Understanding one’s net worth is crucial for assessing financial health and planning investments.
Almost everyone reading this article knows the term “Net Worth” and its meaning.
But again, let us look at the basics before we know how to improve your net worth.
If you want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.
What is Net Worth?
Net worth refers to all the assets owned by an individual, i.e., an individual’s total wealth.
However, while determining an individual’s net worth, a person’s liabilities are to be subtracted.
Let me help you calculate your net worth easily so you can better understand.
Calculate Your Net Worth
First, note all the assets you own and the debt you owe to others.
When I say that you should take note of the assets, you should take note of investments for which you have been making payments.
For example, the house you are still paying the mortgage on should be considered.
However, there are considerations to be made while adding such assets to calculate your net worth.
For example, let us assume you own a house for which you still make mortgage payments.
Imagine that the house’s market value is $300,000, and the remaining loan balance is $200,000.
Now, you can add $100,000 to your net worth, which indicates the theory of assets minus liabilities.
A few examples of assets that can be added while determining your net worth are listed below:
— Bank Accounts
— Retirement Savings
— Real Estate
— Vehicles
— Investments
— Equity in a house, car, or other assets
— Business
Now, let us look at some types of liabilities to be subtracted from your net worth.
— Consumer Debt
— Loans
— Mortgages
— Other Debt
So, now you have understood that assets are to be added while calculating your net worth.
In most cases, assets have a value and can be converted to cash when you sell them.
You can also include valuable assets that can be used for collateral, such as a home or car.
For example, you can use your home for a home equity loan or line of credit or sell it if necessary.
At the same time, liabilities are different forms of debt, ranging from a personal loan to a credit card balance to a mortgage.
As I mentioned in the example earlier, when using assets like a home, you subtract the outstanding mortgage as it is a liability.
Important – A person’s income is not included in their net worth calculation because of the expenses that arise afterward.
For instance, you can get a hefty paycheck but still need to make all the necessary payments.
Even moderate-income earners may have substantial net worth based on their saving habits and appreciating assets.
Now, let us discuss high-net-worth individuals and all the vital information related to them.
High-Net-Worth Individuals (HNWIs)
In the financial industry, people with net worth above a specific limit fall under high-net-worth individuals.
In the United States, people with at least $1 million in liquid assets are known as HNWIs.
In layman’s terms, people who are rich compared to average are HNWIs.
While determining whether a person is a HNWI or not, only the liquid financial assets are calculated.
Such assets include:
— Cash
— Cash-Related Instruments
— Certificates of Deposit
— Certain Bonds
Simply put, all the assets that can be easily converted to cash are included in the net worth of a HNWI.
Assets such as houses, art, antiques, etc., are excluded while calculating because they can’t be sold quickly and involve price volatility.
Some mainstream assets, like stocks, corporate bonds, etc., are excluded because of the risks and potential to lose value.
Nonetheless, an individual’s investment portfolio, which includes certain traditional investments, is still considered.
This calculation process may vary based on who is determining the HNWI status.
For instance, Capitol Bank determines a person as an HNWI based on satisfying (any of the given) criteria mentioned below.
— An income of at least $250,000 or more.
— Investable assets or Investments worth at least $500,000.
— The total net worth of at least $1 million or more (liquid assets).
Benefits of Being a HNWI
If you are a HNWI, you get personalized services from most financial institutions.
For example, most banks offer private banking services to high-net-worth individuals.
Usually, such services have an edge over standard banking services and are unavailable to the general public.
Likewise, HNWIs also get access to specialized investment opportunities such as:
— Hedge Funds
— Private Equity
— Venture Capital Funds
— Other Investments with restricted access.
Such access is generally provided by wealth managers, investment bankers, or any other similar financial entity.
Most financial firms even offer perks and benefits to HNWIs, such as:
— Dedicated wealth manager
— Reduced fees
— Access to conferences
— Access to events
— Sports tickets
— Entertainment event passes
Types of HNWIs
Generally, three types of high-net-worth individuals exist based on their net worth.
