The best ways to grow your net worth include reducing your everyday expenses, dramatically increasing your income by starting a business and investing in assets such as stocks, bonds and real estate.
You can also do smaller steps that also contribute, such as parking your emergency fund in a high-yield savings account and using cashback credit cards. It should be noted, too, that you must choose your investments carefully to maximize your return as this can vary greatly between different investment vehicles.
The idea is to own assets that can appreciate and create passive income.
Know Your Current Net Worth
Knowing your current net worth can give you an idea of if you’re doing something right or not–and if you need to step up your game.
The easiest way to calculate your net worth is to add up all of your assets and then subtract any debt you may have from your total asset value.
Common assets include:
- Investments (retirement accounts, brokerage accounts, etc.)
- Savings accounts
- Home equity
- A business
Some people choose not to include home equity as an asset because tapping into that value requires them to sell their homes, and the housing market can sometimes be tumultuous. As a result, it can be difficult to guarantee the market value of a house at any given time.
Thus, whether you decide to include your home equity as a part of your net worth is entirely a personal choice.
Common forms of debt include:
- Credit card debt
- Auto loans
- Home mortgage
- Student loans
- Personal loans
You can calculate your net worth manually, but there are plenty of tools, such as Personal Capital, that will calculate your net worth automatically in real time. It’s worth noting, though, that certain items, such as your mortgage, will not be automatically updated in Personal Capital.
Pay Off Consumer Debt
Growing your net worth will be difficult if you are tied down by consumer debt. That is especially true with debt such as credit cards and personal loans, which tend to have very high interest rates. In fact, high-interest debt is one of the main things that keeps some people from ever increasing their net worth.
Imagine the difference if you swing the pendulum the other way. Instead of paying dozens or even hundreds of dollars to lenders every month, you use that amount of money to invest in assets that give returns above the rate of inflation instead.
Over time, the difference between paying on consumer debt versus earning interest from assets becomes larger and larger. This is due to compound interest.
Cut Back on Everyday Expenses
One of the quickest ways to pay off consumer debt and “create” more money to invest is to cut back on your everyday expenses. This can come in a variety of ways, from cutting back on eating out to more drastic measures like downsizing your home.
To create the biggest impact on your net worth, consider downsizing the “big three”–your residence, transportation, and food.
Reduce the Cost of Your Residence
Depending on your living arrangement, there are lots of ways to potentially reduce your housing expenses:
- House hack by buying a duplex/triplex and live in one unit while renting out the other(s)
- Rent out extra bedrooms in your house
- Move to a smaller house or apartment
- Move into a place with roommates
- Live in an RV
- Have a dedicated office space for your business and writing it off on your taxes
- Move to a cheaper area
Reduce the Cost of Your Transportation
What kind of vehicle do you own? Do you own more than one?
Since vehicles are a depreciating asset (unless you own a classic car), there’s no reason to own more than one per adult in your household unless you’re already a multi-millionaire.
And if you’re not a multi-millionaire, there’s no reason to own a luxury car or massive SUV either. A Honda Civic can get you where you want to go just as well as a BMW. Luxury cars mean more in initial costs as well as repairs and insurance.
Again, if you want to increase your net worth, your goal is to own appreciating assets. Most vehicles don’t fall into this category. Take the money you save in not buying a luxury car and invest it.
Reduce the Cost of Your Food
How often do you eat out? Where do you eat?
Here at Blooming Wealth, we do believe in living the good life and indulging in fine dining now and then. But eating at home or at less expensive restaurants is key if you’re still working on growing your net worth into the millions.
Be selective about how often you eat out at more upscale restaurants and use that money you save to buy shares of stock in a solid company or to help seed your next business adventure. Then, down the road, you will be able to afford all of the fine dining you could want.
Start and Grow a Business
If you don’t own a business, you should. Over and over again, statistics show that you’re more likely to become wealthy. Nearly half of all US millionaires own businesses. By contrast, only 23% of millionaires work for someone else. By owning a business, you increase your chances of getting wealthy.
If you’re not sure how to start a business, or what to start it in, you can check out our articles How To Launch Your Dream Business: 6 Tips to Finally Get Your Idea Off the Ground and The Best Way to Grow a Business: Six Vital Steps For Success.
Steps to Growing Your Business
The best way to grow a business is to first create a quality product or service (or both) that serves a need. Figure out what problem you can solve and then create your business around helping people solve that problem.
The second step is to focus on building relationships, one person at a time. Whether this is online or in person, if you’re genuine in who you are and your approach, you’re bound to find loyal customers.
The third step is almost like a dirty little secret. In order to get wealthy, you must find people who are good at what they do but are willing to work at a rate that is less than what you can make from hiring them for your business, even to the point that you pay them at the lowest rate they’ll accept.
