How to Increase your Net Worth

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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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Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

27 Comments

  1. Echo on July 6, 2011 at 8:18 am

    Early on in life it’s your savings rate that matters the most. This could include paying down debt. Investing a small amount like $5,000, even if it manages to double fairly quickly, won’t get you as far as saving $1,000/month.

    Once you have around $50k or so invested you should start to pay closer attention to maximizing your investment returns. Young investors shouldn’t chase returns because they are more likely to make mistakes and lose money.

    All of your tips make perfect sense to help grow your net worth. Just keep moving forward.



  2. Eddie on July 6, 2011 at 9:11 am

    Great tips and advice you offer. I have never had to endure losing $7K in investments, but I can not even imagine swallowing that tough pill. Glad you never gave up and found alternative, yet more moderate investment avenues such as ETFs and Index Funds.

    Another sure-fire way for investments for me is Real Estate. I purchased my first place at a somewhat young age and it’s been an awesome investment. Some upgrades here and there, little bit gain on the market, I have over $30K sitting in equity and this is after I paid the realtor (if I sell through one that is) in roughly 2.5 years. I lucked out a bit, but did my research too.

    I think if Real Estate done right, can be the right investment. It’s not one of those set it and forget it, because it requires your constant monitoring, via watching the market, home upgrades, renos etc..



  3. Daniel on July 6, 2011 at 9:27 am

    I don’t know if there are any “sure-fire” ways to increase your net worth, but your list is a great start. I had a plan after college, to save in this way and be out of debt (Net worth = 0) after 2 years. As it turned out, I was able to crush that because I started up my side business. While keeping lifestyle inflation low is really important, increasing income can be an amazing ways to achieve your goals!



  4. jesse on July 6, 2011 at 10:02 am

    We should remember the textbook: savings is investment with low returns. If you have a savings account the money isn’t “sitting there”, it’s being reinvested by your bank with a markup. So you are investing, but you’re letting someone else take a hefty margin. That’s OK sometimes, depending upon your circumstances, but at least understand what’s going on with your money behind the scenes!

    The first and easiest way to save is to cut bottom line expenses and require cash-back deals through credit cards. It’s after-tax savings that reap the largest returns in the end — if your marginal tax rate is 30% every after-tax dollar you save is effectively worth 30% more.



  5. retirebyforty on July 6, 2011 at 12:47 pm

    I think you did very well so far. The important thing is to keep learning and keep investing. We also learned many money losing lessons the hard way. It’s better to learn those lesson early on when you have less money to lose right?



  6. Krantcents on July 6, 2011 at 2:31 pm

    There are no sure-fire ways to increase your net worth! Slow and steady works the best. I have invested in income property, businesses and the stock market. They all have shortcomings, but in the long run can grow handsomely. Develop an asset allocation that matches your risk tolerance and invest over time.



  7. My Own Advisor on July 6, 2011 at 2:34 pm

    Nice advice. You’ve got a good plan in place, re: TD e-funds.

    Definitely a key is to spend within your means, which you have eluded to somewhat. You can’t have any assets or equity long-term for what you don’t save or paydown. On that front, you should try to avoid buying any depreciating asset (cars are hard to avoid on this one). For example, you’re better off buying a decent home in a great neighbourhood than the best home in the worst part of town. You always need to look at appreciating assets and use your income for those as often as possible. That will accelerated your net worth.



  8. cashflowmantra on July 6, 2011 at 8:12 pm

    Sure fire ways mean spending less than you earn. It is the only sure fire way. Ideally once you get around to investing, you have enough time and diversification on your side that you end up much better off in the end.



  9. young on July 6, 2011 at 10:58 pm

    @Echo- Thanks for the wise words and encouragement, Echo! 🙂 I still have a ways to go before I have $50K invested, hopefully I get there sooner rather than later. After I pay off my renovations (still some lingering renos) I plan to use some of that money I save up on a monthly basis in savings, and put it in the TFSA trading account.



  10. young on July 6, 2011 at 11:03 pm

    @Eddie- That’s great to hear, Eddie! The real estate market is so unpredictable- everyone and their pet dog seems to be forecasting their own predictions. Though the only thing about real estate (from what I have thought of so far) is that often you may have to downsize/ move somewhere further away to reap the benefits of the equity gained on the home.



  11. young on July 6, 2011 at 11:04 pm

    @Daniel- Totally agree! I am curious to know how many people have side businesses. It seems the norm for a lot of people, yet it also seems foreign to many more. I love how one can budget on your main income, and then just bank/save/splurge on the rest.



