Thursday, October 29, 2015

How to Increase your Net Worth

Increase Your Net Worth by Jonah Engler
The only way to increase net worth is to spend less than you earn. This doesn’t always require saving from every paycheck. You can gain wealth by investing. Although speculation can pay off, there is no guarantee it will. Often it won’t.

Many individuals grow wealthier through accumulation of assets with long-term investing. In America, one of the easiest ways to save is through employer-sponsored 401(k) plan. You can have a percentage of your paycheck invested every time you get paid, while your employer will match the contribution (subject to vesting). This is also taken prior to taxes, so you get a tax deferral. Due to the power of compounding, your investment can grow substantially over the years.

Not everyone is eligible for 401(k). But there are other options. The Americans can invest in Individual Retirement Accounts (IRAs) and similar vehicles are available in many other countries. Let’s say that at the age of 30 you contributed $2,000 to an IRA account and then $500 per year for 35 years. Could you do that? Many people can. Now, let’s assume your investment grew 9% a year. At a time of retirement, this would grow to $148,683. And this is the great power of compounding.

What are some other ways to increase economic wealth? Surely, buying real estate is one of them, given you buy it at reasonable price and hold on to it for a longer period of time. Not only there’s a chance the value of your property will grow, but you will also pay off your mortgage. On the other hand, if you rent, the wealth you spend for housing will go to the landlord. A conclusion is that ownership is the key to wealth creation.

While these are some of the ways to gain in net worth, it is also crucial not to go in reverse. Yes, your investments will fluctuate in value, but over long-term it is highly probable their value will grow given you invest in smart ways. When it comes to financial investments, it is important to diversify. Basically, don’t put all your eggs in one basket.

For real estate, you should look to buy it in a stable neighborhood and maintain your property. Taking a second mortgage for consumption purposes (such as buying a car) is not a way to grow net worth.

In wealth building, the slow and steady win the race. And when something sounds too good to be true, it probably is. So avoid bad investments. It’s not only what you do, but also what you don’t do.

Jonah Engler is a financial expert and an entrepreneur from the Lower East Side.

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