Net worth is a measure of solvency. Add up all your assets and subtract all your liabilities. That result, as simple as it is, equals your net worth. However, if your main asset is your house and your biggest liability is your mortgage, your net worth may be favorable but your liquidity position is less than great. Don't kid yourself. The only way to get at the equity in your home is to sell it, take out a home equity loan or refinance with a cash-out option. There are two things you can do to improve net worth: increase assets, decrease liabilities. It's easy to say -- difficult to achieve. But don't let that stop you.
So What Is Your Net Worth
Make a list of all your assets and assign values to them. That's a piece of cake for stocks, bonds, mutual funds, checking accounts and other liquid assets. It's a bit of a challenge for collectibles, jewelry, furniture, artwork and other assets. Look at the market value -- if you sold them what would they bring in -- not what you paid for them.
Drag out all your credit card statements, student loan documentation, personal loans and mortgage agreements. Write down the interest rate, total amount outstanding and minimum payment.
Subtract the debt total from the asset total. Now you have a starting point on growing your net worth.
The Not-So-Fun Part
Develop a budget together. Together is important. If one of you doesn't agree, that person won't be supportive and could sabotage the whole program. Order a pizza to make the task a little more palatable.
Go over the budget and cut back wherever possible. Yes, you'll have to make some sacrifices in the short term for the long-term objective. Subtract your budget from your net income to arrive at the amount left over that you can use to pay down debt.
Pay down debt. Start with the debt with the highest interest rate. Every dollar the debt decreases results in a dollar increase in your net worth, all other factors remaining constant. Once the unsecured debt is paid down, review your mortgage. Depending on the interest rate, real estate market and home values where you live, it may make sense to make the regular payments rather than pay off the mortgage.
The Fun Part
Select the investments you want to acquire. OK, it's not as much fun as, say, buying an all-terrain vehicle, but still you do get to go shopping. Ask your employer to automatically subtract a chunk of your paycheck and deposit it in a 401(k) or set up an automatic transfer from your checking account to an IRA. It's an almost painless way to save.
Choose assets that have the potential to increase in value. Not all assets are created equal. If you decrease your cash -- which is an asset -- to buy a diamond bracelet -- also an asset, you may think you've just made a swap out of assets. What you've actually done is decrease your net worth because you won't be able to sell the diamond bracelet for what you paid for it.
Review your net worth position and your asset portfolio every three-to-six months. Get educated on the best way to invest to achieve your goals or get connected with a financial adviser who knows his way around Wall Street.
- If there isn't anything left, or not much of anything, for reducing your debt after you've paid your monthly bills, consider getting a part-time job or other methods of increasing your income.
- Learn about the stock market, Forex, day trading or penny stocks before you invest. Consider investing in a balanced mutual fund while you're learning.
- Don't fall for get-rich quick schemes on or off the Internet.
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