Spend Your Money On Increasing Your Net Worth
Being The Budgeting Wife, I get a lot of questions from people in person or online asking me about how they should spend or not spend their money. The truth is, I think people truly do want to make smart financial decisions. They just might not be exactly sure what a smart financial decision is! Recently, I’ve thought about a question that everyone should ask themselves if they want to make a good financial decision. And that is: Is this purchase going to increase my net worth?
So what is your net worth? Your net worth is your assets minus your liabilities. Or in simpler terms, what you own minus what you owe. This is also how millionaires are defined: When their assets minus their liabilities equals $1 million.
Your assets are things like cash savings, retirement funds, property, a house, car (kind of… more to come on this later), diamond ring, etc… Your liabilities are things you owe like student loans, credit card debt, a mortgage, etc. When you net the two together, you get your net worth!
Until last year, Jacob and I had a negative net worth. As in we owed more in student loan debt than we had in our assets and savings. And as silly as this sounds, it was an exciting day when we hit a $0 net worth! Now that we our debt-free, our net worth has been growing more and more, and I like being able to see that number grow.
If you want to track your net worth, I recommend using mint. I use mint to keep track of all my accounts, and am easily able to see a dashboard view of my net worth!
Purchases That Increase Your Net Worth
Now that you know what net worth is, it’s time to ask yourself if your purchases will have a negative or positive impact on your bottom line. We have done this with our finances in the last 2.5 years that we’ve been married.
Our first goal when we were married was to pay off all our student loan debt. This was a HUGE way to increase our overall net worth because we were lowering our liabilities.
We also have been focusing on increasing our retirement savings contribution to add to our assets. And our next goal after paying off our debt has been to save for a full emergency fund. An increase in cash in the bank means an increase in assets!
Whatever you can spend money on that will either decrease your liabilities or increase your assets is what will increase your overall net worth.
This is why I am a HUGE fan of paying off debt. Debt that is left on the books will increase due to interest, and will therefore add more to your liability! If you want to increase your bottom line, tackle that debt as soon as possible! Then start working on increasing your assets.
Other purchases that people make to increase their net worth is by purchasing property or a house. Now, this isn’t a done deal to raise your net worth. As the market is fluctuating (we all remember 2008). But over the long haul, purchasing a home normally adds to an increase in an individual’s net worth.
Purchases That Decrease Your Net Worth
Now there are many purchases that you can make that can decrease your net worth. And these purchases are usually the fun ones. ha!
That trip to Europe, Starbucks runs, and lunch out every day are decreasing your overall net worth as you spend money and don’t get an asset or get to keep anything out of it.
Taking on debt is another way that many people decrease their net worth. And this is obviously increasing a liability on your books.
Many people think that cars are assets. And they can be… But a lot can also be a major liability. Cars typically depreciate in value. Meaning you’ll spend thousands of dollars on as asset that goes down in value! Confusing, I know. But just a reminder that you shouldn’t always view a car as an asset. And with that, don’t spend so much on a car! I recommend having no more than half your annual income in car value.
Are You Saying I Should Never Spend Discretionary Income?
Absolutely not. Everyone needs fun spending money: money that you plan to just blow on random spending. But you need to budget for it! Set yourself a limit when it comes to that frivolous spending. For example, we have a vacation fund and personal spending fund each month and don’t spend over that!
Also, I find it necessary to say that it’s not always a bad thing to spend money on things that don’t increase your bottom line. More specifically, rent. We are currently renters and have been for 3 years. And contrary to what many believe about millennials, it’s not because we’re lazy. The biggest reason for us still renting is that the housing market is so high and there are no houses available that we could see ourselves in for at least 5 or more years.
Renting is buying patience. Lots of people think that you’re “throwing your money away” being a renter. But the truth is that it’s much smarter to rent until you’re fully ready to buy. Over the long haul, buying is a better financial decision, but renting until you’re ready is a great option! From one renter to another, you’ll be fine. 🙂
Think Through Your Financial Decisions
Now that you have a greater understanding of what net worth is, and purchases that can increase or decrease your overall net worth, it’s time to put it into practice! And to do that, I recommend thinking through all of your financial decisions with asking yourself if it will increase or decrease your net worth.
More recently, I have been thinking about this myself. And to make smarter financial decisions, I try to make sure that I am putting more money into retirement, more money into savings, and getting ready to make our first home purchase!
So if you are wanting to make smart financial decisions, ask yourself if a purchase is going to increase your overall net worth.
Let me know in the comments below!
What have you spent money on to increase your net worth?