- High-Net-Worth Individuals (HNWIs)
As I said, HNWIs have liquid financial assets worth at least $1 million or more.
Certain financial institutions consider a person a HNWI when their net worth is at least $5 million.
- Very-High-Net-Worth Individuals (VHNWIs)
These people/households must have a net worth ranging between $5 million and $30 million to fall under this category.
- Ultra-High-Net-Worth Individuals (UHNWIs)
The people or households with a net worth of at least $30 million or more are considered ultra-high-net-worth individuals.
Certain financial institutions set the limit to be a UHNWI at a net worth starting from $50 million.
Improving Your Net Worth
It would take a lot of dedication, hard work, savings, investments, and time to increase their net worth significantly.
Some common ways that most people become HNWIs are as follows:
— Inheritance
— Lottery (or other prizes)
— Life Insurance
— Marriage
— Business
— Capital gains
— Winning a lawsuit
Now, let us see some of the efficient ways you can improve your net worth.
Given below are the critical steps on how you can improve your wealth effectively.
- Start with a Great Plan
The journey to increase your wealth starts by formulating a financial blueprint.
Planning plays a crucial role in not just increasing your wealth but it helps you achieve any goal.
Planning for your wealth involves dedicating time to identify your objectives and strategize how to achieve them.
If you are doing it by yourself, assess the financial goals that you want to achieve.
Opting for the services of a financial professional is a practical approach to commencing your wealth-building plan.
Yes, it is a pricier option, especially for beginners.
But remember that selecting a certified financial planner means paying for their planning expertise and experience.
Alternatively, choosing a robo-advisor that provides access to financial advisory services can be cost-effective.
Best robo-advisors in Europe:
— eToro
— inbestMe
— Whitebox (Deutsch-speaking countries)
— Indexa Capital (French and Spanish-speaking countries)
— Simplewealth (Swiss investors)
Best robo-advisors in the U.S.:
— Betterment
— Wealthfront
— Vanguard Digital Advisor
— Vanguard Personal Advisor Services
— SoFi Automated Investing
In Asia, robo advisors such as StashAway and Kristal. AI have a presence in multiple countries.
Most international brokerages, such as eToro, Interactive Brokers, Saxo, etc., offer robo-advisory services.
For individuals who do not have a significant net worth and don’t need experienced financial services, robo-advisory services are ideal.
However, there are certain drawbacks of opting for robo-advisors, such as:
— Limited personalization
— Lesser flexibility
— No human interaction
— It might be expensive compared to DIY investing
HNWIs should proceed with wealth managers or other similar financial professionals.
They can understand your situation and offer tailored solutions based on your goals and needs.
They can even evaluate your financial profile and develop better investment strategies.
Remember that planning without taking necessary actions to achieve your goals is worthless.
- Budgeting
Many individuals are anxious about budgeting, yet you should remember that it is crucial for accumulating wealth.
Creating and committing to a budget enhances the likelihood of staying within your plan and achieving your financial goals.
Budgets also help you understand your monthly expenditures in a better way.
This will allow you to avoid behaviors like overspending, which might jeopardize your financial goals.
Given below are some valuable steps that assist you with the process of budgeting.
— The first step of creating a budget is to calculate your income.
— The next thing you have to do is devise a budgeting strategy.
— The budgeting plan should be in such a way that it should cover all of your needs and some of your wants.
— Needs are mandatory expenses such as rent, utility bills, groceries, gas, and other essentials.
— Wants may not be necessary, but you still want to do them, such as eating at a restaurant, watching a movie, etc.
— You must pay attention to your needs and wants and put some money aside for your emergencies.
Most people adhere to the 50/30/20 rule when sticking to a budget.
50% of the income should be used for needs, 30% for wants, and 20% for savings and debt repayment.
Keep track of your budget by actively monitoring it and making changes based on how you can improve it.
