Your net worth is probably one of those things you don’t think about often. Or maybe you do. But either way, you might be interested to know that over the three-year period from 2019 to 2022, Americans’ net worth increased by an impressive 37%. Data from the Federal Reserve. To put this in context, if you had a net worth of $10,000 and it increased by 37%, you would reach $13,700.
Now, there are different reasons why Americans are seeing their net worth increase so much. Part of this had to do with rising home values. Gains in the stock market also help explain this increase in net worth.
If you’re eager to increase your net worth, there are a few important steps you can take. But first, let’s make sure you understand what net worth is. The formula is simple: Your assets minus your liabilities equal your net worth. If you have $30,000 in your savings account and own a home worth $300,000 and also owe $130,000 on your mortgage, your net worth is $200,000.
With that in mind, here’s how to prepare yourself to increase your net worth.
1. Put more money into savings
It’s a good idea to keep money saved for emergency expenses. And the more savings you have, the more your net worth can increase.
But if you’re good at short-term savings, you can fund your long-term savings by investing in an individual retirement account (IRA) or 401(k) for retirement. These are assets that are also included in net worth.
Finding money for various savings accounts is not always that easy. But one trick that can help is to set up automatic transfers.
Use 401(k) plans, which do this by default because contributions are deducted from your paycheck. But if you’re funding an IRA, for example, you can set up an automatic contribution each month so the money comes out of your checking account and gets transferred into it. If this money is transferred automatically, you may be less likely to accidentally spend it on something else.
2. Pay off your credit card debt
Your debts are part of your net worth calculation. So the less debt you have, the more your net worth can increase.
You may have different types of debt, including a mortgage, car loan, and credit card balance. However, before these, it is useful to focus on your credit cards, because the interest rates of your home and vehicle loans may have lower and fixed rates.
Of course, it is possible to have a variable rate mortgage. But it still has a lower interest rate than a typical mortgage credit card, even though homeowners’ borrowing rates are higher than they were a few years ago.
If you’re carrying multiple balances with high interest rates, one thing you may want to do is consolidate your credit card debt. In this case, a balance transfer may work, but beware of the fees and limited-time introductory rate these offers come with. Another good option is to consider consolidating credit card debt through home equity or a personal loan.
3. Invest in the stock market
Funds you need for near-term expenses should not be invested. But putting your spare money into the stock market can increase your net worth in a very meaningful way.
Over the last 50 years, the stock market has achieved an average annual return of 10%. If you have $10,000 that you don’t need for other purposes and you invest it in stocks for 20 years, you can grow it to almost $62,000.
If you’re worried that investing in the stock market is too risky, know that you can reduce the risks by investing for the long term. This gives you the opportunity to recover from crises. Diversifying your assets can also help you minimize your losses and make nice gains in your portfolio.
Owning a home can increase net worth
Whether or not your net worth has increased in recent years, there are steps you can take to increase that number in the coming years. Of course, it’s worth noting that buying a home can be a great way to increase your net worth, as home values tend to increase over time. But right now house prices are up, mortgages are expensive to sign, and there isn’t a lot of inventory. Therefore, you may face many challenges in today’s housing market.
If it is not possible for you to own a home in the near future, do not despair. Increasing your savings, paying off credit cards, and investing your money are other very effective ways to increase your net worth.
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