By Tua | September 22, 2018
Do you know your own Net Worth? It is calculated by taking your Total Assets, like your house, your cash, and any investments you have, and subtracting your Total Liabilities, i.e. Your Mortgage, any lines of credit, and Credit Card Debt. Chances are if you're a recent graduate your Net Worth is negative, and that's ok! You're just about to enter the prime earning years of your life, and here are x easy tips to help you make the most of them and increase your Net Worth.
1) Make a budget
Do you know how much you're spending and on what? Finding out is the first step in increasing your Net Worth. If you think about it, the only way to increase your Net Worth is to have more cash inflows than outflows. If you've got a leak in the ship, making a budget is the only way to find it, and in these days of modern technology budgeting has never been easier.
First, I like to download my monthly Bank & Credit Card Statements as CSV files and then analyze them in a master Excel spreadsheet with all my statements that I've accumulated over the years. Next, I go through my statements and put each outflow into categories, mine are: Student Loan Repayments, Rent &Utilities (this can be your mortgage payment as well), Car, Insurance, Gas, Groceries, Shopping, Dates, Self-Improvement (Books and Fitness), Grooming, Savings, Vacation and finally, Miscellaneous.
With everything categorized, I first account for my fixed costs. Your Fixed Costs are the payments that you know are coming out of your account every month, in my case they're my: Student Loan repayments, Rent, Insurance, Car and Cellphone payments. Secondly, I work backwards from a savings goal. Hopefully after your fixed costs, you'll still be able to save 10-20% of your monthly income, if not, you may have to re-evaluate some of the decisions you've made, perhaps you're living in an apartment or driving a car you can't actually afford. See? Even after these first two steps you're budget already reveals whether you're living within your means or not. After accounting for your Fixed Costs (btw its helpful to think of Savings as a fixed costs so you get in the habit of putting it away every month), the following steps become a little more nuanced.
I like to estimate what I spend on each of the remaining categories, my Variable Costs, if you will, by looking through my statements and seeing what I've historically spent on each. But this is where the actual budgeting part comes in, if what you're historically spending on each category is outside of your budget, your spending is unsustainable, and your Net Worth is decreasing. You need to find the goldilocks zone when accounting for your variable costs. Gas and Groceries are my highest priorities, so those are the ones I budget for next. After that, I budget a certain amount for Miscellaneous expenses. It's nice having a Misc. section in your budget so that random things that come up like parking or speeding tickets feel a little bit more manageable. Plus, if you don't end up using it, you can add it right to your savings, or use it for whatever you wish. Then I stash a way an extra bit of savings solely for the use of vacation, knowing my next trip to a beach is slowly being paid for is what gets me through the winters in Calgary. Now the rest of my money is free to blow on the fun stuff, Dates, Shopping and Self Improvement! I can take my girl friend out for a nice dinner guilt free knowing full well that I've got all my costs for the month covered, I'm actively saving for retirement and increasing my Net Worth!
My monthly Budget looks like this:
|Total Monthly Outflows||3,307|
|Total Monthly Inflows||3,760|
So you've made your budget and are actively saving 10-20% of your monthly income. Now what? You have to make your money work for you. If you've got your money chilling in cash in a savings account, you're loaning the bank your money! Most retirement calculators assume a 6% return on investments, and the only way to earn that is to invest in the stock market.
The main school of thought when it comes to buy and hold investing is known as Modern Portfolio Theory, a theory Henry Markowitz won a Nobel prize for in 1952. MPT proves the most efficient way to invest is to own the Market Portfolio, ie, Own ALL the stocks! This is accomplished via owning an index fund or an ETF that holds companies from every industry. In actuality, an index fund is only a proxy for owning all the stocks, but it still captures the full benefits of diversification. Depending on how risk averse you are, you can leverage up or down on the market portfolio by borrowing money to invest, or buying the risk free asset instead of keeping your money in stocks. The Risk-Free Asset is typically a 10 year government bond; while not entirely risk free, government bonds are backed by a government capable of printing money, so you shouldn't be too worried. However, the returns on a Risk-Free asset are typically much less than the Stock Market's, the 10 year government bond in Canada is currently 2.14%, the return on the S&P 500 last year was 19.5%. At the current rate of inflation 1.7%, investing only in bonds provide almost no real return. Theoretically, stocks must offer a higher return via something called a Risk Premium, an extra reward to entice investors to invest in their company.
And that's really all there is to it. To capture the markets return you need to own One asset, a fully diversified Index Fund, and if you're not feeling as risky, take some of the money out of the Index Fund and buy a Government Bond. You can sit back and watch your Net Worth increase monthly, simply by having skin in the game. But if you still don't feel comfortable investing by yourself, you're in luck. There are many low fee actively managed ETF's from Vanguard or Horizons that you can invest in, or if you really want to impress your friends, you can tell them you have an Artificial Intelligence portfolio manager, by letting Responsive AI manage your funds.
3) Have a Side Hustle
Not the last way to increase your Net Worth, but the last covered in this article, is to have a 'Side Hustle'. In the beginning this can range from taking advantage of the sharing economy by driving for Uber on the weekends, or even renting out your car on Turo, to doing freelance work on sites like Upwork and Freelancer depending on your skill set. You can even find sites that pay you to take surveys. The benefit of having a side Hustle is that it's cash flows over and on top of your monthly budget. You can use all the money you earn from a Side Hustle to chip away at any Debt you have left, or just put it directly into your savings and investments. Over time, depending on how much you can save, your side hustle could evolve into an actual business like having investment properties. Having multiple streams of income is another form diversification and provides a safety net in case you lose your main stream of income.
To Recap, the best ways to Increase your Net Worth is to Budget and Invest! These are essential steps in getting retirement ready, and the sooner you can start the better! If you have time for a Side Hustle, its another awesome way to boost your income and see your Net Worth increase, and who knows, maybe if you start freelancing you might find yourself excelling at something you never considered as a career before.