Net worth is a critical financial measure. Here’s how you can increase yours.
What is net worth?
Net worth is the difference between the value of what we own and the total amount that we owe. Net worth is a way of measuring our wealth. It's the amount of cash we'd have if we sold everything and paid off all our debts right now. For most of us, our financial goal should be to grow and protect our net worth over time, for ourselves and those around us.
Why grow your net worth?
With increased wealth comes increased flexibility, choices, and a sense of security. This could also provide the greater ability to give, a sense of pride or fulfilment, and of course freedom. Many surveys have also proven that money does make you happier, but the bottom line is increasing your net worth should make it easier to solve any other problems you might have.
Net worth is crucial when we're thinking about retirement. Most of us want to be debt-free, ideally own a house and have some money to live on when we retire.
Here are a dozen steps for you to follow if you’d like to make this year the best one you’ve ever had.
1. Mentally commit
Without this step, the rest of the steps below are useless.
Before you follow any of the steps below, you’ll have to decide to become net worth focused.
Consider this tip from best-selling author, business owner, and self-made multimillionaire Grant Cardone: “Regardless of your current economic condition, where you live, or what you do, you can become wealthy.”
Cardone continues: “The biggest mistake is to think becoming a millionaire is impossible”
Once you’re fully committed, avoiding big investment mistakes, or otherwise getting sidetracked becomes a lot less likely.
2. Change your circle
Friends, family, advisers, and so on all influence how we behave, how we think, and the results we achieve in life.
Once you’ve mentally committed to achieving something, align yourself with people that support that vision. This could mean:
Spending less time with friends, colleagues, or family members who may be inclined to distract you from your goals, or otherwise not support your new-found mission (on purpose or not)
Depending on your field, getting in front of potential buyers, customers, clients, or investors
Probably getting support from the right accountant, lawyer, financial adviser (yes, that is a shameless plug for our services!), business consultant, and so on
Spending more time with people who’ve already achieved what you want to achieve. Ask them questions, learn, and apply what you learn
3. Increase your income
This might be easier said than done over the short-term, but over the long-term is easier than most people think.
One way is by ‘side hustle’. There’s now an overwhelming array of side hustle opportunities available, though beware, many of these might just be a distraction. If you’re in a good role in a growing field, you’re probably best focussing on your primary skillsets and career and ignoring a side hustle or any type of part-time work. The most wealthy and successful people the world over usually got there by focussing on one primary thing, at least to begin with. There might not be much point in a young lawyer – or another professional with good prospects – spending 10 hours every weekend working on a blog or walking other people’s dogs for cash. Instead, the young professional will surely be better off using that time to develop more skills that can be applied to their career, perhaps by learning more in specialist areas of law, or by working 10 hours overtime to get a faster promotion.
Avoid collecting a bunch of expensive junk. Nearly all the following can collect dust:
What to do instead?
Save the purchases above for when you’re a multimillionaire, though by then you might realise that those things don’t always make you happy anyway!
First, collect investment assets.
The famous book, The Millionaire Next Door by Thomas J. Stanley, was based on extensive research about millionaires in America, and we think the same lessons apply to NZ. In one passage in the book, Stanley wrote:
“Many people who live in expensive homes and drive luxury cars do not actually have much wealth. Then, we discovered something even odder: many people who have a great deal of wealth do not even live in upscale neighbourhoods.”
Quit gambling in modern variants of a “get rich quick” scheme.
Many people, especially among younger generations, are putting all their savings into one or two stocks (shares), or even NFT’s or cryptocurrencies. They hope the price will “go to the moon” (skyrocket), but what if it doesn’t?
Mostly, these things are just a distraction and detract from the ability to buy investment assets.
This also means staying broke as long as you reasonably can, that is to say keeping your expenses low and avoiding lifestyle creep, which is the tendency for us to spend more as we earn more. A simple tip is to pay your future self first, invest your money before paying any bills and so on. This way, you’re never even tempted to spend or waste money that’s sitting around.
The biggest single expense for most NZ households is tax paid to the IRD.
There are fewer ways in NZ to minimise your tax bill compared with many other countries, but it can still be done. Possible ways to reduce the taxes you pay in NZ include:
Invest in PIE funds. Even for top earners and trusts, Portfolio Investment Entities (PIE) structured funds have a maximum tax rate of 28% on any income earned within them. What is a PIE fund? – you’re probably already invested in one as all KiwiSaver Schemes are structured as PIE funds.
Invest for long-term capital gains in growth assets that pay little or no income. This includes buying shares in growing companies that pay little or no dividends. Of course, this can also be investing in the ‘Kiwi favourite’ of residential property, where the main objective is usually the capital gain.
Borrow to invest. This isn’t common for investments like shares but is very common for property investment. Usually, the interest paid is tax-deductible. As a general guideline, any interest on a loan taken out to invest is tax-deductible. Such a tax deduction reduces income.
Ensure you claim deductions. The end of the financial year is approaching, 31 March, and when it passes it’d be wise to check what you might be able to claim as a deduction. Tax credits (a tax refund) is available for donations, some income protection insurance policies, and perhaps other areas. To learn more in this area, see an accountant or tax adviser.
Increasing your net worth should make it easier to solve any other problems you might have. You might also benefit from increased pride, freedom, choices, and a sense of security. Follow these six steps and you’ll be well on your way to being wealthier:
1. Mentally commit
2. Change your circle
3. Increase your income
4. Collect assets
5. Don’t lose money
6. Be tax efficient
It would be our pleasure to arrange a discussion about the above with a trained professional. To book a free initial consultation, leave your details below and we’ll be back in touch within a workday.