Is your income stagnant?
Do you feel stuck in a financial rut?
Are your costs increasing while your incomes remain the same?
Is your Financial Net Worth negative?
If your answer to any of these is yes, then you are at the right place. In this article, we discuss the practical ways to increase your net worth without robbing a bank.
Financial Net Worth represents your financial health at any point in time. It is essentially a summary of all the incomes and expenses that you have undertaken up now. It actually shows the quality of your past financial decisions. Net worth is a dollar amount that can either be positive or negative. When positive, it means you own more things than owe, while when negative, your liabilities outweigh assets.
Though it represents the quality of your past decisions, it has to be read with future projections because you may have just taken out a loan today which will translate into huge future earnings. Calculated on a regular basis, analyzing a net worth trend can assist individuals to change the course of their personal finance for good.
The most logical place to start while answering a how question is usually to plan. Abraham Lincoln said, “Give me six hours to chop down a tree and I will spend the first four sharpening the ax”. In planning, you start to understand the things that you already have and those that you do not have to solve the problem.
In the battle to increase your net worth, the strategy should be; increase your income while reducing your expenses. It is in planning that you identify what skills or privileges you already possess to solve that problem. This is your toolkit.
Below are five steps that you must take to increase your net worth.
Step 1. Increasing your income
Cardinal sin number one; You only have one source of income.
You are employed. You earn a paycheck every month; very good. If this is your only source of income, damn you, really, it only means one thing; you are over-dependent on your salary. If your salary is removed for any reason such as your employer running into headwinds and having to close shop or your skills being declared redundant, you will not have a way to finance your life.
Focus your energy on creating a new source of income.
The best second income for an employed person is passive income. This requires you to save as much as you can from your salary and use it to finance a less risky investment such as a government bond or investment in a Sacco or Chama that pays dividends regularly. You can also buy speculative properties such as plots in an area expected to increase in value.
Once this portfolio is a year or two old, you will be earning a steady second income. Strive to make this income bigger by diversifying and progressively taking on more investments.
Once this income is countable, you now have the muscle to take on even more risk. This can come in the form of real estate, side hustles and stock exchange investments, including FX and cryptocurrency.
While taking on more risk, remember to always protect your earlier sources by ring fencing them so that they don’t collapse in the face of the new untested businesses.
Your salary, for example, should be protected and grown. Don’t go into a business that conflicts directly with your employment such as starting a Matatu business that requires your time when your employer is looking for you. For your salary to grow, continue negotiating with your employer to improve your career and earn higher.
How does it feel to have your CEO take home Kes 2m a month while you taking home Kes 60k, yet both of you are giving 8 hours to your company each day? This is where career enhancement comes in.
Step 2. Managing your debt
Debt is generally expensive, whether the rate of interest is low or high. Debt creates uncertainty in your financial decisions, especially where interest is variable. Interest is an added expense that you can as well do without. If you carry debt, remember for each shilling you pay in interest, a debt-free person has saved or invested it.
Not only does eliminating debt increase your net worth, it makes it easy to further increase your net worth by other means because you’re no longer burning money up with interest.
For example, for every Ksh1,000 you owe at 14% interest, you’re losing Ksh 140 per year to that expense. This means you actually have to pay Ksh1,140 just to make your net worth increase by Ksh1,000! On the other hand, if you invest Kes 1,000 at 7%, you’re gaining Kes 70 per year. The net worth differences between a -Kes140 drag and a +Kes70 boost is Kes 210. This means that a debt-free person is already almost Kes210 ahead for every Kes 1,000 in the net worth game than a person that has debt.
If you have large debt balances like mortgages or car loans that will take a few years to pay off, don’t beat yourself up too much. More likely than not, it took you a few years to get into debt, so it’s going to take you a few to get out of it! The important thing is that you make debt repayment an urgent financial goal, and strive to pay off all your debts ahead of schedule. The sooner you get to debt free, the less interest you pay, and the more money you’ll have to increase your net worth!
Step 3. Play the 50:50 rule with your income.
Your net worth can only increase rapidly if you’re saving a high percentage of your income. Most financial advisers are prescriptive and will want to straightjacket you into a saving percentage of 10 or 20 or 30. This does not work well if you want the freedom to choose how much money should be saved and invested, depending on your personal circumstances.
The 50:50 rule states that once you get your gross pay, divide it into two halves. The first half to be spent on current day to day expenses while the remaining half to spend on future expenses. If this seems insane, I promise it looks a lot less intimidating broken down into different categories.
Current expenses include your rent, food, children school fees, medication, insurances, car maintenance and practically anything that makes the current day to day living bearable.
Future expenses will be stuff like your pensions, savings, tithe, investments, your personal career-enhancing education. Literally, stuff whose benefits will accrue to you in the future.
Maximizing and re-investing of tax reliefs such as pension contribution reliefs, mortgage reliefs, life insurance reliefs as provided for in your jurisdiction will help increase your capacity to grow your net worth rapidly in the future.
Step 4. Arbitrage rent and car expenses
If you think saving more than a quarter of your income is crazy, it’s probably because you’re carrying a ridiculously huge car payment or a mortgage or a big rent expense.
We are all wired to want big. I met a girl a few years ago. She was financially stressed and she did not understand why. She was convinced that her expenses were lower than those of her comparable colleagues because she did not own a car like they did.
So we sat down and started looking at her incomes and expenses. I immediately noticed that her net earnings were Kes60k and her apartment cost Kes30k monthly. I also noticed that her transport costs were ridiculously on the higher side. They averaged about kes20k a month and I started asking questions.
For the rent, she used to stay in this same SQ with her former boyfriend who used to pay the rent. When they parted ways, she did not want to change estates, so continued living here hence she has to pay the rent. On transport, her boyfriend used to drop her at work daily, so she felt embarrassed to take Matatu and decided to contract an Uber guy to drop her every morning and sometimes evenings.
Although she received a stipend of kes15k from her mum monthly, this was not enough to help stabilize all her expenses noting that she spent about kes10k monthly on beauty products.
To solve her problem, we talked about converting her rent into ownership. In fact, her employer had a housing scheme where employees could access mortgages at 6%. At three quarter the amount of her rent, she could afford a less than Kes2m studio in a non-leafy suburb, which she could later sell or rent out when she outgrew it and her salary had increased. She could immediately save the Kes10K and invest it to grow a second stream of income. Alternatively, she should find another boyfriend to replace the lost sponsor.
Most people would not even a consider a small house for a mortgage; leave alone a studio even when they are single. They want mortgages of Kes10m which they can’t afford and wait their whole life and end up owning nothing in the end.
In the current world, there are many travel options, with proper planning, you should ask yourself whether the increased cost in ownership of a car is a replacement of previous costs or an outright increment on your expenditure.
Step 5. Invest in income-generating assets.
The more you convert your salary into income generating assets, the more you reduce the distance to your financial independence. Learn about the investment opportunities in your environment and channel your savings into those areas promising high returns.
Accept manageable risk because where there is no risk there is no gain.
The goal is to maximize passive income to relieve some of the net worth boosting duties of your salary. In my mind, the more money you can get without working, the better.
Increasing your net worth requires you to start now, stay focused and be disciplined. In the end, the calm and peace that financial freedom brings in your sunset days are well worth the hustle now.