Net Worth
Net Worth is normally associated with those over a million dollars, but it applies to everyone regardless of worth. Whether you are at $100,000 or -$100,000 it's important to know and track. It is a great indicator of financial health and works as a guide and a compass. You can have a detailed budget, but if your net worth is going down month after month clearly some numbers on your budget are not accurate. There are a few ways to explode your net worth and one of the quickest and easier ways is to simply track your net worth with a Monthly Report.
1. Net Worth Monthly Report
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Taking the time once a month for 10 - 15 minutes to look at each of your accounts to see how they are performing will give you a heads up on underperforming investment and overperforming investments for your future deposits. It allows you to see trends month to month or year to year. Does most of your net worth grow from your current investments or from your paychecks from your job? The simple act of just viewing your wealth will motivate you to save more, earn more and invest more. From your debt that is dragging you down and costing you more than you thought to your investments that are doing better than you thought. This will cause your net worth to increase which will increase motivation, creating a wealth snowball.
Nonsense Filter
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Net worth cuts through your garage excuses and lies and gives you the hard truth. "You went down this much" or "You went up that much". Sometimes it is truly the market's fault but you can always break it down by account and just look at your chequing account. "Did it go down by $200 when you are supposed to save $100" then you probably went over budget this month by $300. You can say that you have been doing good and cutting back on unnecessary expenses, but your monthly net worth report will call you out on your garbage excuses and slap you in the face with reality. "You spent too much last month".
2. Home Purchase
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Housing takes up the largest percentage of income and when you rent, 0% of it stays and builds towards your net worth. Rent buys you another month of shelter and that's it. When you own you gain equity or ownership of your home bit by bit. You may start off owning only 5% of your house but after 15-18 years you will own 50% of your house. The amount going toward interest vs equity increases over the duration of the mortgage with most of it going to interest in the first few years to most of it going towards equity in the last few years.
Say your mortgage payment is $2000 a month, $500 to $1500 of that can be going straight to your principal, building your equity and thus growing your overall wealth. Think about getting $12,000 a year after tax raise going straight into your wealth.
Appreciation
Debt is normally viewed as bad and to be avoided but for items that appreciate it can actually be a great investment. Homes tend to increase in value around 3.5% each year so a $400,000 house would increase to $945,298 after 25 years. More than doubling your investment after 25 years. The total interest paid over the 25 years would be around $233,404.21 if 4% interest is assumed. Adding the original $400K would equal $633,404.21 total but it is still dwarfed in comparison to $945K total value. Never purchasing a house means missing out on potential appreciation gains while paying rising rent rates.
Locking Down Housing Cost
Rent tends to increase at around 3% depending on city and location. Each and every year your largest expense (housing) will increase eating into your budget. Purchasing a home locks in housing payments at the year you purchased (ignoring interest rates). Plus after 25 years no more mortgage payments.
3. Employer RRSP Matching
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Employers often incentive employees to save for their retirement by offering up to 5% matching on RRSP (Registered Retirement Savings Plan). This is free money that you would be leaving on the table if not taken advantage of. Just like a home purchase you may not feel wealthy as you build equity since you cannot access it and an RRSP is similar since you most likely will not touch it until retirement. Hence the name. You may think you barely have enough money to keep your head above water but if you can cut back enough to invest that 5% you essentially have gained a 5% raise.
For example say you make $50,000 a year that is $2,500 extra money invested for your future on your behalf. That's not even the end of it either. Since it's in an RRSP account that lowers your taxable income saving you more money come tax time. It would be financially irresponsible not to take full advantage of any employer RRSP matching.
4. Getting Married (Committed Life Partner)
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Getting married may seem odd for a list of wealth but if you think about it in terms of economics it can make a lot of sense. When you are single and you need a couch, you need to pay for the entire couch. But if you are married, you have someone to split the cost of the couch with. Suddenly the couch seems like 50% off. Same goes with every piece of furniture and decoration.
Housing
Housing can be split along with everything that goes along with that, home insurance, utilities, internet, cable. All furniture and decoration like kitchen table, lamps, beds, chairs. Going on a trip you can share a hotel room cutting the cost in half.
Food
Cooking for one can be annoying and seem not worth the hassle but cooking for two saves time as only one person has to cook. It saves food with less waste and saves more by buying in bulk at value stores like Costco. Ordering in a combo special vs a single item. Food is cheaper when split between two people.
Entertainment
Entertainment media can be split like Netflix, Crime, Amazon Prime and Spotify for music. Video games, consoles and controllers can be shared. Electronics like computers, iPad, TVs can be split.
Transportation
If you share a vehicle you can split the car payments, insurance and maintenance costs. Car washes even.
When you get married everything that is your spouse becomes yours in traditional marriages. By pooling resources, sharing expenses, and working together towards common financial goals, married couples can achieve greater financial security and enjoy the benefits of a shared life. While love may be the foundation of marriage, the financial perks are certainly a compelling bonus for tying the knot.
5. Invest
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It is extremely rare to become wealthy without investing. Having your money make money on top of your paychecks is crucial for most everyday individuals wanting to build wealth. Simply having your money simply sitting in a chequing or savings account is missing out on huge gains over the years as well as bleeding value to inflation.
Money tends to double every 10 years (assuming 7% return) meaning if you were to amass $200,000 by age 30, you would be looking at $400,000 at 40. Then $800,000 at age 50 and then finally $1,600,000 by age 60. This is all without further investment but it really illustrates the value in investing and how it can compound over time.
Time
Building wealth involves more than just earning a paycheck. By implementing these straightforward strategies and letting them work over time, you can significantly boost your net worth throughout your life. The best time to start is now, while you still have the most valuable asset: time.
If you found this helpful and would like help budgeting or investing please email me at taylormckeecoaching@gmail.com
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