High net worth clients are highly sought after by financial advisors and banking institutions alike. Many banks will offer significant discounts on interest rates and other financial products for people with a high net worth portfolio.
Yet most people focus solely on earning a good income so they can afford to keep up with mortgage payments and car loan payments. Even if you have ginormous income, if you spend every cent you earn keeping up with payments and living expenses, you’re essentially broke!
If you’re stuck in the pay-cheque or credit mentality, it’s time for a shift over to a net-worth way of thinking. After all, real wealth isn’t about how much you earn. It’s about how much you keep and build.
Fortunately, with the right plan and discipline, it’s possible for almost anyone to build up their assets far enough to become a high net worth client. As the foundation of your financial plan, determining Net Worth is STEP 1 of the solowealth financial plan and should be completed annually. Here are some simple, yet powerful tips to help you build your net worth.
1. Spend Less Than You Earn
It sounds simple enough, but it’s surprising how many people ignore this tip. If you spend less than you earn, you have more money to put towards building up your net worth. Work on cutting back your budget wherever you can. Spend with a priority list in mind and be prudent about purchasing a ‘big-ticket item’ such as a home or vehicle that swallows too much of your take-home pay. Understand that every dollar spent on interest for a higher mortgage along with higher property taxes, higher utility bills and higher insurance premiums, is money that should be in your pocket. If you have a fancy home and luxury vehicles, but you’re not maximizing contributions to your 401(k) or IRA, you should be concerned. Purchase big-ticket items based on your ability to pay them off within a shorter time-frame. The STEP 3: Cash Flow calculation of the solowealth financial plan makes this task a breeze. Complete this task every month and try to meet or exceed the amount you are able to save or invest every month.
2. Eliminate Bad Debt
Bad debts are any outstanding loans that don’t contribute towards building your overall wealth. Credit cards and car loans are usually considered bad debts, as they’re used to purchase depreciating assets.
Pay off any high interest debts you have outstanding as quickly as possible. The payments on those bad debts are eating into your disposable income each month, which slows down your efforts to build wealth. STEP 7: Debt Management of the solowealth financial plan can help you break out of this destructive cycle with real solutions.
3. Use the Power of Compounding
Keep saving until you have a healthy emergency fund put aside to cover any unforeseen expenses that arise. Add to your emergency savings fund until you have enough to begin investing, even if it’s on a small scale. Aim to save 5% of your net income for emergency savings and 15% of your net income for investments. This means you’re setting aside 20 % of your net income to help build your Net Worth. These numbers are not fixed in stone and can be adjusted as needed, but have a realistic savings goal that you aim towards, even if it’s in small segments at a time. Apply STEP 2: Financial Goal of the solowealth financial plan to help you with this task.
Compound interest is a powerful factor in any wealth building exercise. If you’re serious about creating a high net worth, consider opening an investment account that pays dividends on your investments. The earlier you contribute and the longer you maintain your investments, the greater the impact of compounded wealth. In other words, let your money earn for you as you deposit and forget it! STEP 4: Investment Accounts of the solowealth financial plan can help you with this goal.
4. Invest in Appreciating Assets
Building a high net worth isn’t about making a quick buck. It should be a long term goal you aim towards with baby steps. When you’ve paid off all your bad debts and saved enough cash to cover emergency expenses, it’s time to think about investing your money to help it grow faster.
If you have sufficient funds to do so, consider buying a carefully-considered rental property. If you buy wisely, it’s possible to earn rental income that covers all your mortgage interest and insurance expenses for the investment property, and still generate an income from the rent your tenants pay. A qualified real estate agent can help you determine locations and regions of continuing growth and demand resulting in appreciating value of your real estate investments.
5. Automate Your Wealth Creation Efforts
Your wealth should be growing even if you’re not working for it. The key to automating your wealth creation efforts is to look for ways to re-invest as much as you can into building a high net worth.
For example, if you buy stocks that pay dividends, convert your earnings into additional stocks using the dividend reinvestment plan, or DRIP system. Many companies allow their shareholders to receive their dividends as additional shares instead of receiving cash. Each time your dividend payment is due, the company adds the appropriate number of shares to your portfolio, effectively increasing your net worth automatically.
Likewise, if you have cash earning interest in the bank, leave the interest to accumulate in the same account. You’ll essentially be earning interest on the interest already paid to you by the bank, which helps to boost your overall wealth.
If you have an investment property, consider putting any profit made from the rental income back into repaying the investment loan as quickly as possible to establish greater equity that you can then reinvest into private lending.
6. Increase Your Income
When most people think about increasing their current income, they imagine asking the boss for a pay raise or working longer hours. While they’re both easy ways to increase your income right now, they aren’t always possible for many people.
Look for ways to increase the amount you earn wherever you can. One of the most fulfilling ways to do so is to turn a hobby or interest into a profitable part-time business. If you’re a fitness enthusiast, consider opening a personal training business and scale your business by hiring assistant trainers. If you’re truly producing effective results for your clients, your referrals would be word-of-mouth, minimizing marketing expenses. If you’re an expert swimmer, consider opening up a swim academy, either at home private lessons or by leasing a pool at a local facility. Since swimming has the dual benefit as a fitness and life-saving skill, parents will prioritize this activity for their kids resulting in immediate demand. If you’re proficient in the social media landscape, apply your social media savvy to manage social media accounts as a consultant for local businesses in your community. You get the idea!
No matter what you decide to do, keep looking for ways to increase your income. Then use that extra cash to keep building your wealth wherever you can.
Building a high net worth is not as difficult as most people seem to believe. The key is to take baby steps that may not look like much at the time, but they all accumulate into a massive boost to your overall net worth in the end.