How to Build Your Net Worth

Do you feel like you can't seem to get ahead with your finances? Do you feel that no matter how hard you work, how many hours you put in, how much money you earn, you're just spinning your wheels? Maybe you need to change your mindset about your finances.

According to Bryan Hawker, there are two mentalities when it comes to net worth: the paycheck mentality and the net worth mentality. Someone with a paycheck mentality just tries to increase their income to increase their wealth. A person with net worth mentality, on the other hand, tries to increase their income but also increase net worth through saving and smart investing. The net worth mentality seems to be the obvious path to wealth and yet too many people are stuck in the paycheck mentality.

The Benefits of  Net Worth Mentality

• The paycheck mentality is fragile whereas the net worth mentality is more stable. Life is great when you have a steady check coming in. But what happens if you get laid off from your job? If you're living paycheck to paycheck, you will find yourself in a bind. This is why the paycheck mentality makes you fragile, because income is something you don't  have complete control over and can be taken away at any moment. A net worth mentality makes your finances more stable says Bryan Hawker. You have financials resources outside your weekly paycheck so you can bounce back if setbacks happen.
• Wealth continues growing even when you're not working. If you want to increase your income you have to either 1) work more hours or 2) provide more value to your employer or client in other ways. On the other hand, increasing your wealth doesn't require you to do either of those things. You simply need to save more to increase your assets. If you do this long enough, at a certain point your money starts working for you instead of you working for it.  Thanks to the power of compound interest, your wealth will grow whether you work or not.
• Using a two-pronged approach builds your wealth quicker. As you strive to become financially secure, focusing on increasing your income alone is a less effective strategy. If you work on building your net worth as well, you will grow your wealth faster.

How to Calculate Your Net Worth

Calculating your net worth is straight forward. Bryan Hawker states that you simply add up all of your money and assets like home, vehicles, etc. then subtract your debt. That's your net worth!

How to Begin Increasing Your Net Worth

To increase your net worth you just need to pay off your debt, save more and earn more. This is sometimes easier said than done. You really need to think long term when it comes to your finances to switch from paycheck to net worth mentality. If you keep at it and do it consistently, over time you will gradually see your net worth grow.

Be Frugal. The easiest way to increase your wealth is to spend less than you earn. You may not be able to control your income, but you can control how much you save. So if your boss can't give you a raise this year, start saving more by cutting back on spending. Bryan Hawker says it's easier to reduce your spending than to try to increase your income.  So every dollar you don't spend could be put towards saving or investing.

Start an Emergency Fund. Focusing on a long term goal such as creating net worth of a million dollars may be so daunting that you'll give up before you start. You need to break it down into manageable sub-goals. Your first sub-goal should be to create an emergency fund. An emergency fund is for unexpected setbacks in life. Rather than turning to credit cards, you should use your emergency fund to fall back on. Bryan recommends that you create a $1,000 emergency fund before you start paying your debt. This will enable you to have a cushion for emergency expenses. Yes it will require some sacrifice and hustle but if you want it bad enough you can do it.

Pay off Your Debt. Another simple way to increase your overall net worth is by eliminating debt from your balance sheets says Bryan Hawker. Look for ways to budget better, save more and pay down that nut. It will require some sacrifice but in the long run you will be better off. It may seem impossible to get out of debt, but if you are frugal and funnel any extra money into debt eventually you will be back in the black.

Start Investing in Index Funds. After you wipe out that debt, focus on increasing your net worth through investing.

Start investing in index funds. Once you demolish your debt, start focusing on increasing your net worth through investing. When investing for wealth, you need to start thinking long-term. Don't think that you can make a quick buck through day-trading.  That type of investing is risky and requires a lot of know-how. It would be wiser to focus on index funds to invest it. This is what a lot of wealthy individuals do and has proven to be less risky and more lucrative long term. Research has shown that index funds generally outperform actively managed funds and cost less in fees. You can compound your tax savings by holding these funds in a retirement account like 401K or IRA.

In summary, Bryan Hawker says if you follow the above guidelines you will have a more secure future and eventually an amazing net worth.

[ Source: The Art of Manliness ]

Reading a net worth estimate

An ownership interest in a private company is different from cash in a bank account. Its estimated value depends on the method, ownership terms, and date used. A useful summary shows those assumptions separately so readers can tell how much of the total depends on estimates.

Read the blog for more on this topic, or get in touch with a question.

How valuations affect net worth

Consider two assets with the same estimated value: cash and a private business interest. The cash balance can usually be checked directly, while the business interest may depend on earnings, ownership rights, and what a buyer would pay. Recording those assumptions separately helps explain how much confidence to place in the total.

Review liabilities as of the same date as the assets. If a property estimate rises while the mortgage falls, both changes affect net worth, but for different reasons. Recording the source of each change makes it easier to compare one period with the next.

Recording a range for uncertain values

When a private holding is difficult to value, show a low and high estimate alongside the date and method used. Recalculate the total with both figures to see how much that one assumption affects the result.