We all have the best intentions when it comes to saving. One of those intentions is to build a positive financial net worth, which is simply the difference between how much debt you owe and how much you’ve saved. In many ways your net worth is the biggest factor in how much financial independence you will ever enjoy. Most of us manage to pay our debts on time because there are obvious negative consequences if we don’t. Building savings, and net worth, requires more thought, effort, and conviction than paying debt. Here, we present a few helpful ideas from a financial advisor with 20 years of experience.
1. Remember, lifestyle determines net worth.
Your ability to build your savings sooner rather than later is mostly a function of your lifestyle choices. Often we forget how much these choices impact our ability to save. One lifestyle choice is to view marriage or domestic partnership as a unique financial opportunity. Two financial partners can combine resources to reduce costs for each of them, which frees up money to build savings more rapidly.
2. Once you’ve paid off a bill, keep paying it—to yourself.
Build on that great feeling of satisfaction you get from paying off an installment loan or credit card balance by continuing to make those payments into a savings or investment account. You’ve already proven to the world that you have what it takes to pay your obligation, now just make yourself the beneficiary of that discipline instead of a creditor. Over time, as you convert more bills to savings, your net worth will grow dramatically.
3. Increase your financial IQ.
Earlier we said that building savings, and therefore net worth, requires more thought. Part of this is mastering some new concepts about how money grows and the time-value of money. You’ve heard that a dollar today is worth more than a dollar tomorrow. That means that if you’re trying to build savings and net worth, starting today will make you better off in the future than starting tomorrow.
4. Prioritize the different types of savings that you’ll need.
Recognize that your savings may have different purposes and may have to be handled in various ways. Which type will you build up first? For example, everyone should have a cash cushion to use for emergencies in order to avoid interrupting the compounded growth of their long-term savings or investments. In addition, you may want a special-purpose savings account for a home purchase, or retirement or maybe saving up to buy a rental property.
5. The easiest way to save is automatically.
We said earlier that it takes more effort to save than to pay debt. One way to make it easier is to save through salary deferral programs such as your employer’s 401(k) plan, or making payroll deductions directly into a savings or investment account.