When it comes to improving our quality of life, getting the most happiness out of every day, and reaching our goals, it helps to have some type of plan in mind. Giving some thought to what you want, and how to get there, is generally more effective the operating randomly without a plan.
To me, when it comes to those aforementioned aspirations, my framework is to focus on relationships, health, and wealth. As I wrote in one of this blog’s foundational articles, the role of money in our lives is of course personal, but for me it does encompass those 3 aspects I just mentioned. Relationships, health, and wealth can all influence one another. To the extent that we are strong in one area, we can potentially help ourselves in the others – with the opposite holding true as well.
So clearly, while money isn’t the most important thing by a long shot, it’s realistic to say that it can help improve the quality of our lives. To that end, tying back to the opening paragraph, it behooves us to have a plan for how to manage our money and grow our net worth.
With that in mind, I’ve come up with these 15 ways to protect and grow net worth:
- Get a good formal education. I’m starting with this one since there has been much chatter in the blogosphere in the last few years about the value of a college degree, and whether or not it’s really worth it. This topic was addressed here in a discussion on the choice between college or entrepreneurship. Well, I do think that where one goes to school and how much it costs can greatly impact the ultimate value proposition of a particular investment. However, that doesn’t change the reality that a college education is important and does matter. Plenty of data out there indicates that those who avoid higher education will face a lifetime of lower earnings. Again, just be extremely careful when making your decision on where to spend tuition dollars. Also remember, you can always be an entrepreneur and a college graduate!
- Embrace continual learning. Keeping up on the education theme, it’s important to keep in mind that what we learn in our formal education gives us a good foundation and an essential piece of paper, but the learning doesn’t stop there. I think that the ability to continually grow through experience, along with the trait of intellectual curiosity, are important factors in determining personal and career advancement. We can always learn something new everyday, and add this experience to our toolbox.
- Focus on your career. Your experience, and the value you can add to someone who will pay you for your services, is what will make you a big share of your money. Unless you’ve inherited big money, where else – realistically – are you going to be able to generate the income for your food, shelter, transportation, etc? Basically, my idea is this, as I’ve expressed before: you have to make money before having anything to save.
- Generate multiple sources of income. While your career will likely be your biggest source of income for a good part of your life, you don’t want to put all your eggs into one basket. Jobs can be lost, career tracks can be altered, and a whole host of so-called unexpected events can happen. For safety, it’s a good idea to work on alternate sources of income that can be done on the side. Plus, aside from safety, these efforts can provide additional income and maybe an opportunity to do something entirely different someday!
- Discern wants from needs. What do we need? I had put together a personal finance hierarchy of needs that I think provides a framework for thinking about certain priorities. Along those lines, it’s essential to be able to decide upon what we presently need, and what we simply want. For example, if given an option of a older, dated 3 bedroom house or a brand new, sparkling 4 bedroom McMansion, choosing the older home over the newer home is looking at needs vs wants. Nobody needs a brand new house.
- Maximize the income minus expense gap. Once we earn money, as noted above in #3 and #4 – and figure out needs vs. wants, as noted in #5 - we can work on saving. This is the bottom line, where income and expenses intersect to result in savings. It’s kind of like a company that reports profits - income minus expenses equal how well they did. I mean, unless we focus on this gap and actually save, our net worth will have difficulty growing.
- Practice effective asset allocation. Put your savings to work for you. If you have an immediate need for funds, you may want them in safer investments (like cash). If your investment timeline is longer, you may want to increase the percentage of funds in stocks. There are many approaches people take to asset allocation, and it’s vital to utilize one that matches your situation.
- Put money in your employer 401(k) plan. The employer match is a great deal for employees. The rate of return that you can earn on such allocations can be significant. For example, if you drop in $3,000 – and your employer matches it dollar for dollar with another $3,000 – that’s pretty good!
- Manage Risks. Not all risks are bad. It’s good to keep in mind that risk and potential reward often go hand in hand, which is factored into our decisions in #7 above. Additionally though, there are risks in which we need to protect the downside. When it comes to assets, the the Buffet’s Rule #1 on losing money is one to keep in mind when it comes to making up losses. In a different context, avoid big losses, and get proper insurance for your home, health, and vehicle. Additionally, proper estate planning falls into this category as well.
- Eliminate Debt. If you owe someone money, you’re essentially a servant to them. If you needed to take out a mortgage loan to buy your home, then you’re effectively a servant to your lender. If you don’t pay your lender, you’ll be out of your home. That puts things in perspective, right? Plus, by paying high interest, you can really dig yourself in deep. Best to avoid debt if you can, and pay off what you do have as soon as possible
- Think long-term. While living in the moment is important and a source of joy, we also have to spend some time also thinking of the future too. Taking a long-term time horizon, and remembering that we ultimately need to retire, is fundamental to growing and protecting net worth. Personally, I like to think that I’m working for the me of today, as well as the me of 35 years from now, who might not be able to work. That’s my biggest financial motivator right now – making sure I’m not old and broke. The opposite would be old and financially prosperous, which is preferred!
- Be relentless and persistent. My own observations are that the times where I’ve truly wanted something badly enough, and really, really worked hard for it – are the times when I’ve achieved the most success. I’ve observed this in others too, where some people who are determined and tenacious may achieve things that others who are seemingly brighter and more talented – yet less persistent – may not. The more I’m around, the more it seems like once you pass that threshold of being “smart enough” to do something, the next real differentiator between success and lack of it is hard work.
- Be resilient. For most people, life is not a straight, linear path to some type of nirvana. While we hope that the majority of days are spectacular, there will be a few speed bumps along the way. More than that, there might be times where truly “unexpected” setbacks occur. Job loss, health issues, divorce, accidents, and the like come to mind. It may not be easy, but try to be mentally tough and prepared, as the odds are that at least one of those less than exciting events will happen to most of us.
- Nourish positive relationships. So, we’re back to what I said up front – how wealth is tied in some way to relationships and health. In terms of relationships, this can take on many forms. First of all, people that are married tend to have a higher net worth than those who are single, on average. At the same time, divorce can damage finances severely. So, that’s one way relationships matter! However, this applies to many other relationships. If you get along with your boss, for example, you’ll be better off than if you were at odds. If you network well, you’ll learn more from others and might have more professional and business opportunities than if you were more isolated. To the extent that you enjoy people, are interested in others, and are able to get along with others effectively (and smartly), it seems like you’ll be in a better position to succeed.
- Stay healthy. Most importantly, of course, being healthy means that you can enjoy life and be there for family and friends. However, it also matters for your net worth. First of all, if you’re not healthy and incur significant medical bills, that be money out the door that you could have saved. Second, and actually this might be more important, if you’re not healthy, you’ll have trouble working. Which means, you’ll have trouble earning an income. That’s yet another motivator to eat well, get plenty of exercise, and manage stress. Even sleep can impact wealth, so it’s important to get enough!
My Questions for You
What are your thoughts on this list? Are there any here you especially agree with?
Which of these approaches do you feel like you do best and worst?
Do you have any more suggestions on general tips to grow and protect net worth.