  12. young on July 6, 2011 at 11:22 pm

    @Jesse- Very true- there’s no point in putting money into a HISA gaining 1.25% when inflation is at 3%. I never thought of using cash back deals through credit cards that way- interesting thought!



  13. young on July 6, 2011 at 11:24 pm

    @retirebyforty- good point! That’s a very positive way to look at it. Sometimes though, it’s hard not to make the same mistakes over and over again… hindsight is 20/20.



  14. Little House on July 7, 2011 at 6:14 am

    It’s great that you were so finance oriented at an early age. I still struggle with the whole “pay yourself first” idea! I’m getting better at it, but I’m still way off.



  15. My University Money on July 7, 2011 at 7:04 am

    My whole goal, and I think a worth goal for any student was to have a non-negative net worth when they first start their working life. I was able to almost break even (I dipped into my line of credit for my last semester). I keep putting off doing a net worth update of my own, but I think I’ll sink my teeth into it next week.



  16. Andrew Hallam on July 7, 2011 at 7:30 pm

    Hey Young!

    I think you’re doing really well, despite what Stanley’s formula indicates. No matter how you slice it, anyone coming out of university and into a job paying ($45,000 a year, for a hypothetical example) is going to be below average in Stanley’s net worth department unless they already have significant investments. But how can they have significant investments if they just started working?
    I’m a huge fan of Stanley’s books, but that “expected net worth” formula only works well for people in their 40s and 50s, I think.
    Keep up the great work Young!



  17. Darwin's Money on July 7, 2011 at 6:18 pm

    I think a wonderful way to get rich over time (which I’m not doing regrettably) is real estate. You get someone else to pay your principal and interest for ya, enjoy the tax deductions and keep rolling capital gains into new properties. Some day…



  18. Untemplater on July 7, 2011 at 10:02 pm

    Making it automatic has worked the best for me. Every time I get a raise I adjust my financial goals and increase the amount I’m saving. Having goals and adjusting them as one’s situation changes makes a big difference. -Sydney



  19. young on July 7, 2011 at 10:45 pm

    @Little House- This month I was pretty horrible at paying myself first. I paid myself first, and then had to take money out! I think it definitely helps when you pay yourself first, and then you feel poor for the rest of the month, and then you spend less. Win win win, except not at the time 😉



  20. young on July 7, 2011 at 10:46 pm

    @My University Money- I’m looking forward to your NW 🙂 It’s good to start doing it, it’s a nice “check in” to see where you stand in terms of your personal financial goals.



  21. young on July 7, 2011 at 10:47 pm

    @Darwin’s Money- I’m itching to get into real estate too! I guess first step is a principle residence… Here in Canada, the new rule is that you need 20% down payment for anything other than a principle residence now. What is it in the US?



  22. young on July 7, 2011 at 10:49 pm

    @Andrew Hallam- Nice to see you here Andrew! I’m excited to read your book- have yet to order it online 😉 I’m glad you agree that Stanley’s formula is a bit flawed- it seriously made me feel inferior, that’s for sure. I’ll let you know when I’m 40-50, whether I think his formula works. Thanks for the encouragement, I really appreciate it, coming from you!



  23. young on July 7, 2011 at 11:02 pm

    @Untemplater- I think it was the key for me too. It’s way too easy to spend from what you have until you don’t have anything left for yourself. I’ve been pretty bad about adjusting my financial goals based on increase in income/ raise… perhaps because I just keep on getting more taxed off so I don’t notice the raise!



  24. Paula @ AffordAnything.org on July 7, 2011 at 11:36 pm

    I agree with Andrew Hallam’s comments — I think the Millionaire Next Door formula only applies to people who have been in the workforce for many years. If you’re young (as your name states, “young” and thrifty), then it’s just not possible to have that much saved, since you only started earning “real” money a few years ago.



  25. Kellen on July 8, 2011 at 6:06 am

    You definitely have to have the earnings to make a dent on your net worth. You can only save as much as you earn (less essential expenses.) Even if I save 30-50% of my gross income, it would still take me several years to get $50k invested. (Well, depending on what happens with pay increases.)

    I like the idea of side income, but I’d have to go for something more truly passive, since my main job is pretty intense – I think it would benefit my income more to focus on being really good at my main job than it would for me to take a weekend job, for example.



  26. 101 Centavos on July 23, 2011 at 9:16 pm

    You seem to be headed down the right road. $7K is a steep lesson, but lucky for you it was learned early on, with plenty of time to recover.



  27. young on July 29, 2011 at 12:01 am

    @101 Centavos- Yup, lesson learned! I hope to recover.. though there might be another cycle. I guess I’ll try not to let history repeat itself for me.



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