For high net worth individuals and families planning is a necessary component that puts them on track to reach their financial goals. Those with a high net worth often work with financial professionals that specialize in working with them as they typically have different priorities when it comes to their investments, portfolios, and estate plans.
What do we mean by net worth? Net worth is a measure of financial health and robustness. Simply put, your net worth is determined by totaling up the value of all your assets and subtracting your liabilities, or debts.
Your assets can include the value of equity in your home, the value of your car, your cash accounts, investment accounts, retirement funds, collectibles, and more. Your liabilities can include outstanding mortgage amounts, car loans, credit card debt, personal loans, student loans, medical debt, and more.
Knowing your net worth provides clarity about your overall financial life. Even if you have a lot of money saved, it may be wiped out on the books by the money you owe. If that’s the case, your retirement may be rocky and your estate worth little – or even worth a negative amount.
Steps To Raise Your Net Worth Higher
Fortunately, there are many steps you can take to raise your net worth higher.
They divide into two major categories: 1) raising the total amount of your assets and 2) reducing the total amount of your debt.
The quickest way to raise your net worth is a one-two punch: hike your assets and reduce debt at the same time.
Before taking any steps, be sure to have a firm statement of your assets, your liabilities, and your net worth. It’s a good idea to keep spreadsheets as you grow the assets and reduce debts, so you can track your progress.
It’s also very important to track your expenses and income on a weekly, monthly, and quarterly basis. (Financial planners often refer to this tracking as budgeting.) To grow your net worth, you must live within your means, making sure that your income covers your expenses. It does you no good to add to your assets if you’re also incurring more debt every month.
Regular budgeting also provides a clear idea of how much disposable income you have to either make your assets climb or eliminate debt.
Now, here are steps to increase your assets and reduce your debts:
Raising Your Assets
Guess what the first step in raising your assets is? It’s saving steadily! Automate a monthly contribution to your savings plan.
Everyone should have from three to six months’ worth of expenses saved in an emergency fund. If you don’t currently have an emergency fund, make it a first priority.
Then, review your goals. Do your goals include investing in assets such as a home? If they do, start saving for a home down payment.
After that, review your investments and save steadily in them.
Maximize your retirement funds
Retirement funds can be major assets. Be sure you are saving as much as possible in tax-advantaged retirement funds such as 401(k)s and individual retirement accounts (IRAs).
If your employer offers a matching 401(k), participation in it is one of the best ways to grow your assets. If it’s a 100 percent match, for example, and you contribute 3 percent of your salary, they will also contribute 3 percent of your salary. If you make $70,000, in other words, your 3 percent contribution places $2,100 every year in the account. But a matching 3 percent means the yearly total will rise to $4,200.
In addition, traditional 401(k) contributions are made pretax, which lessens the total amount of tax you pay every year. All your contributions grow tax-free until you withdraw them at retirement.
Currently, the maximum contribution to all 401(k)s is $19,500 per year. If you are 50 and over, you can save an additional $6,500 every year.
If you don’t have access to a 401(k), self-directed IRAs can also boost your retirement savings. Traditional IRAs may be tax-deductible. Roth IRAs aren’t tax-deductible, but qualified withdrawals at retirement are not taxed, while withdrawals from traditional IRAs are. The contributions to both grow tax-free until withdrawal.
The current maximum contribution to IRAs is $6,000 per year, with an additional $1,000 annually allowed if you’re 50 or over.
Returns on stocks and yields on cash and bonds can grow your assets. Be sure to invest prudently, with a portfolio designed to increase over time.
Reducing Your Liabilities
Pay down your unsecured debt
The first and most important way to reduce your liabilities is to pay down any unsecured debt (such as credit card debt, personal loans, student loans).
There are several steps to an unsecured debt repayment plan. First, assess your budget to see how much you can pay. Second, determine the best payment method.
If you owe on several different credit cards, it’s prudent to choose either the snowball or the avalanche method.
In the snowball method, you prioritize payments to the smallest balance first, moving to the next-highest as you eliminate balances.
In the avalanche method, you prioritize payments by interest rate, paying off the debts with the highest interest rate first.
Reduce the interest rates on your liabilities
Currently, interest rates are at record lows. That’s good news for people with liabilities related to interest rates, because the lower the interest rate, the further your repayment money goes.
If you have a mortgage, see if refinancing can reduce the amount you pay each month. If you pay more than the minimum, you will realize equity in the home and reduce the outstanding mortgage more quickly.
If you have unsecured debt on a credit card, see if you can roll the balance over to a personal loan or a low-interest rate card. This can save you on the required minimum payments. The amount you save can be applied to reducing more debt.
Save on expenses
If you’re steadily increasing your liabilities, take steps to save on expenses. Comb through your expenditures in each category to find out how you can save.
If you have more than one car, for example, assess whether it’s costing you more than it’s worth. Can you cut eating in expensive restaurants, buying new clothes, or multiple streaming packages? The more you apply thought and creativity to cutting expenses, the more you’ll find to reduce.
Managing HNW portfolios presents both opportunities and challenges. At Financial Freedom Fee-Only Wealth Management, we have over 30 years of experience working with high-net-worth individuals and couples. We are a fee-only, fiduciary, wealth management firm dedicated to helping our clients protect, grow, and maximize their wealth.
Contact us today for a complimentary consultation, and find out if we are the right fit for your needs.