Steps to Build Net Worth

Taking small steps to build net worth can be done immediately. Building huge net worth takes time. Consistency is critical; start today.

Define Your Net Worth

First, determine your definition of net worth. For some people it is all assets minus all liabilities. Others may make distinctions depending on how liquid the asset is. For example, they might count the value of unvested stock options differently. They may also not count equity in a home as part of their liquid net worth. Another person might include the retail value of art and jewelry, while another person might only count it’s liquidation value.

Getting Started

Once you have your definition, calculating your starting point is an important step. Some people never take a step because they are afraid to know where they currently stand. I had a friend in her 30s who would not calculate net worth because they were afraid it would be negative because of student loans. That’s no reason not to start. Perhaps she could have done a net worth that did not include student loans, or put in an asset for her degree that helped offset the loans. Even if that doesn’t seem the right method to some people, it is if it gets them moving in the right direction.

Here’s a screenshot of how you might track net worth in Excel:

Net Worth Tracker

Steps to Build Net Worth

Once you have a benchmark you can tell what you need to do next. The most common steps to building personal net worth are:

  • Eliminiate credit card debt
  • Create a savings plan
  • Contribute to retirement savings plans
  • Build streams of income other than salary

Notice how achieving a high salary is not in the list? I remember reading The Millionaire Next Door which described high-salaried professionals who were not able to accumulate the same assets as a lower-paid teacher. The high-wage professionals tried to earn their way out of saving. You just have to spend less than you earn.

Other Steams of Income

Building streams of income other than a base salary can be helpful. It makes you less dependent on one specific employer or industry. On the other hand, I read a book about the wealthiest people in the world and how many of them had taken enormous gambles on themselves and were highly leveraged. Some of the super-wealthy had even earned it, lost it, and earned it back again. I believe they are the exception, not the rule. I once met an entrepreneur who woke up every morning wanting to be a billionaire and nothing less. For the rest of us $10 million might be a very satisfying number.

I believe the easiest side-stream of income for a working professional is probably in real estate. If you can resist the urge to trade-up and hang on to your starter home, it could turn into an excellent rental property. I’ve met several small business owners who built their retirement from never selling a house they lived in.

Forest from the Trees

While calculating net worth can be rewarding, don’t let the short-term progress sacrifice long-term goals. For example, graduating from high school and going straight into the workforce will increase your immediate net worth. If the career you want requires a college degree, be willing to trade the cost and those extra four years of school for a short-term net worth hit.

Also think about what you might do when you achieve your goals. You’ll be surprised; someday you will. Would you suddenly want a new career, or to take an exotic vacation? Build rewards along the way so you can enjoy the journey. If all you really wanted was to pursue a new career once you had the money, why not try it now?

Tax Implications

Accessing your net worth in retirement should be considered. Tax-advantaged savings can make an enormous difference. Consider investing in a Roth IRA while you have a lower income; you may not get the chance again.

While there can be penalties for accessing retirement funds early, don’t let this stop you from funding these accounts. As long as you have a decent cash cushion you should be able to save in a retirement account. If you need the money in the same year you can probably take it out and re-class the deposit without a penalty anyway.

Specific Examples

  • 16 Year Old, First Job: Get a checking and savings account; probably at a credit union. By age 18 setup a low-cost retirement account. Put 10% of your earnings in a Roth IRA. Learn about investing by making a mistake; you’ll have plenty of time to recoup it. A credit union might be a good place to start, or perhaps ShareBuilder. Apply for tons of scholarships. Don’t worry too much about building your credit.
  • 22 Year Old, College Grad: Consolidate student loans and lock-in low interest rates. Get a roommate. Do good work and a career will find you. Travel, cheaply.
  • 25 Year Old, Working Professional: Buy an owner-occupied duplex. Or a condo with a roommate. Enroll in the automatic 401k, and automatically increase it if possible. Avoid credit cards like the plague. Pay cash for your next car. Get ready to pay to attend a thousand weddings. Be careful when developing expensive tastes.
  • 30 Year Old, New Parent: Goodbye, time. Save for your own retirement first. Do a quick estate plan and make insurance is under control. Buy your kids a savings bond for their birthday. Buy / sell your used stuff on craigslist. Get ready to pay for a thousand baby shower gifts. Automate your finances.
  • 40 Year Old, Kids + Dependent Parents: Get your parent’s estate plan in control. Use tax advantages to pay for dependent care. Don’t suck equity out of your house when moving. Make your teenage son practice left-handed pitching and deep-snapping for scholarships (ha, just kidding). Consolidate your accounts — even that old 401k from 3 jobs ago. Have an affordable mid-life crisis.
  • 50s, Kids in College: Survive, financially. Make kids take student loans in their own names. Don’t support the victory lap. Don’t let them go to grad school because they don’t want to find a job. Stay healthy, it’ll save you money. Try not to take equity out of your house. Make kids apply for scholarships, and work a summer before they need a full-time job.
  • 60s, Kids Out of College: Payoff your house if it makes you feel better. Update your estate plans and communicate to your now-adult kids. Figure out how you’re going to access that retirement account without incurring penalties. Get healthcare costs under control. Decide when to take Social Security. Retire, or take a job with less stress now that your kids are out of school. Travel, not cheaply.
  • 70s: Congrats. Don’t leave a lot of money behind; start gifting it in $13k increments.
  • 80s: Congrats again. Tell us how you did it.

Hope this long-winded rant was helpful. Leave your thoughts below.

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