OK I know this is going to sound like I’m bragging, but that’s not the intention. I spent a lot of my years, actually the majority of my adult life in debt. This is the first year I will actually have a positive net worth in my entire life.
In my teens I had money, but no savings. I lived at home, worked two jobs and spent absolutely every cent I made. In my 20s when I moved out of my parent’s house I had no idea how to budget so I started applying for credit cards. My financial life just spiraled downhill from there. My little $1000 credit card from when I was 18 years old turned into over $50,000 of debt by the time I was 28. YIKES! Yes I know.
I’ve spent the last few years paying off my debt and now for the very first time I have a positive net worth!
Pay Off Debt
After I made the final payment on my last credit card my net worth suddenly jumped into a positive position. That’s the thing about your net worth, it doesn’t equal your savings. Your net worth is calculated by subtracting your debts from your assets. If you have $10k in savings but $40k in debt you still have a negative net worth. This used to be my situation.
When clients ask me (I’m a financial planner) whether they should pay off debt or save I always tell them to pay off debt. First of all debt costs so much more than just what you borrow, monthly interest payments can sometimes be more than your capital payments. I know mine were. Secondly saving money doesn’t help increase your net worth if you aren’t paying off your debt.
Don’t Touch Your Bonus and Tax Refund
This gave my net worth a nice big boost this year. When I found out the amount of my yearly performance bonus I was so tempted to take it in cash, until I realized I would lose over half in taxes. I decided to put it into my retirement account, invest it and watch my net worth grow.
In past years I would always take my bonus in cash because I needed it to pay off debt, but losing half in tax is just not worth it. This is the first year I have the freedom to choose what I want to do with my windfall of cash (both my bonus and tax refund) and I’ve decided to save them both. Hello Net Worth!
Save Regularly
This is where I have the most difficulty when it comes to growing my net worth. I hate commitment of any kind so even though I advise people to set up regular savings I don’t actually do it myself. Yep that’s right, I don’t have an automatic transfer from my checking account to my savings with every pay. Can you believe it?!
I try to manually transfer money every month, but that also rarely happens. I save regularly by allocating a particular income towards savings. I have a 9 to 5 job plus several gigs on the side and when that extra money comes in at the end of the month I don’t touch it. I don’t actually save any money from my regular job. I used to use my freelance income to pay off debt, now I allocate half of it towards savings and the other half towards travelling. That’s how I roll.
Photo from I’d Pin That
Thanks for the post 🙂
Great advice. Common sense really – but so many people do not get started.
As for saving manually I would really lack the required discipline. I also recommend to save automatically and forget about it.