Most people don’t get it right on the very first try, but you should know that it is not some accurate science.
Each individual’s situation varies based on various factors, and no single budget plan suits everyone.
It is more of a trial-and-error method, changing your plan until you get it right.
- Establish an Emergency Fund
Nobody can either anticipate or avoid the unexpected expenses that happen in their lives.
So, when unexpected expenses arise, lacking emergency savings can lead to heavy use of credit cards.
Doing so will incur additional costs, including higher interest rates.
For example, imagine dealing with unexpected expenses like a broken refrigerator.
This might set you back by a few hundred dollars, which may not be readily available because you spent all the monthly income.
In such a case, most people often rely on a credit card or a personal loan to deal with the unanticipated costs.
However, by having an emergency fund, you can efficiently deal with emergency expenses.
A rainy day fund safeguards your credit and enjoys the benefits of earning interest.
For example, online savings accounts can be a great way to earn interest and easily access your money when needed.
- Automatic Payments
Most financial institutions, online service providers, brokerage firms, etc., offer an auto-pay option.
With this auto-pay option, not only can you pay your bills automatically, but you can also save or invest.
This helps you overcome the issues of forgetting the crucial payments to be made at the right time.
Most entities usually deduct money for auto pay through the individual’s paycheck credited to a bank account.
Alternatively, You can connect your credit card for such payments to enhance the credit card features as well.
This strategy is valuable for savings and investments, as it eradicates the temptation to spend instead of investing.
- Manage Your Debts
When growing your wealth, you should remember that managing your debt is crucial.
Living from paycheck to paycheck is a common reason for most Americans having a significant debt.
Debts like mortgages can be considered advantageous due to their lower interest rates.
Simultaneously, high-interest debt, such as credit card balances or advance salary loans, can negatively impact your financial objectives.
Developing a repayment plan for your debts is highly recommended for a debt-free financial situation.
Unless you can manage your debt effectively, you may become a victim of the debt cycle.
Don’t opt for debt unless extremely necessary; even if you borrow, ensure you are only taking what is needed and nothing more.
For example, some people get credit cards because they have a great welcome bonus upon spending a certain amount.
It may seem lucrative at first, but you should remember that credit cards are tools for utilizing debt.
Don’t get carried away and spend just for the rewards because you will probably spend on the things not necessary for you.
I have described the details related to credit cards and how to use them correctly in another blog, which can be accessed by clicking below.
Different Types of Credit Cards: How to Use Them Properly?
Remember to pay off your debt as quickly as possible to make the most of your earnings and grow your wealth.
- Increase your Retirement Contributions
Utilize various options offered by the government, like employer-sponsored retirement plans and retirement accounts (IRAs).
Try contributing as much as possible to your retirement while trying to match the employer contributions.
If the maximum contribution is impossible, just go for any available employer match.
Even the most negligible investments over a long duration can provide substantial returns through compounding.
Below are some of the retirement accounts available in the world’s top countries.
United States
The retirement accounts available in the United States are given below:
— 401(k)
— Individual Retirement Account (IRA)
— Roth IRA
— A simplified Employee Pension (SEP) IRA
— Solo 401(k)
— Roth 401(k)
Luxembourg
The retirement accounts available in Luxembourg are as follows.
— Luxembourg Pension Savings Account (Compte Epargne Pension)
— Luxembourg Pension Insurance (Assurance Pension)
— Luxembourg Pension Fund (Fonds de Pension)
Australia
The retirement accounts available in Australia are as follows.
— Superannuation
— Self-Managed Superannuation Fund (SMSF)
Germany
The retirement accounts available in Germany are listed below.
— Riester-Rente
— Rürup-Rente (Basis-Rente)
— Betriebliche Altersvorsorge (bAV)
Switzerland
The retirement accounts available in Switzerland are given below.
— Pillar 1
— Pillar 2 (BVG/LPP)
— Pillar 3 (often called 3a and 3b).
