Focus more on increasing net worth
In the journey to financial independence, the most widely accepted approach is to earn more and more in due course. The formula is quite simple. Earn a good professional degree, gain experience and keep moving up the corporate ladder. This growth will give you thrust in your income too. So more your income is, more you have money.
However there is one more catch. What if you are earning INR1, 00,000 per month and your monthly spend stands at INR1, 00,000 per month. This is something which is worrisome. This will be a kind of status-quo where you are placed extremely well in the corporate ladder and earning a handsome paycheck every month. However on asset / net worth front you are ZERO. You will not be able to create any asset which will appreciate and give you good returns in due course.
So, increase in income does not necessarily mean increase in your net worth. On the road to financial freedom, you must focus on increasing net worth and track it month on month so that you have all figures about your financial growth at hand.
It’s great to have a 6 figure monthly income but not focusing on net worth will make you work like a workhorse till you die. Instead of focusing only on increasing income, once must focus on increasing net worth as net worth again will keep increasing thus making a substantial gain on monitory front through investments and asset appreciation. Here you must note that more your income is, more your tax liability will be. However assets you make are taxed in different bracket which is quite less when compared to your tax on income. You are taxed on what you earn, not on what you own.
Off course I am not undermining the importance of increasing income, but if this increase in income is coupled with serious attempts to increase net worth, your hard work will bear fruits much earlier than anticipated.
Why you should focus on net worth:
- The major component of the tax is computed on the income, not the net worth
- Higher net worth gives you much more financial security compared to high income levels.
- High income can be spent easily and loose its value, but higher net worth is not that easy to dilute and spend. This way the assets, equity you create is safe from impulse purchases
- Net worth always keep growing – the components will keep on working and giving you passive income hence overall net worth will keep increasing
How to increase net worth?
- Practice frugality: This is the first step. This will ensure that your expenses are always less than your income
- Pay down your debt on war footing: Debts are trap. They suck money in terms of interest. Though monthly payments look small for any debt, especially consumer debt, but if you consider the entire cost of debt, it is indeed a high figure.
- Track your expenses: This will give you a very clear picture where your money is going month on month. If you keep tracking, it will give you clear alarms about money drains.
- Have an emergency fund: This will help you in fighting emergencies like car break down, home repairs, sudden job loss etc. You need not to break your fixed deposit or take out money from retirement savings for emergencies.
- Start investing based on your appetite and with proper asset allocation: This will help you grow your net worth and in turn your wealth. Also a proper investment portfolio gives you a good passive income month on month and is your best buddy in the race towards financial freedom.
- Find ways to increase your income and keep investing religiously all the raises you get: This will help you in avoiding lifestyle inflation. Believe me lifestyle inflation is the biggest wealth killer. If you divert salary raises towards investments, you are enhancing your wealth in the longer run.
- Track your net worth month on month: This will give you clear picture of your performance towards your financial freedom. Also this will tell you every month whether you are moving in right direction or not?
- Look at starting some side hustle, or some side business in addition to your day job: Again this will bring additional money which can be invested again to increase your wealth. Anything which contributes to your wealth speeds up your journey towards financial freedom.
- Avoid any consumer debt: Again consumer debts are traps. They force you to pay higher amount for the goods and come with processing charges. Plan to pay cash and learn to live within means.
No doubt focus on increasing income is important in creating wealth. But income is only one part of the overall equation which contributes in creating wealth. But focus on net worth will make you an individual with multi pronged approach on creating wealth.