What if you could increase your net worth by a $100k in the next five years?
Increasing your net worth by this amount can seem like a monumental task. But the fact of the matter is that it can be done – even for the ordinary person or family with an average income.
By taking one or more of a series of small steps, you can increase your wealth. At first glance, these steps may seem as if they won’t amount to much.
However, if you stick to your course and adopt a “marathon” mindset, you will see your wealth grow.
How to Increase Your Net Worth
Building wealth – at least for most people – is a marathon and not a sprint. It’s a “slow and steady wins the race” type of endeavor.
By taking advantage of a combination of the steps below, you can easily have an increase in your net worth of $100,000 – or even more – in a just handful of years.
Check out the ideas listed here and see which ones you can implement to start increasing your net worth.
1. Pay Off Credit Card Debt
Getting rid of credit card debt can be the most effective step to building net worth. While you’re not acquiring physical assets or earning passive income that enhance your portfolio values, credit card interest rates are drastically higher than the average annual stock market return.
For example, credit card APRs are usually around 20% while the average annual return for the S&P 500 is closer to 8%. Eliminating the finance charges and monthly payment ultimately gives you more free cash to save and invest later on.
You should still consider investing something while you’re paying off high-interest debt, such as earning a 401k match which is “free money.” However, most of your disposable income can be more effective paying off your highest interest rates first.
Mortgage interest can really take a bite out of your net worth. Here’s an example. Let’s say you take out a mortgage on a house for $200,000. You get a 4.5 percent interest rate with a 30-year term.
If you choose not to pay any additional principal payments, you’ll pay out over $164,000 in interest by the end of that 30 years. That’s a lot of cash!
However, by paying an extra $500 toward the principal balance on your mortgage every month you automatically – without even accounting for real estate growth or interest savings – increase your net worth by $30,000 over a 5-year time span.
Take advantage of this simple, yet powerful strategy that comes from paying off your mortgage early.
You’ll increase your net worth by tens of thousands of dollars in a relatively short period of time. Are you worried about losing the tax write-offs that come with mortgage interest?
Put the money you were paying in mortgage interest toward a worthwhile charitable cause. You’ll get the same write-off and help support a cause you believe in.
3. Increase Your Savings Rate
Increasing your savings rate isn’t as difficult as it seems to be for most people. However, the average American puts less than 5% of their income into a savings account. Rule number one for increasing your monthly savings rate is simple:
Pay Yourself First
After you develop a habit of setting aside a certain percentage of your paycheck into savings each week, you can take other steps to increase your savings rate even further.
Start by implementing a challenge everything budget, which will help you to decrease expenses wherever possible and give you hundreds in extra cash to put into savings or investments.
Some practical tips for cutting expenses and increasing your savings rate can include:
- Cutting cable: $60-$120 a month
- Skipping restaurants: $75-$200 a month
- Bringing lunch and coffee from home: $200+ a month
- Learning to cut grocery costs: $200-$500 a month
By cutting costs in these four areas alone, you can save at least $300 a month to add to your savings or investment account. Multiply that $300 a month times 60 months, and you’ve just increased your net worth by $18,000, not including interest earned.
Add in interest earnings of 5 percent annually from investing that $300 a month, and your additional savings will add up to over $20,000 in just five short years.
If you don’t have an investment account yet, check out Ally Invest as their trades are only $4.95 compared to other brokers charging around ten bucks per trade.
If you’re looking for a return on your money that involves less risk, consider a high-yield savings account from a bank that pays well.
For instance, CIT Bank’s Savings Builder pays an interest rate that is over 10x what traditional brick and mortar banks pay.
There is a $100 minimum balance and no monthly service fees for this account either.
By cutting down on daily and monthly expenditures, you can increase your savings rate – and subsequently your net worth.
4. Cut Your Expenses
If you’re struggling to increase your savings rate, an excellent first step is reducing your monthly spending on unneccessary purchases.
Some of the possibilities include:
- Canceling streaming plans
- Switching to prepaid cell phone plans
- Making meals at home
- Packing a lunch for work
- Taking cheaper vacations
- Downgrade to cheaper service plans
Cutting expenses can be easier than increasing your salary if you’re unable to get a promotion, work more hours or switch employers.
