Feeling financially stuck can be a frustrating experience. One might be earning, spending, saving, and even investing, yet still struggle to boost net worth or perhaps even find themselves falling behind. This predicament naturally leads to the question: How to increase your net worth?
Regardless of one’s financial standing, exploring ways to increase net worth is an essential step for anyone aiming to improve their total wealth. However, before growing net worth, it is relevant to know the average wealth when setting a realistic benchmark, as this provides a crucial context for personal financial goals.
Data from Gov.uk, spanning 2016 to 2020, highlights that older adults tend to be wealthier than younger ones. The average net worth in the UK climbs from £66,000 for 25–34-year-olds to £575,000 for 55–64-year-olds, mostly due to accumulated property and pensions. This suggests that long-term investments, such as property and retirement funds, are primary drivers of financial security in later years.
Recognising the influences behind higher net worth and average wealth, individuals can leverage strategies to increase their net worth. From paying debts to portfolio diversification, this article explores how to raise net worth to achieve personal financial success.
- Why Net Worth Matters?
- 5 Steps to Grow Your Net Worth
- Pay Down Debt
- Reduce Unnecessary Spending
- Increase Income Streams
- Diversity Investment Portfolio
- Build an Emergency Fund
- Transforming Strategies into Real Net Worth Growth
- Best Way to Increase Net Worth: Frequently Asked Questions
Why Net Worth Matters?
As defined by Investopedia, net worth is determined by the total value of what a person owns (assets) minus what they owe (liabilities). They may accumulate assets, such as homes, cars, savings accounts, and investments, while also carrying liabilities, including credit card balances, mortgages, car loans, and personal loans.
Given how net worth is determined, this leads to the question of: why does net worth matter?
Measure Financial Health
It is this calculation that provides a snapshot of one’s financial standing. According to a loan agency, CashASAP, if a person arrives with a positive net worth, it indicates financial stability as their assets outweigh their liabilities.
On the other hand, a negative net worth signals financial challenges, as it means liabilities overpower assets. This can lead to significant debt and can limit their ability to secure loans or weather economic downturns, Esade highlights.
Evaluate Progress Relative to Goals
Forbes emphasises that understanding one’s net worth is crucial for evaluating progress towards goals. Whether paying off debt, buying a home, or saving for a high net worth retirement, net worth offers a quantifiable method for tracking progress, said PAX Financial Group.
Essentially, when individuals track and understand their net worth, they gain the ability to make informed decisions, allowing them to adjust their financial strategies and stay firmly on track toward their goals.
Read More: 10 Best Net Worth Apps to Track Your Wealth
5 Steps to Grow Your Net Worth
Assuming that individuals have already calculated their net worth, the next crucial step is often the realisation that growing their net worth is essential to achieving their objectives.
Fundamentally, boosting one's net worth hinges on two core strategies: increasing assets and decreasing liabilities. Learn actionable ways on how you can increase your net worth in this article:
1. Pay Down Debt
Paying off existing debts contributes to net worth growth by lowering the liability component in the net worth calculation. However, with multiple outstanding obligations, determining which debts to tackle first can be a strategic challenge.
To guide this decision, there are two debt repayment strategies offering distinct approaches:
Debt Avalanche Method
The Debt Avalanche Method is a way to minimise the total interest paid on one's debts. According to Citi, this method requires an individual to list all their outstanding debts and then arrange them from the highest interest rate to the lowest.
The core principle involves making the minimum required payments on all debts while simultaneously directing any additional available funds towards the debt carrying the highest interest rate.
After paying high-interest debt, the amount previously allocated to it is then "avalanching" onto the next debt in the prioritised list (the one with the next highest interest rate). This systematic process continues until all debts are paid in full.
Debt Snowball Method
Converely, the Debt Snowball Method prioritises tackling debts with the smallest balances first. This is done by listing all their debts from the smallest total balances to the largest, regardless of interest rates.
Wells Fargo notes that the method involves making minimum payments on all debts while channelling any additional funds toward the smallest balance. Once the smallest debt is paid off, its payment amount—minimum and additional—is rolled into the next smallest debt.
This approach gradually increases the payment amount applied to each subsequent debt, creating a “snowball” effect.
