Your net worth (how much you own minus how much you owe) tends to be a fairly good indicator of your financial health and stability. If your net worth is increasing, that means you are building wealth and setting yourself up for a more secure financial future. But how do we do we go about building our net worth?
According to Jeffrey Hunter, Wealth Strategist at TD Wealth®, there are several strategies that can be employed to increase your net worth. You can begin by considering these seven tips.
Build an emergency fund
We all have those unexpected expenses like when the dishwasher breaks or a family member suddenly needs to visit the emergency room. But in those moments, you want to avoid pulling money from your investments or taking on any high interest credit card debt. A liquid emergency fund allows you to meet these unplanned expenses while protecting your net worth and preventing any financial setbacks.
Reduce your expenses
By reducing your expenses, you are able to free up more dollars that you can use towards building your wealth. One of the keys is to find areas where you can lower your expenses without it negatively affecting your existing standards of comfort and happiness. This can include things like cancelling unused subscription services, cooking at home instead of eating out, or negotiating with your service providers for lower bills. You also want to remain vigilant for any opportunities to refinance or consolidate your outstanding debts at lower interest rates.
Invest prudently
To increase your net worth, you should consider investing in assets that may generate income or have the potential to grow in value, or ideally, assets that offer both of these attributes. Assets in this class include real estate, stocks and bonds, mutual funds, annuities, life insurance, artwork, and collectibles. Equally important is to avoid or minimize accumulating any assets that can negatively affect your net worth. This includes assets that don't generate income and that tend to depreciate in value like electronics, boats, and cars.
While we're on the topic of investing, please don’t forget to also invest in the most important asset of all…yourself. Spend some time investing in your good health so that you are capable of sustaining the vibrant level of energy and productivity needed to continue building your wealth. Ongoing investments in your continuing education are also important for building wealth because they can enhance your skills, open up new career opportunities, expand your network, and improve your financial literacy.
Maximize retirement account contributions
A powerful investment strategy for increasing your net worth is to regularly contribute to IRAs and employer retirement plans. These accounts offer both tax advantages and the potential for long-term growth, which makes them extraordinary tools for building wealth. Contributions to traditional IRAs and 401(k)s are typically tax deductible. This can lower your current tax bill and free-up more money that you can invest for the future. Anything you contribute will then grow tax-deferred until you begin making taxable withdrawals in retirement. Another great choice is investing in Roth IRAs or Roth 401(k)s. These contributions are made with after-tax dollars so there is no current tax benefit. However, you then have the ability to access your contributions and any associated earnings tax-free in retirement. Your tax advisor can help you decide whether the traditional or the Roth option is a better fit for you in your wealth building journey.
Many employers also offer matching contributions as part of their retirement plans. This is essentially free money that can significantly boost your overall retirement savings. Accordingly, you want to make every effort to at least contribute enough to receive the full amount of any such matching funds.
Homeownership
Homeownership is one of the most common ways to grow your net worth. That's because home values tend to rise over time. In fact, the Federal Reserve Board's 2022 Survey of Consumer Finances reported that the net worth of the average homeowner is nearly 40 times greater than that of a renter. In addition, homeowners also enjoy certain tax perks. For example, if you ever decide to sell your home and it has been your primary residence for two out of the last five years, some, or all of your capital gains on the sale will be tax-free (up to $500,000 for a married couple and $250,000 for a single taxpayer).
Manage your debt
Getting your debt under control is also a key element in growing your net worth. This doesn't mean that you need to immediately rid yourself of all debt. Instead, you should prioritize paying off any debt that has a high interest rate (like credit cards or personal loans). It's also important to recognize that not all debt is bad. Debt you take on to buy items that create value, like a mortgage or an education loan, can actually help you grow your net worth. If possible, what you want to avoid is taking on any debt to purchase assets that are going to depreciate in value like that brand new state of the art TV.
Protect your net worth
Finally, don't forget the importance of protecting the net worth that you worked so hard to build. Insurance is a cost-effective way to safeguard your assets. So, make sure that you have adequate levels of insurance coverage for your health, real estate, automobiles, and any other valuable assets. That way, your assets will be protected in case of any unexpected events.
For more on personal finance topics
If you have more questions about personal finance topics that matter to you, visit the Learning Center on TD Bank’s website. You can find out more information about TD Bank's services at td.com.
We hope you found this helpful. This article is for informational purposes only and is based on information available as of December 2024 and is subject to change.
This content is not intended to be used or acted upon with respect to any client's specific circumstances.
For specific advice about your unique circumstances, consider talking with your qualified professionals.
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