How to Increase Your Net Worth

Your net worth is the quickest and easiest way to tell you if you improving financially.  Your net worth is what you have after subtracting your liabilities (debts) from your assets.  There is really only one way you can increase your financial net worth.

Most people would think that if you paid off debt you would increase your net worth.  I think that over time that will pan out to be true because less debt allows you to increase your net worth later.  However, you are taking an asset (cash) and using it to reduce a liability.  So the net effect to your net worth is zero in that scenario.  Really, the only way you can increase your net worth today is to increase your asset values to be larger than they were yesterday while not increasing your liabilities (debt) by the same or higher amount in the meantime.  So, if you were to work to make extra money (an asset) then your net worth would increase because you have more assets.  You could also do work to increase your asset values (such as enhancing what your business or real estate is worth).

Keep in mind, this does mean that spending money on things that aren’t assets themselves (e.g., paying a bill, going on a vacation, etc.) decreases your net worth.  You have taken an asset and used it on an expense so the net effect is you are now worth less than you were before.  If you use cash to pay a debt then at least it is a neutral exchange and your net worth does not go down.

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