Knowing your net worth is essential for anyone who wants to attain financial freedom. It helps you understand how much you are worth financially and sets a base point in your journey to financial freedom.
What does net worth mean
Your net worth is the difference between everything you owe and everything you own. Or, to put it another way, it’s the difference between your liabilities and your assets.
Before we can continue, let’s break down the difference between a liability and an asset.
- Assets are things you owe that have financial value. These could be either cash or can be converted into cash. They include your various investments, savings, house, cars, etc
- Liabilities are debts or outstanding financial obligations. They include loans and other forms of debt.
How to calculate your net worth
Before calculating your net worth, you need to know all your assets and liabilities. Then subtract your liabilities from your assets like this.
Assets – Liabilities = Your Net Worth
For example, if your total assets equal Ksh 800,000 and your total liabilities equal Ksh 600,000, your net worth is Ksh 200,000.
Here is a net worth calculator to make it easier for you to calculate your net worth
How to increase your net worth
I was shocked at the result when I first calculated my net worth. It was much lower than I expected.
Even though on the surface, I thought I was doing ok financially, paying my bills, and living below my means, the low result was a big eye-opener for me. I knew then that I needed to make a change.
And just like me, your result may be lower than you expected. Or it may even be in the negative because of the amount of debt that you have.
No matter the result, knowing your net worth allows you to see where you are financially today and help you figure out the steps you need to take to increase it.
To help guide you, here are things you can do to increase your net worth:
1. Pay your debts
One of the best ways to improve your net worth is to reduce your liabilities by paying off all your debts. It would be best if you came up with a plan for this.
You can start paying off the debts with the highest interest rates and move to the lower ones.
As for me, I decided to pay more than the required amount each month, and any extra cash I received went to paying loans. This way, I was able to pay off all my loans faster.
Another way you can help reduce the loans is by consolidating them into one loan. This simply means taking out another loan to pay off multiple loans.
You do this by combining the loans into one and paying them off. After that, any payments you make will be to pay off the new loan.
This approach works well if the new loan has a lower interest rate than the other loans.
Some SACCOs and banks offer this option. Talk to your bank or SACCO to see how you can consolidate your loans.
2. Increase your savings
To increase your net worth, you must increase your savings. You can start by increasing your emergency fund with 3-6 months worth of expenses. This will help you avoid getting into debt in case of unexpected emergencies.
Save your emergency fund where it will earn interest. A money market fund is an excellent place to save your fund due to its relatively good returns and low risk. This way, your savings will grow faster as you continue to save.
Growing your fund to 3-6 months worth of expenses is not easy. To help you figure out how to do it, here are six practical ways to increase your emergency fund
3. Invest
Once you have paid off your debts and increased your savings, it’s time to invest. Investing allows your money to grow over time which will help you increase your net worth.
You can invest in land or properties, the Stock Market, Treasury Bills, and Bonds, etc.
As you invest, make sure to invest in more than one investment. This will help you manage your risks if one investment fails.
Final Note
Increasing your net worth may be challenging and may take a bit of time or even years, but with focus, determination, sacrifice, and the right systems, you will see a gradual improvement.
Disclaimer: This article provides information and education for investors. Please do your research and consult your financial advisor before making any decisions.