Next, you can transfer your spending reductions to a savings account to avoid spending it on something else. You may also consider using a money saving app to simplify this process.
It’s only possible to reduce your living expenses and discretionary spending by so much. In response, increasing your income through side hustles helps increase your cash flow.
There are many ways to earn extra money online and locally. The various ideas also require different levels of skill and effort.
Freelance in Your Free Time
You may consider offering additional services in your free time that you do during the daytime. For example, you might be a graphic designer for your employer but you also make graphics for others in your free time as an independent contractor.
If you’re a teacher, you might offer tutoring.
Use Gig Economy Apps
On-demand gigs can also be a good option if you need a flexible schedule. One options is renting unused space for self-storage through Neighbor.
Another possibility is using Rover to walk dogs and provide pet daycare or overnight boarding.
Create an Online Course or e-Book
Self-directed online courses and e-books can be a great way to make passive income. Once you create your course or e-book, you simply market it to your target audience.
If the content is good and beneficial, proper marketing will help you sell it to others.
Rent Out a Room in Your House
Renting rooms out in your house on Airbnb can be a great way to produce some passive income. If you’ve got house space you’re not using, consider opening it up to people traveling for work or pleasure.
For more information on using Airbnb, check out this post on how my friends Steve and Annette make an average of $1,500 per month using Airbnb.
License Your Photos
Got a knack for photography? Consider making some cash by licensing those photos on stock photo sites.
Businesses will pay you to use your photos on their websites or other business venues.
Making additional money through passive income sources can help you grow your net worth quickly – if that income is saved and managed well.
6. Increase Your 401(k) Contributions
Choose to start living on less and invest in your future by increasing your 401(k) contribution amount today. Increased contributions to your 401k (or similar) plan will hardly be noticeable to your budget because they’re pre-tax contributions.
For the tax year 2022, 401(k) participants can contribute up to $20,500 per year ($27,000 if you’re age 50 or over) to their employer-based 401(k) retirement plan.
If you make $40,000 annually and make contributions of 15% of your income increase for retirement savings (up to the maximum allotted), that’s $6,000 a year.
A 5 percent rate of return on that additional $6,000 a year into your 401(k) investment will yield a nearly $34,000 increase in your net worth over a five year period.
If your employer matches your contributions, even better. If that is the case, then you can expect even bigger growth in your net worth number.
Not sure what to invest in with your 401k monies? Try Blooom, where you can get free investment advice regarding your company-sponsored 401k account.
7. Max Out Other Retirement Accounts
After earning your full 401k match, you may decide to max out your 401k as the money you can easily withhold the funds from your paycheck. The annual contribution limit is also significantly higher than other retirement vehicles.
You should also consider maxing out your individual retirement account (IRA). Individuals can contribute up to $6,000 in tax year 2022 ($7,000 if age 50 or older).
Your contributions can fund a tax-deductible traditional IRA, tax-free Roth IRA or both. However, the combined contribution limit is either $6,000 or $7,000, depending on your age.
If you need help finalizing your retirement savings strategy, Playbook can analyze your situation and make suggestions to optimize your net worth and tax situation.
8. Contribute to a Health Savings Account
Retirement accounts are not the only tax-advantaged investment option. Health savings accounts (HSA) are an efficient way to save for future medical bills with tax-deductible contributions and tax-free distributions.
You can be eligible for an HSA if your employer offers a high deductible health plan (HDHP). It’s also possible to obtain an HSA-eligible plan from the Marketplace or your state exchange.
The annual contribution limits are as follows:
- Tax Year 2022: $3,650 for singles and $7,300 for families
- Tax Year 2023: $3,850 for singles and $7,750 for families
Participants 55 or older can make a $1,000 catch-up contribution. For example, you may be able to contribute up to $4,650 (individuals) or $8,300 (families) in 2022.
Some of your account balance must maintain a cash buffer for any immediate medical bills that arise. However, you can invest the rest and potentially earn passive income from dividends and share price appreciation.
There are no required minimum distributions (RMDs), so you can likely keep accruing cash until retirement. You can also pass your remaining balance to a surviving spouse to continue enjoying the tax benefits.
