These steps are for anyone interested in increasing net worth and savings.
Whether helping you get started with saving your first dollar, or guiding you to remain motivated as you cross another financial milestone, these 3 steps are the building blocks of increasing your overall net worth.
My advice: revisit these 3 step early and often.
Saving money does NOT have to be difficult
Saving money does not have to be a difficult endeavor. Yet for many of us, we find it nearly impossible. Most of us suffer from "too much month at the end of the money" which essentially means the average American is living paycheck-to-paycheck.
In the United States, it is a sad state of affairs when examining our average net worth by age.
The chart below highlights, by age, the average net worth inclusive vs. exclusive of the equity in their own home:
Average Net Worth in the United States by Age:
Average Net Worth in the United States by Age minus Personal Home Equity:
As you can see, the average American under the age of 35 is only worth less than $7,000. You would hope that by the age of 50, that number would go up dramatically.
Well, guess what, it doesn't.
By 50, you can expect a net worth of less than $90,000.
After the age of 65, that net worth only sees an increase up to $170,000.
That means that after 30 plus years, the average American only increases their net worth by $160,000.
Sound like a lot? It isn't!
So how can we kick these savings into overdrive and take advantage of the power of compound interest
Easy ways to increase your overall net worth
1. Learn about money
Seems simple right? This one seems straightforward but many readers ask why this is important.
Think about it this way: you would not perform heart surgery without going through undergraduate studies, med school, fellowships and residency training first. That's a lot of preparation.
So why would preparing to increase your net worth be any different. You need to learn about it. What is the primary driver of net worth... money!
Here is a list of the most meaningful books that I read when I first started my financial independence journey.
2. Track your money
I don't really care how you do this but it is unavoidable. You do not need a full blown budget but you do need to be aware of where your money is going. If you have no idea where an entire months worth of earnings or paychecks are going, you have very little chance of increasing your overall net worth.
If this intimidates you, take this on incrementally. For example, if last year you had an extra $200 every month in your checking account after expenses, and now you only have $50, investigate where that extra $150 went.
This is a great place to start. This is where you can identify extra savings very quickly.
Some ideas and quick tips for where to look for extra money each month:
3. 'Automate' or 'Normalize' your savings
I purposefully used BOTH automate and normalize for #3. Why? The fear factor associated with "automation".
Some of you are going to be scared off by the "automate" verbiage. You do not like the rules of needing to link accounts and automate savings in regular intervals directly to your 401k, 403(b), 457 (b), etc. I am certainly aware that this is very common advice in the common wisdom of pay yourself first.
The problem with automation is that it becomes another point of friction, or sticking point. Many of us do not like the rigidity of automatic deposits.
For others, automation is great advice. If your company gives you a "match" into your retirement account, you need to take advantage of this up to the maximum amount they will match. Otherwise, this is free money being left on the table each month.
To get started with automation, simply set up an automatic deposit on a weekly, bi-weekly, or monthly basis. Direct it to your 401k, 403(b), 457 (b), IRA, brokerage, etc.
I personally prefer sending it to a taxable brokerage account or IRA which gives me access to low cost index funds (although volatile, over a 210 year history they typically yield an 8% return, give or take). Please consider the fees of your retirement accounts. Make sure to ask for all types of fees. Be sure to ask about:
If you need a little extra motivation, consider that Tony Robbins - in his book Unshakeable - tells a story of what happens if the government imposes a tax on you.
To paraphrase Tony: if you had a tax imposed on you suddenly, you would initially complain and kick dirt, but you would still eventually pay it. Think of your automated savings like a self-imposed tax. You might complain about saving a pre-determined percentage of your pay initially, but eventually you would find a way to "pay it". Consider the added benefit, in this case, that this self-imposed tax is actually just you "paying" yourself.
If you still cannot get over the idea and rigidity behind automation, do not give up. I believe there is an alternative option.
It is something that I personally do. It typically is not as consistent and it does require some discipline.
I call it normalization of savings.
What I mean by normalization of savings is find a way to make savings a normal part of your life and money management.
How would you do this? With repetition and practice.
For example, if you never saved before and you anticipated finally starting to save, that first $100 deposit is going to seem monumental. While it certainly is monumental, it only is so because you have never done it before.
Over time, as you continue to deposit $100, month after month, year after year, each individual deposit will not have the same psychological impact as the very first $100.
This habituation effect is actually what we are looking for! It is the normalization of savings.
If a deposit into your accounts seems like a big deal, it is probably because you have never done it before (or at least not in that amount). This psychological "wow factor" adds yet another layer of friction which will prevent you from saving it in the first place.
Put your money where your mouth is.
Write these 3 steps on a whiteboard, paint them on the wall, whatever. I do not care how you do it, just remember to revisit these 3 steps no matter where you are on your path to financial independence.
They can serve as a great motivator for beginners or a "back to basics" course for those well seasoned pros already along the journey.
Be sure to leave us a comment below on how these strategies gave you a kick in the ass to get started or helped orient you somewhere down the road...
Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.