In one of my previous blogs, I mentioned about ways in which we can stop living a life paycheck to paycheck. One component to do so is how we smartly manage our assets and income. This can be tracked by our net worth which is simply the total of all your assets minus all your liabilities. This is a no-brainer that for our net worth to grow, our assets should grow at a much faster pace than our liabilities. We should never lose sight of this number and is an important metrics towards determining financial freedom.
Ways to increase the net worth
Review your liabilities
Remember that most loans are expensive and also not desirable. The basic thumb rule is that those loans which are taken to enhance your assets are good, whereas those loans which only decline your net worth are harmful and, in most cases, would also be more expensive. As an example, education loan taken for a study which could improve your job prospects or promotion could be considered good, so also a loan for a house which can help you in creating an asset. But a loan taken as a personal loan or on your credit card to fund your wants, like an exotic vacation, which otherwise you could not afford would be considered harmful and could move you towards a debt trap. It is not enough just to pay the minimum balance or the EMIs on time, but to pay off the loan as quickly as possible, focussing first on the most expensive ones.
Add to your assets
Do review this regularly and assess how you can add to your assets. Even if you are able to identify funds which can help you reduce your liabilities, then that is fine as well. Some ways in which you can achieve this objective is by taking advantage of investing which help is in reducing taxes, contribution towards retiral funds since there could be a matching contribution by employers as well, investing in asset classes like equity over a long-term period since that is one asset class which beats inflation comfortably. Power of compounding really works well over a long period which can help us in building a sizeable amount of assets.
Remember to stay within the means and as mentioned earlier not take undesirable loans to fund an extravagant lifestyle which otherwise we cannot afford. We should do a budget review periodically and segregate the expenses into categories like discretionary and non-discretionary which will get us a lot of clarity on what are necessary expenses and what is not.
Proper asset allocation
One of the most important aspects of financial planning is having a proper asset classification. Work with your financial advisor in determining what is the most suitable for you considering your age, goals, risk profile and time horizon. As the popular saying goes, we should not put all eggs in one basket. We should not let greed take over our emotions and therefore proper diversification is most important.
Pay off your mortgage
Interest component is very high within the EMI in the initial years of a mortgage payment and we should try to pay off more than the EMI to save costs. Do check that there are no pre-payment penalties associated with it. Taking a home saver loan is also one good way of reducing your interest costs.
Do review your annual costs periodically. Sometimes there are certain costs which we end up paying but do not utilize. Some examples are subscriptions which we do not use because of a busy lifestyle, vacation packages which are not used etc. Also look at your healthcare, life insurance, auto insurance policies etc. Determine whether they are aligned with your needs. It may be worthwhile to surrender some expensive insurance policies providing a low yield and opting for term insurance as your cover.
Books to Read
If this blog excited you for working towards improving your net worth, then the following books are highly recommended:
The Millionaire next door by Thomas J Stanley & William D Danko