How To Build Net Worth
Increasing your net worth gives you more financial security and options later in life. And building net worth doesn’t have to be confusing — here are four steps you can take to get started.
1. Create And Stick To A Budget
A budget is a plan for how you’ll spend your money each month, and creating and sticking to a budget is the foundation of any good financial plan. It enables you to manage your money responsibly, avoid debt, and prioritize saving and investing.
To calculate a budget, you’ll start by estimating your monthly income. From there, you’ll add up all your fixed expenses, like your mortgage payment, utilities and loan payments. You’ll also think about variable costs like food and gas.
There may be a bit of a learning curve at first, but budgeting will get easier if you stick with it. If you’re having trouble coming up with a budget, tools like Rocket MoneySM can help.
2. Ensure You Have An Emergency Fund
An emergency fund is a cash reserve specifically for unplanned expenses or financial emergencies. For example, if your car breaks down or you lose your job, you can take money from your emergency fund. This tool helps you avoid relying on high-interest credit cards or pulling from your investment accounts.
Ideally, you’ll have at least 6 months’ worth of expenses in your emergency fund. If you have to draw from your emergency fund, make sure to replenish it as soon as possible.
3. Invest Heavily In Your Retirement
Too many people put off saving for their retirement and miss out on the benefits of compound interest. The sooner you begin saving for retirement, the longer your money has to grow. You should aim to save at least 15% of your annual income for retirement.
Start by taking advantage of your employer-sponsored 401(k) plan, especially if your employer will match your contributions. A 401(k) allows you to contribute pretax dollars toward your eventual retirement. If your employer doesn’t offer a 401(k), you can open an Individual Retirement Account (IRA) and manage it yourself.
4. Make Smart Investments
If you have additional money to invest, you can put these funds in stocks or real estate to grow your wealth. These are considered long-term investments — accounts you plan to hold for more than a year that can generate additional income.
However, there’s more nuance involved in long-term investing. Before you start investing, it's a good idea to speak to a financial planner or brokerage professional. That way, you can ensure you’re building a safe and well-diversified portfolio.