Whether opting for the Debt Avalanche Method or the Debt Snowball Method, the point is to be consistent. By maintaining focus and refraining from new, unnecessary debts, an individual can gradually reduce existing obligations and achieve financial freedom.
2. Reduce Unnecessary Spending
Generally, spending represents an outflow of cash, which is deducted from an individual’s assets. Furthermore, when a person spends money they do not possess yet (like a credit card), it creates new debt, which lowers their net worth.
This clarifies why reducing unnecessary spending is crucial. Every non-essential purchase, no matter how small, either drains a person's cash or creates new debt. These actions consistently chip away at their net worth, making mindful spending a key to a stronger financial position.
Non-Essential Expenses to Minimise
Recognising their impact on net worth, what are some examples of unnecessary expenses that individuals can reduce?
- Dining Out and Takeaway: Eating at restaurants, ordering delivery, or grabbing coffee from cafes daily.
- Entertainment and Hobbies: Subscriptions to multiple streaming services, movie tickets, concerts, gaming, expensive hobby supplies, and excessive nights out.
- High-Cost Transportation (when alternatives exist): Opting for expensive taxi rides or private car services when public transport or walking is feasible.
- Impulse Purchases: Buying items on a whim, often driven by sales, emotional triggers, or social media influence, rather than a genuine need. This can include clothing, gadgets, home decor, etc.
- Unused Subscriptions and Memberships: Unused gym memberships, rarely watched streaming services, or forgotten subscribed apps.
Nevertheless, reducing spending is generally effective when integrated into financial planning. This planning enables individuals to assess their financial situation—income, expenses, assets, and liabilities—providing the insight needed to identify areas for reduction and establish clear priorities for net worth growth.
Also Read: Powerful Apps to Take Control of Personal Asset Management
3. Increase Income Streams
Growing one’s income stream is often one of the fastest ways to increase net worth. This is because net worth is calculated as assets minus liabilities, and a higher income directly contributes to the "assets" side of this equation.
Thomas C. Corley, author of "Rich Habits," conducted extensive studies and found that 75% of those he surveyed actively maintain multiple income streams to grow net worth.
This diversification is not merely about increasing earnings; it mitigates risks and creates amplified opportunities for accelerated wealth accumulation and sustained financial growth, said The Gulf Entrepreneur.
By not relying on a single source of income, individuals are better protected against economic fluctuations or unexpected career setbacks while generating more capital for investments that can further compound their wealth.
Types of Income Streams
Recognising the relevance of diversifying income streams, this raises the question: what types of income streams can individuals pursue? Here are the common types of income streams to consider:
- Capital Gains: Selling appreciated investments like real estate or stocks often yields profits that grow net worth.
- Dividend Income: Income generated through periodic payouts from investments in dividend-yielding stocks.
- Earned Income: Money received from employment, such as salaries and wages, or profits for running a business.
- Interest Payments: Bonds and high-yield savings accounts produce interest that compounds over time.
- Rental Income: Passive income often comes from leasing out residential or commercial properties.
- Royalties: Payments received for licensing intellectual property, including written works, musical pieces, or patented ideas.
- Side Businesses or Freelancing: Consulting and digital product sales are popular avenues for entrepreneurs seeking additional income streams.
By exploring and developing various income streams, individuals can boost their net worth and achieve financial stability.
4. Diversity Investment Portfolio
Are you concentrating all your investments in one place? If so, it may be time to consider portfolio diversification to raise net worth —and here’s why.
The financial service Paytm defines portfolio diversification as a strategy that allocates investments across a range of assets or securities. The idea is to minimise risk in a way that if one asset, such as stocks, bonds, or real estate, underperforms, others can help cushion the impact on the overall portfolio.
This raises an important question: What are the best ways to diversify your portfolio? Here are some types of diversification strategies worth considering:
a. Asset Allocation
Raisin notes that this method is applied by spreading investments across different asset classes (i.e. stocks, bonds, real estate, commodities, and cash equivalents), as each asset type reacts distinctly to changing market conditions.
b. Geographic Diversification
As highlighted by the banking company Saxo Group, geographical diversification is a strategy of spreading assets across multiple economies instead of concentrating solely on one country. This is because different markets behave distinctly due to unique political landscapes, economic conditions, and local trends.
c. Industry and Sector Diversification
Another way of portfolio diversification is industry and sector diversification, which involves distributing investments across a range of industries and sectors (like technology, healthcare, or finance) to reduce the impact of business or economic risks affecting a single sector.