Norway
The retirement accounts available in Norway are as follows.
— Folketrygd
— Occupational Pension (Tjenestepensjon)
— Individual Pension Savings (IPS)
Austria
The retirement accounts available in Austria are given below.
— Betriebliche Kollektivversicherung (BKV)
— Pensionskasse
— Pension Fund Savings (Vorsorgekasse)
The Netherlands
The retirement accounts available in the Netherlands are as follows.
— Algemene Ouderdomswet (AOW)
— Pensioenfonds
— Individual Retirement Savings Accounts (Lijfrentespaarrekening/Lijfrentebeleggingsrecht)
Belgium
The retirement accounts available in Belgium are as follows.
— Employers’ Pension Schemes (Pensions Complémentaires d’Entreprise)
— Régime Individuel de Pension (RIP)
— Pensioensparen
France
Given below are the retirement accounts available in France.
— French Public Retirement System (Sécurité Sociale)
— Plans d’Épargne Retraite (PER)
— Plans d’Épargne Entreprise (PEE)
— Plans d’Épargne pour la Retraite Collectif (PERCO)
Always pay attention to the details like availability, eligibility, and terms and conditions while choosing one.
- Maintain Diversification
I have mentioned the importance of a diversified portfolio in many of my previous articles.
Rather than relying on specific assets, diversify your portfolio with different investment types to spread the risk.
This strategy safeguards the obtained wealth and allows you to benefit even during market downturns.
- Boost Your Income
To invest more money, which helps you build and preserve your wealth, you have to earn more money.
Having more than one income source can provide more money for investing.
You can negotiate raises with your employer and boost your income, which is the most efficient way.
There is a possibility (but no guarantee) that you may expect an increase in salary if you change jobs.
Pursuing professional development, i.e., doing a course or certification that helps your career, can be beneficial while seeking another job.
Alternatively, exploring side hustles can also be a better option to improve your earning potential.
For example, starting a small business or freelancing or consulting are good strategies for a side hustle.
Building Wealth from Scratch
Creating wealth from nothing can be challenging and requires thoroughly evaluating your circumstances.
Make note of your income and expenditures over the last few years, and based on that,
— Identify areas to reduce spending
— Explore avenues to increase earnings.
Even unconventional approaches might be helpful while you are trying to build your wealth from scratch.
In Your Youth
In your 20s – 30s, you have a suitable timeframe to accumulate wealth.
This is because you have a long time horizon for investing, which increases your risk tolerance.
If you also have a good income, you can expedite the process of building and preserving wealth.
Lower financial responsibilities and avoiding lifestyle inflation assist you in investing a considerable portion of your income.
Geographic flexibility can help in finding high-paying jobs in affordable regions.
This would further enhance your ability to invest early and benefit from compound interest.
In Your Middle-Age
Your 30s and 40s offer similar advantages to your 20s and the consequences of prior choices.
However, having a diverse portfolio with aggressive and conservative investments is wise.
Reduce your debt and expensive habits because they obstruct your financial progress.
Consider downsizing expenses, pursuing professional development, or advancing your career to boost income.
While Nearing Retirement
Regardless of your obstacles, retirement age is still an ideal period to build wealth (with a higher income).
Unless you have a higher income, being conservative and avoiding aggressive strategies is wise.
Try considering your past decisions, identify areas for improvement, and make possible changes to enhance your wealth.
For those nearing retirement, a job change for a higher income may not be advantageous.
This is because of factors like contributions to your retirement account, job security, etc.
Bottom Line
I am trying to say that building and preserving wealth may be challenging yet achievable.
Simply put, all you have to do to improve your net worth lies in the five steps I’ve mentioned.
I have helped several people improve their net worth situation, including those nearing retirement.
Therefore, you can benefit from my tailored wealth management services.
Feel free to contact me to find out whether you can benefit from the best-in-class services I offer.
Having discussed that, I hope the information provided in this article was helpful for you.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
