Guest Post by Chris Marchalleck
I rarely have guest posts, but I thought this would be helpful to share with you.
Building Substantial Net Worth
Most Americans begin their professional careers with a goal of retiring comfortably one day. After all, no one wants to work 40 hours a week when they are in their 70’s. Thus, it is safe to assume that most, if not close to all, Americans have a desire to build a substantial net worth during the course of their lives.
Net worth is calculated as one’s assets minus her liabilities. This number is a person’s net worth. Unfortunately, most Americans never build up a substantial net worth. In fact, very few people even retire comfortably. It is estimated that 62% of Americans who reach age 65 have less than $25,000 in net worth for retirement, and another 35% have less than $100,000.
So, let’s arbitrarily decide that $100,000 is substantial net worth. If we were to say that building a nest egg of $100,000 meant that a person had build up a substantial net worth, then statistics tell us that only about 3% of Americans do it. Now, of the 3% of Americans that do build substantial net worth, only about 2-3% of those people have over $1 million. The reality is that very, very few people ever build up any substantial amount of net worth. The question we must ask is why?
Do people just not make enough?
This is a legitimate concern. Perhaps most Americans simply do not make enough money in order to build substantial net worth. Have you ever calculated how much money you will make over the course of your professional career? Most people have not, but if you do use a financial calculator to determine this amount, it can be quite revealing. Assume Jared is 25 years old, and he graduates college and lands an entry-level job at a company, earning only about $30,000. If he receives a standard 3% raise each year during the course of his career, by age 60, Jared will have earned a total of $1.8 million! And this number is not taking into consideration the fact that Jared may move into higher paying positions at some point in his professional career.
By calculating lifetime earnings, it quickly becomes apparent that the problem is not that the average person does not earn enough money. Instead, the most likely scenario is that most people do not properly manage the money they do make. Let’s examine this a bit more.
Unfortunately, the current economic system in the United States is built on consumer debt, and it is a societal norm that a person enters in adulthood with major yokes of debt. An average college graduate has tens of thousands of dollars in education loans, credit card debt, and maybe even car loan debt. Most Americans enter in their professional lives with a heavy negative net worth, meaning their liabilities far outweigh their assets. Then, as most people begin earning more money as adults, they simply continue to increase their living standard and increasing general expenses, so no real headway is ever made toward building substantial net worth. So, what are the practical steps one can take to break this cycle and walk toward true financial independence?
The first step is to eliminate liabilities. Once liabilities are eliminated, then that extra cash flow each month that used to be spent paying off liabilities can now be funneled toward purchasing assets. The best way to practically eliminate liabilities is to sit down and list them all out and list out the interest rate you are paying on each one. Interest rates are extremely powerful weapons in financial planning, and they can both work for you if you are earning interest or against you if you are paying interest. Thus, you want to list out your liabilities and begin making significant payments toward your highest interest debts. Once you have identified which debt needs paid off first, then you are ready for the second step.
For one month, track every single penny you spend. Write every expense in a notebook and keep the receipt, whether you are purchasing a pack of gum or a flat-screen television. At the end of the month, review your spending habits and see how much you are spending on discretionary items (things you don’t really need). Then, honestly evaluate how much of that spending you can cut back. One of the quickest ways to build net worth is to simply adjust your life style and begin spending less money. This extra cash flow each month can then be funneled directly toward paying off debt.
Once all of your liabilities are eliminated, then you are ready for the “fun” part of investing. This involves directing your extra cash flow each month into purchasing assets. These can be as small and risk-free as bank CD’s, or they can be more risky such as real estate, currency trading , or stock market investments. It is also beneficial to investigate your companies retirement plans such as 401k’s and IRA’s where the company matches every dollar you invest. These decisions are best made with a financial planner.
Want to find out your net worth?
What are you saving for?