Ultimately, regardless of the specific strategy employed, the core principle of portfolio diversification hinges on the idea that different assets possess varying levels of risk and return potential, making this method an indispensable approach for balancing overall portfolio risk and return.
5. Build an Emergency Fund
An emergency fund is a set amount of cash saved for unexpected financial situations. Whether unplanned medical bills, urgent home repairs, or sudden relocation, this fund serves as a financial safety net. It allows individuals to manage emergencies without resorting to debt or disrupting their long-term financial goals.
Listing Monthly Expenses
To begin building an emergency fund, an individual must list all their monthly expenses. This includes recurring costs such as rent or mortgage payments, transportation, utilities, and groceries, as well as other regular living costs. Once these are itemised, they can determine their total monthly expenditure.
One might think about the connection between listing expenses and building an emergency fund. To answer this, an emergency fund should ideally cover a significant portion of one’s monthly outgoings, thus requiring accurate calculation of expenditures to set a realistic savings goal.
Recommended Emergency Fund Savings
This then leads to the question of: How much should your emergency fund be? The recommended savings amount depends on personal factors, like employment stability, family responsibilities, and comfort with risk. However, a common rule of thumb is to set aside enough to cover essential expenses for three to six months.
For instance, Lloyds Bank suggests having at least three months' worth of essential expenses saved in an easily accessible account to fall back on.
Many other financial experts also recommend this 3-6 month range, emphasising that a larger fund (closer to six months or even more) offers greater security, particularly for those with less stable income or higher financial responsibilities.
Nevertheless, as a financial safety net, an emergency fund is invaluable as it provides peace of mind and safeguards against unforeseen financial shocks.
Transforming Strategies into Real Net Worth Growth
While many individuals may not aspire to or attain Musk's $330 billion net worth, they can achieve their own financial success by focusing on strategies that grow assets and reduce liabilities.
This involves paying down debt and cutting unnecessary expenses to free up capital, which can then be redirected toward various avenues, like investment. To accelerate wealth accumulation and long-term growth, consider increasing income streams through capital gains, rental income, side businesses and more.
Beyond accumulation, incorporating practices such as portfolio diversification and maintaining an emergency fund creates a financial safety net, helping to manage risk and provide stability in uncertain times.
Nonetheless, building a substantial net worth is not mere luck; it is about taking deliberate, consistent action and making smart financial choices.
Best Way to Increase Net Worth: Frequently Asked Questions
1. What’s a good net worth increase per year to aim for?
Research suggests that aiming for a 10-20% annual increase in net worth, coupled with strategic saving and investing, can effectively put individuals on track for long-term financial security.
2. Should I prioritise paying off debt or investing?
HSBC generally advises that individuals prioritise paying off their debts, particularly those with high interest rates, before initiating investment activities. This approach is recommended because the interest accrued on high-interest debts often outweighs potential investment returns.
3. How often should I review my net worth?
A review of one's net worth at least once or twice annually is an excellent starting point for understanding current financial standing and observing any changes or improvements over time.
Fortunately, net worth tracker apps can significantly simplify this process, offering comprehensive insights into one's assets and liabilities.
MyAssets: Your Partner for Monitoring Net Worth Growth
Regularly monitoring net worth enables individuals to measure progress and make informed decisions. The challenge, however, often lies in simplifying the task of managing assets and liabilities from multiple sources.
This is where net worth tracking tools like MyAssets come in, offering a streamlined way to consolidate, monitor, and understand an entire financial portfolio in one place.
MyAssets is a comprehensive net worth calculator that allows users to log diverse assets, including cash, savings accounts, current accounts, investments, collectables and more.
To provide a complete picture, it also tracks liabilities, ranging from credit card balances to loans and mortgages, ensuring all financial components are accounted for.
With MyAssets, users can quickly see what they still owe thanks to debt-to-asset associations.
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