One only needs to look at Walmart as an example: Their CEO earns around $23 million per year while the average Walmart “associate” earns just 20K per year. While Walmart is a bit of an extreme example, using this form of arbitrage—paying less at the bottom so that more money gets funneled to “the top”—is the principle all successful business owners use. While this may not seem fair, it’s the reality.
It will be up to you whether you are generous or stingy in what you pay others. Either way, you still have to ensure that your business is getting more in return than what you are giving that particular employee or contractor. Otherwise, there’s no point in having them on your team.
Invest In Real Estate
Real estate investing is one of the most powerful ways to grow your net worth. Many people invest in real estate, and with good reason: people aren’t going to stop needing a place to stay anytime soon.
What’s great about choosing real estate is that you can leverage the money the bank lends you. With stocks, you would have to buy them on margin from a stockbroker in order to use OPM (other people’s money) to increase your net worth. For the average (or even above average) investor, this is much riskier than securing a loan from a bank for a piece of property.
You can grow your net worth by investing in more than your primary residence. You can invest in:
- Apartment buildings
- Duplexes and triplexes
- Parking garages
- Storage units
Just be sure to learn what to look for when buying a piece of property–read and take courses from people who have done it successfully. This holds true even if you just want to stick with your primary residence. It’s amazing how many people buy a home because they heard it’s always a “good investment,” yet they fail to learn even the basics of real estate investing.
Investing in real estate can go beyond the obvious of buying a piece of property. You can also look into renting out:
- An extra room in your home
- Space in your office
- Parking space (if you’re in an over-crowded urban area)
- An RV in an RV park (look for popular places for snowbirds)
Invest In Stocks
Stocks can get a lot of bad press and there are certainly times in history where the stock market has dropped to staggering lows. But overall, it’s going to give you the most bang for your buck–if you learn how to do it properly.
One strategy is to invest in dividend stocks. Historically, they have returned a whopping 11% per year. Many large, stable companies pay a dividend, such as Apple, Verizon, and Pfizer, and more is covered about the advantages of these types of stocks in the article Why Everyone Should Own Dividend Stocks (A Simple Guide).
The downside is that it can be a gradual accumulation of wealth so you have to have patience. Investing in dividend-paying stocks is not a get-rich scheme.
But it does work. Investing in these stocks takes advantage of compound interest which is earning interest on top of interest. It’s like starting out with a small snowball and rolling it down a hill: Your returns will start out small but they will gradually get bigger and bigger.
If you can keep buying shares of dividend stocks and reinvest the dividends into buying additional shares, and you can do this over a long period of time such as 20 years, you will be amazed at the amount of money you could eventually earn just from the dividend payments.
The problem is that most people lack patience and discipline. They want to see those big returns right away and when they don’t see it, they give up. But if you were to invest just $5,000 this year and let it sit for 20 years in a dividend-paying stock without adding any more of your money to it—but reinvesting the dividends into buying more shares—you would end up with $40,300.
Invest 10K and it would turn into about $80,600 after 20 years. Of course, you want to keep adding money to your account along the way so that your investment grows even more exponentially.
If you’re not sure how to get started, check out How To Buy Your First Dividend Stock.
Mutual Funds: Index Funds and ETFs
Mutual funds and ETFs are definitely one of the best ways to grow your net worth. While there are subtle differences between the two, both will help you grow your net worth much faster than you could if you were to simply put money in a savings account, for example.
Both mutual funds and ETFs will allow you to invest in a broad range of securities. There are some differences between the two, such as how they are traded. But, in either case, you’ll be able to take advantage of the power of the stock market.
If you’re a fan of apps such as Robinhood and M1 Finance, you will find that they will allow you to invest in ETFs, but not mutual funds. Typically, if you want to invest in a mutual fund, that would be done either in a retirement account or in a taxable brokerage account with a company such as Vanguard or Fidelity.
Whether you decide to invest in an ETF or a mutual fund, you are taking an important step toward growing your net worth.
Invest In Bonds
Bonds are a type of debt instrument issued by either a corporation or the government. You can use this debt to grow your own net worth.
By investing in a bond, you help this entity finance a project in return for steady interest payments over a fixed period of time. Once that time period is up, you get your initial investment back. (The exception to this set-up are zero-coupon bonds, which don’t pay interest but are sold below its face value. In other words, it’s like getting a discount off of the original price.)
The Three Types of Bonds
Corporate: These are issued by corporations to raise money. They pay higher interest rates but the earnings are taxed at both the state and federal level.
Municipal: These are issued by local governments. The interest rate is less than what you would get through corporate bonds but since they are issued by your city or state government, they’re considered safer. The earnings from these bonds are exempt from federal taxes and, if you buy bonds from your home state, they will be exempt from state and city taxes as well.
Treasury: These are issued by the federal government. The interest rates are lower than corporate bonds, which means you would earn less per bond, but these are backed by the US government so they are considered virtually risk-free. You will, however, pay federal taxes on the interest earned but no city or state taxes.