9. Invest in Income-Generating Assets
Income generating assets can come in many different forms. You can:
Invest in dividend-paying mutual funds
- Check out Betterment where you can get a personalized investment plan for whatever you’re saving for, based on your savings goals.
Start or invest in a business
Open a high-yield checking or savings account
- CIT Bank, mentioned above, also pays a much higher savings account interest rate than traditional banks.
Options such as the four listed above can really help you grow your net worth fast.
In addition to the options listed above, there are other numerous opportunities available to generate passive income. These strategies may take a lot of work at first, but take up very little time and effort once you get the ball gets rolling.
By earning just $300 a month through passive income sources, you can increase your net worth by $18,000 over a 5-year period.
10. Invest in Real Estate
Real estate is a classic way to build your net worth as you can earn rental income from tenants. It’s also possible to see your investment portfolio value increase if property values rise.
There are several ways to get exposure to this asset class:
- Real estate stocks and REITs
- Crowdfunded real estate
- Owning rental property (short-term and long-term rentals)
- Flipping homes
Unfortunately, investing in real estate in a traditional way can be quite costly. You have to come up with a 20 to 30 percent down payment plus closing costs to purchase a rental property.
Then, there is the difficult work of maintaining and managing the property. Dealing with tenants – especially those who don’t pay – can be stressful.
Crowdfunded real estate makes the investment process easier. You can enjoy the stability of traditional real estate but have the relatively low investment minimums and maintenance-free benefits of publicly-traded stocks and REITs
Some of the platforms to consider first include.
Fundrise
Invest as little as $10 in crowdfunded real estate through Fundrise. Advanced portfolio strategies are available with higher balances including exclusive options for accredited investors.
Streitwise
With as little as $5,055, you can begin investing in real estate through Streitwise.
This platform invests in commercial properties across the United States. The platform is open to all investors in the United States and foreign investors too.
Your Personalized Net Worth Increase Plan
If you were to do four steps listed above, you would have an increase in your net worth of over $102,000 after just five years!
| $30,000 | Pay down mortgage |
| $20,000 | Cutting expenses |
| $34,000 | 401 (k) contributions |
| $18,000 | Income generating assets |
| $102,000 | Total after five years |
And, what if your income is higher and you can put more money in savings and into your 401(k) or pay a bigger additional principal payment toward your mortgage? If that’s the case, you can expect an even bigger net worth growth after five years.
As you can see, there are many ways to grow your net worth exponentially in a relatively short period of time.
By working to incorporate the four wealth-increasing steps listed above in ways that work for your financial situation, you too can increase your net worth.
Making Your Plan
Ok, it’s time to get serious. Take out a pen and a piece of paper. Write down one thing you can do right now to start growing your net worth. Choose just one of the steps above and implement it today.
Now work to increase your net worth even more by asking yourself the questions listed below:
- What can I do in my situation to reduce debt?
- How much can I truly afford to increase my 401(k) contributions by?
- Where can I reduce expenses and increase my personal savings rate?
- How much in additional monies can I contribute toward making principal payments on my mortgage each month?
- What skills do I have that I can turn into a profitable side business for myself?
Take some time to assess your financial picture and work to determine how you can take steps to grow your net worth by using the ideas above. In doing so, you can drastically improve your financial situation and increase your wealth quite quickly.
Summary
There are many small, doable actions you can take to increase your net worth. Which ones will you choose to implement?
The great thing about this plan for increasing wealth is that you can customize it to fit your income and lifestyle.
You can choose which steps you’ll apply to your finances. Additionally, you can decide how to apply those steps. For instance, will you make additional principal payments on your mortgage?
You don’t have to start by paying an extra $500 a month. Instead, you may choose to pay an extra $50 a month. Just increase the additional principal payments as you’re comfortable doing.
The same goes for other steps such as increasing your 401k contributions. Start by increasing your contribution by 1 percent. Then raise it another 1 percent six months from now. Just keep moving in the right direction, and you’ll see your net worth grow.
Similarly, you can choose to increase your passive income in the same manner. Add one passive income source. Then another. Or, increase the passive income sources you have in place.
The point is to keep taking small steps that will eventually add up to large increases in your net worth. After all, a journey of a thousand miles begins with a single step, as the old saying goes.
