they can help you form a plan, and advise on where to invest your money.
Related reading: At what net worth do I need a wealth manager?
What investments are most effective for increasing my net worth?
These typically include investment funds, ISAs, property, and pensions.
Diversifying investments can reduce risk while optimising the potential for growth over time. Lastly, Venture Capital Trusts, or Enterprise Investment Schemes are options for high net worth individuals. However, they are riskier investments, so always get professional advice and act with caution.
How do you increase it while balancing the need for liquidity and cash flow?
Increasing net worth while maintaining liquidity involves diversifying investments, and keeping a portion of assets easily accessible – such as cash. Furthermore, consider planning for short-term and long-term financial goals to ensure your wealth and cash flow needs are met.
How is net worth calculated, and what items are included or excluded?
Net worth is calculated by subtracting total liabilities (what you owe) from total assets (what you own). To summarise, assets include cash, investments, and property. On the other hand, liabilities encompass loans, debts, and other financial obligations. In terms of what’s excluded, personal possessions aren’t often included, unless you have collected valuable antiques and art.
Can increasing your net worth have tax implications, and how can you reduce them?
Yes, increasing your net worth can lead to tax implications. This can include capital gains and inheritance tax. Looking at tax-efficient investments (pensions and ISAs) and careful estate planning can help to reduce and avoid unnecessary taxes. Consider speaking to an experienced financial planner about how to plan for, manage, and reduce taxes. Furthermore, careful inheritance tax planning can help to avoid unnecessary taxes.
What role does debt management play in increasing your net worth?
Effective debt management is crucial for increasing net worth. It involves prioritising high-interest debt repayment, refinancing existing debts to lower interest rates, and avoiding new debts. As a result, by managing and reducing your debt, you increase your to invest and grow your wealth.
What are the different ways to build wealth?
To build wealth, you could consider investing in stocks, contributing to pension schemes like a personal pension or a SIPP, and diversifying into property. Furthermore, save consistently and cut back on unnecessary expenses. Lastly, focus on long-term financial goals to ensure steady growth.
Please note, that the above responses are an illustration of your options and don’t constitute financial advice.
If today’s article has given you food for thought, and you would like to speak to a wealth manager, call us on the number below.
