As soon as you start earning money, you start to think about your wealth. You all know that the more money you earn, the larger your wealth will be provided by how carefully you are spending your money. However, most people are always concerned about the size of their net worth.
They do not know how much net worth they should have at a particular age. You must have some net worth at a certain age, but you may not be satisfied with it when you compare it with others. But there are various factors you need to consider before that comparison, and one of them is age.
Secondly, it depends on your profession how much it allows you to earn. For instance, a celebrity is, of course, richer than an entrepreneur. How much money you owe also plays a paramount role in deciding the amount of net worth. Everyone’s financial circumstances vary, so it is worthless to compare your net worth with others, even your age.
What is net worth?
Net worth is the value of assets that you obtain after deducting liabilities. Net worth reflects a true picture of your financial condition. If your assets are more than your liabilities, your net worth is positive, and it is a favourable condition. If your liabilities are more than your assets, your net worth is negative, and it is not a favourable condition at all.
Assets can be of two types – liquid and non-liquid. The former are those assets that you can easily convert into cash, for instance, mutual funds, stocks, bonds or antiques. At the same time, the latter includes those assets that cannot be converted into cash conveniently, and they are subject to a significant loss, for instance, real estate property, the business you own, and the like. Liabilities include the money you owe, for instance, auto loans, mortgages, student loans, credit card bills, medical debt, and business loans.
How much net worth should you have by age?
There are generally two ways to calculate the net worth. The first one is as follows:
Your age X pre-tax income / 10
The next formula for calculating net worth is absolutely different from the one given above. Instead of considering your pre-tax income, this formula takes into account your savings based on your age. According to this formula, by the age of 30, you should have savings equal to the annual spending in that year. However, it does not mean that it should be equal to the annual spending at every age. Note that as you grow older, you will have a higher multiplier of your spending.
To find out the net worth at a particular age, here is what you need to do. Divide your age by 166, subtract 0.15 from the result, and then multiply the resulting number by your age. That number shows how many times your net worth should be.
Suppose you are 30-years-old and earn £50,000 per year and spend £30,000 per year. Your net worth should be equal to your annual spending that amounts to £30,000. However, if you are 40-years-old and earn and spend the same amount of money, your net worth should be 3.63 times your annual spending, which is £108,900.
How to improve your net worth
Here are some of the great ways to improve your wealth.
Reduce your spending
First off, you need to whittle down your spending. The more money you spend, the more difficulty you will have to build your net worth. Whether you accept it or not, you cannot underestimate the importance of budgeting.
You should create a budget to take control of your spending. You can also use budgeting apps if you do not like a manual spreadsheet. Budgeting apps can help you set your spending goals and prevent you from overspending. Some apps can allow you to invest money.
Pay off debt
You will have to reduce your liabilities. This is why it is essential to take control of your debt. A rule of thumb says that you should avoid borrowing money unless it is very urgent and try to build an emergency cushion to dip into when you come up with unforeseen expenses.
Try to have cash with you whenever you want to buy anything. The excess use of plastic can lead to overspending and huge credit card bills. As far as it is about your current loans, you need to come up with a strategy so you can get rid of debts.
Analyse your financial condition to decide whether you should start paying debt with a small amount first or pay off debt with high interest. It does not indicate that you cannot borrow money. If you need money urgently and you do not have enough savings, you can take out very bad credit loans with no guarantor with direct lenders.
Increase your earnings
You will have to increase your earnings if you want to improve your net worth. Apart from your full-time job, you should consider additional work so you can easily make more money. It is not just about a part-time job or freelancing. You should think of investing your money.
You should invest money in stocks, bonds and property. If you are new to the investing world, you should hire an investment expert who can help you identify your investment goals and risk tolerance capacity. Investing money is a great way to earn money.
A rule of thumb says that you should make a diversified investment portfolio to avert risk when the market does not work as per your expectations.
Now that you must have understood how much money you should have as net worth based on your age. Try to increase your earnings and reduce your spending.
You will have to be very careful about your finances, so you do not struggle to achieve your goals. Pay off your debt and avoid taking it on when you do not need money urgently. Instead, you should try to build an emergency cushion.