10 Ways to Build Your Wealth

When thinking about our finances there are many different numbers and indicators to check. We tend to check more regularly just our checking or savings account and not too much of our liabilities and assets.

What is Net Worth?

When talking about wealth, net worth becomes the most important number, that tells you if you are building wealth or not on a regular basis.

Net worth is the amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by annual operating losses or a substantial decrease in asset values relative to liabilities.

Personal Wealth Flow

Below you can see a great visualisation of personal wealth flow. There are different sources for income and as well for costs or spending. Key point to concentrate on is Saved Wealth  – which will be your assets that earn you passive income (income from cash flow received on a regular basis, requiring minimal to no active effort).

1. Review and Reduce Your Liabilities

Liabilities are debts and other obligations for one’s cash or assets. This means that everything that takes cash from your pocket is considered a liability. In order to have a good understanding of your liabilities you need to regularly list them in net worth calculations and make plan to decrease them over time, starting from most expensive debt (read more 4th paragraph). In summary there are following liabilities to review:

• Mortgage
• Car loans
• Credit card debt
• Student loans
• Personal loans
  

2. Review and Increase Your Assets

Simply stated, assets represent value of ownership that can be converted into cash (by selling or renting). Here we need to also think about intangible assets like education, as it will produce positive economic value. Another example is your personal brand. On the next table you can see a list of tangible and intangible assets.

On the 10th paragraph you can read more about income investing, which of these assets can become your passive income.

3. Analyze and Budget Your Monthly Expenses

One of the most important aspects in order to be successful at increasing the net worth is to have positive cash flow every month or year. This depends on how you prefer to do your budget. More regular savings increase straight away your net worth as your assets (cash) increases. Next step would be to find a good investment with calculated risk. When analyzing expenses it comes more clear of which of these are a must be and which are nice to have comforts. In todays world where you swipe-to-pay, usually on the go and not even being conscious of cash flow.

4. Prioritize High-interest Debt

Try to get rid of high-interest debt as fast as possible. Find the best and cheapest way to pay all of the high-interest debt, which significantly has negative effect on your net worth and cash flow.

5. S.M.A.R.T. Money Goals

Of course loving the process is most important, but you need to know where you want to go, how you want te get there, that is why you need to have smart financial plans. (S.M.A.R.T. – Specific Measurable Assignable Relevant Time-based). Self-made millionaire T. Harv Eker writes in his book “Secrets of the Millionaire Mind.” “Rich people are totally clear that they want wealth.”

6. Save and Invest Unexpected Cash

Coming into some money unexpectedly, no matter what the amount or where it came from (lottery winnings, an inheritance, the sale of a car, a bonus at work) requires a period of reflection. There are always ways to spend all of the unexpected money, but with unexpected cash you need to take a step back and think more to the future. How to invest that your future will be financially improved. In 2015 when I did my M.A. thesis on “Youth saving habits in Estonia”, one of the conclusions was that if income increases, monthly savings rate barely increases. This means that unexpected money is spent straight away, in most cases without increasing net worth.

7. Automate Your Finances

Nowadays there are many convenient ways to automate your finances. When you get the salary, you can straight away have automatic payments to your investment portfolios which are running on automatic portfolios for example. This will avoid the risk of spending too much and not having to memorize all the payments, will decrease the risk of forgetting.

8. Be Financially Prepared for an Emergency

No one wants to be in a position when something happens, which dramatically effects your life negatively. In our minds and in our financial plans we need to have buffer for such events that we can continue living without taking any high-interest debt and other loans. I can also recommend to check different possibilities for life insurance and inurances that can be beneficial in these kinds of situations.

9. Live Below Your Means

One of the hardest things to do is live below your means as our social life expects us to have huge houses, fast cars, newest phone and brand name clothes, to even start considering you successful. As we all like to live life to the fullest and when your income increases, it is when you want to reward yourself and live with the best and newest technology, clothes, food nearby. This doesn’t mean that you can’t live at all, more to the point that during good times there is no point to take loans for the maximum amount, buy a brand new car with all included accessories. Always think of the net worth effect and plan it ahead. New car value will decrease significantly within first couple of years, do you really need this kind of expense that will in the end most probably decrease your net worth?

10. Start Income Investing

In order to build your net worth, you need to invest your money. Investing allows you to put your money in vehicles that have the potential to earn rates of return.
If you don’t invest, you are missing out on opportunities to increase your net worth. Of course, there is always risk in investing, but if you invest wisely, the potential to gain money is higher than if you never invest.