Wealth building is a lifelong endeavor open to all, but only a few will triumph in this game in their financial goals. While hard work can provide a head start, it often falls short of securing a prosperous future.
For true success, strategic planning and unwavering commitment are essential. This involves taking practical steps throughout adulthood to monitor, maintain, and steadily grow one’s net worth.
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What Is Net Worth?
Your net worth is the remaining value after settling all your liabilities. Put another way, net worth is what is owned minus what is owed. Here are some examples:
- Personal loans
- Business loans
- Car loans
- Mortgages on properties
- Credit card debt
- Student loans
- Medical debt
- Judgments or liens
Net Worth = Assets – Liabilities Assets include, Among Others
- Cash savings
- Current market value of investment accounts (stocks, bonds, mutual funds, insurance policies, etc.)
- Current market value of real estate holdings
- Total current value of your business
- Depreciated value of vehicles
- Other valuable possessions like furniture, artwork, jewelry, etc.
Why Track Your Net Worth?
Many make the mistake of assessing financial success based solely on monthly earnings. However, this approach often leads to spending all income on non-yielding expenses, leaving little savings.
Tracking net worth provides a comprehensive picture of overall financial health, facilitating wiser spending, saving, and investing decisions, ensuring progress over time.
Net Worth Benchmarks by Age Different milestones should be targeted based on age, calculated using the formula: Net worth = (Age X Pre-tax income)/10
- Between 20 and 30 years of age: In your 20s, it’s common to have a low or negative net worth due to education or early career. Minimize expenses and avoid bad debt.
- Between 30 and 40 years of age: A crucial stage that sets the pace for your financial status. Focus on budgeting, saving half of your annual salary, and seeking safe investments.
- Between 40 and 50 years of age: Target having twice your annual salary saved, with real estate investments playing a significant role.
- Between 50 and 60 years of age: By age 50, aim for four times your annual salary, along with a steady cash inflow from investments.
- From 60 years of age to retirement: At 60, you should have saved six times your annual salary, considering health plans and reduced expenses.
Conclusion
- In your 20s, explore different trades and learn from your mistakes.
- Between 30 and 35, prioritize risk-free asset acquisition and building net worth.
- From 41 to 55, focus on safeguarding your accumulated wealth.
- By 60, aim to achieve your financial goals and gain freedom.
Tips for Financial Freedom by 60:
- Establish a passive income stream.
- Save at least 20% of your salary monthly.
- Set actionable financial goals each year.
- Maintain a strict savings, spending, and investment budget.
- Minimize losses as much as possible.
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