The Complexity of Bonds
Bonds can actually be a little more complex than dividend stocks so you would definitely want to read more about them than what’s provided here should you want to invest. But if you pick the right bonds, they are almost a guaranteed return. Plus, most financial advisors recommend investing more heavily into bonds as you get closer to your golden years.
But since bonds can be more complex to invest in, including needing at least 5K to invest in most of them, you might consider looking at a bond fund. Also, if you have a mutual fund, you most likely already have a portion of your money invested in bonds.
Bonds are typically less risky than investing in stocks but they also historically return less. Since 1926, long-term government bonds have returned 5 to 6% versus 10% for large-cap stocks.
The 5 to 6% rate of return outpaces historical rates of inflation but, currently, the rate of return on most bonds returns a rate that is right around the rate of inflation or even below it.
The other tricky aspect of bonds is that you often need 5K or more as a minimum initial deposit with a broker. You can, however, invest in bond funds for as little as $100. Bond funds diversify by investing in a variety of bonds which also helps minimize risk.
Also, there are mutual funds that can have a certain percentage of their holdings in bonds. In fact, if you have a mutual fund through your IRA or 401(k), it is quite likely that you are already invested in bonds.
Because understanding bonds can be a bit complicated, choosing a mutual fund that invests in both stocks and bonds is a much easier and less risky route. You don’t have to choose individual bonds or even bond funds and can leave it to your mutual fund manager to do it for you.
Choose High-Interest Savings Accounts
High-interest savings accounts are a “quick win” that virtually everyone should be using today. While they certainly won’t grow your net worth all that much, they can usually be opened in a matter of minutes.
What are high-interest savings accounts? If you aren’t familiar, dozens and dozens of banks have them now and the number is only increasing. Traditionally, brick-and-mortar banks would give people a fraction of a percent–0.1% of even lower–to bank their money in a savings account.
Modern Savings Accounts That Pay You More
Today, many banks–most of them partly or entirely online–are giving people in the range of 1.5% to 2.5% interest on their savings accounts. These rates vary from bank to bank and they also vary based on the interest rates set by the Fed.
But putting your money in one of these accounts is helpful because not only do you earn a lot more on your money, but the interest rate also acts as an inflation hedge. In other words, the percentage is close to the rate of inflation, so your money doesn’t lose purchasing power. That can’t be said for money sitting in a savings account earning 0.01% interest!
Plus, these accounts often have no monthly fees and are FDIC-insured for $250,000. Sometimes, they’ll even be insured up to $1 million.
Use the Right Cash-Back Credit Cards
There are many differences between the habits and decisions of the affluent and the middle class and poor and how each uses a credit card is one of the differences.
Middle class and poor people use credit cards as a temporary loan to pay for things. Sometimes these things are essential and sometimes they’re not, but there is often a balance that carries over to the next month. In other words, it’s a tool that is used to create debt.
The affluent, however, use credit cards to earn a percentage back on any purchases they make and pay off the balance each month. It’s in this sense that you can use credit cards to grow your net worth, too.
Credit Cards That Give You Cash
What you’re looking for is a card that gives you cash back—not airline miles, not gift cards, but cold hard cash that you can apply straight to the balance of your card or have deposited into your bank account. Why? Because cash is king.
You can’t pay a medical or electric bill with airline miles or gift cards. But money in your bank account or a reduction on your current credit card statement? That works every time.
When it comes to the cash back, you want one that pays you at least 1.5% on all purchases. Forget the cards that give you a higher percentage but only on select purchases or cards that offer cash-back at a lower rate.
Our biggest expenses are usually our rent or mortgage payments and the type of cards that offer discounts on select purchases never include these two types of expenses. They also never cover ongoing expenses such as utility and cell phone bills.
To best use your cash-back credit card to contribute to your net worth, you’ll want to set up your ongoing bills to be charged to your card so you’ll want to choose a card that gives you money back for any type of expense.
Save Big on Taxes
Savings on taxes can contribute greatly to your net worth. Why give the government any more money than you have to?
Always be a business owner
Owning a business allows you to take advantage of deductions and reduce your overall liability.
Always hire a tax professional
Even if you own a small business, you will still want a professional doing your taxes for you. A good CPA will always find ways to legally save you thousands each year.
Max out your IRA
As a business owner, you will be funding your own retirement. Whether you have a Roth or a SEP, take advantage of the tax breaks by contributing as much as you’re allowed each year.
Open up an HSA
An HSA is the only type of account in existence in the U.S. that is never taxed. Unfortunately, you can only have one if you have If you an HDHP (high deductible health plan). If you do, then you need to open one immediately and start contributing as much as you can. The money rolls over each year so there’s no worry of losing what you’ve contributed.
Move to a no-tax state
State taxes can take a big bite out of your net worth over time. Choosing to live in one of these no income tax states–Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming–can put more money in your pocket.