I got an email from a reader (love emails!) asking me to write a blog post about strategies on how I managed to accumulate a net worth of a relatively large amount for a young-ish aged person (I certainly don't feel young by any means, but I suppose I still am? I'm in my late 20's). She was wondering whether it was primarily from investing, or was it primarily from saving?
Now, according to The Millionaire Next Door, I am not wealthy for my age by any means, and I am actually below average (about $50,000 off).
From my experience, I believe there are three key ways to consistently increase your net worth. Two of these are part of the financial cleanse series I wrote a while back. Of course one of the ways is to generate more income. But if that isn't possible, here are some other ways to work with what you got 😉
Write down what you spend your money on:
I remember I started writing down what I spent my money on when I was 17. I had a little note book where I would write every expense down, including lunches out, dinners, the multiple presents I bought for my then loser boyfriend. At the end of the month, I would tally up the amount I spent that month, and evaluate my purchases. I would often be surprised at how quickly things add up. I have been writing down my purchases again recently and am still amazed at how quickly little purchases here and there add up.
The first step is to be aware of where your money is going. Once you're aware of where you money is going, you will automatically spend time thinking about where you would WANT your money going. I realized quickly that buying gifts for my then boyfriend was adding up big time… so then I stopped smothering him with gifts. Later on, I realized I was spending way too much money eating out and work when I would rather be spending that money elsewhere, so I decided to make my lunches daily and bring it to work.
Write down your net worth goal:
With the same notebook, I would write down the “goal” net worth I would want to achieve by the end of the month. It wasn't very precise by any means, but it was at least something to shoot for. Back then (like 10 years ago), I would try and save $200 a month from my job as a retail sales associate and spend the rest. When I first started my little net worth book, it started off as $200. As months went by, the numbers kept adding (as I increased the amount of money I wanted to save a month) and it was something like $25,000. Some months I would be over my net worth goal, some months I would be under (wayy under, like during Christmas and boxing day when spending is at an all time high). It seemed to all balance out in the end.
I was very goal oriented as I wanted to save for a down payment, so writing down the net worth goal helped in this aspect. It was something to save my money for. Keeping the bigger picture in mind always helps you with your goals. But breaking down these goals (e.g. every month I would save X amount of money) helps keep the bigger goal in reach. Often, if the goal is too lofty or big or not immediately achievable, I lose sight of it and give up/ procrastinate. However, if I make it small and achievable, achieving it boosts self confidence and helps one continue on the path of the bigger goal.
Make it automatic
When I was 22, I graduated from university and got a job, I finally started to make some real money. I discovered high interest savings accounts and really found them helpful for my saving money strategy. It was a way for me to keep my money separate from my regular chequing account and it provided more difficult access (I couldn't just get the money out via ATM) to my money. That way, I could see the amount saved up instead of having it in a regular banking account. Making payments to yourself automatically is probably (to me anyway) the most important step. It helps you feel poor (because you don't have all that money sitting in a chequing account and waiting for you to spend it) and it helps you save up money fast. I am saving up about 25% of my gross income a month by “paying myself first”. It doesn't have to be 25%, it can be 10% of even $50 amonth. It just adds up and compound interest is your friend 🙂
Without money saved up, you can't really invest. Unless you borrow money investing, which I personally do not do and caution those who are planning to do it. Then again, some people have been quite successful with this strategy as interest income used as leverage for investment income is tax deductible.
Invest it, then forget it?
Because of all the money I was accumulating from paying myself first and paying myself automatically, I wanted it to earn more than 1.25% interest. Therefore, I got involved with some mutual fund advisors and invested large chunks of my hard earned money (like $5000 in each fund) because I expected to have the “projected” yield of 7-8% and have compound interest on my side. I think I ended up losing $7000 of the $15,000 I invested. It was a hard pill to swallow… basically I would have accumulated more money by NOT investing in mutual funds and venture funds and keeping my money “safe” in a high interest savings account… and at the time, losing that money didn't seem like a big deal to me (not sure what I was thinking!). However, I think that we learn best from making big mistakes. At least I do!
Investing can be scary (at least I feel so!) and there is a lot to learn. I still have a lot of learning to do.
However, what I did was I started investing in index funds like the TD E-series and put in an automatic contribution of $200 a month for my RRSP. That way, you buy some index funds when the market is high, when the market is low, when the market is in-between…. basically you don't try and “time” the market. It's a nice way to invest and gives me some piece of mind. You can do a survey to see what kind of investor profile are you and the funds you choose to buy are indicative of your investor personality.
I also bought some Exchange Traded Funds though these would need some re-balancing and active management on your part.
Finally, I started buying some stocks that gave dividends, which is the investment where I re-gained most of the money I have lost. Dividend paying stocks are great and I have fallen in love, though I need to contribute to them regularly to reap the benefits.
So there you have it.
Readers, what do you think? Do you have any “sure-fire” ways to increase your net worth? Do you think its more saving or more investing? What was the biggest financial lesson you learned?
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