Net worth is the scorecard of financial well-being, security, and ultimately independence. You want to increase your net worth every day.
To review, net worth is equal to all of your assets added up subtracted by all of your liabilities added up.
In the way of definitions, assets are things that put money in your pocket. A cash-flowing real estate investment property is an asset. It puts money in your pocket in the form of cash flow every month. Real estate also makes you money in 4 other ways too!
A liability is anything that takes money out of your pocket. A brand new luxury car that depreciates 10% when you drive it off the lot is a liability.
So, with that said…
Without keeping score, we have no idea how we are doing financially
I am perfect evidence of this theory. Before beginning my financial education, I was clueless. I had no idea what net worth actually meant. Obviously, I had never tracked my own.
I’ve now tracked my net worth twice, as my written financial plan calls for my wife and I to calculate our net worth every 2 months.
My net worth started on the wrong side of -$500,000 (thank you student loans). However, in the matter of 2 months during a time when neither my wife nor I were making any money, we increased our net worth by thousands, just by making the right decisions!
And now, after 18 months, our net worth has increased to over $400,000! You can see an exact break down of this here: Net Worth Update: From -$400K to +$400K in 14 Months
Just knowing how to keep score made us accountable. Now, with every financial decision, we consider which option will help us most grow our net worth. Before, we were shooting in the dark. Now we have a roadmap.
Step #1: Start tracking your net worth to increase it
This is a very easy first step. There are innumerable online calculators that will compute your net worth, walking you through the whole process.
If you are like me, there will likely be a sense of dread upon doing this. I was embarrassed by my mistakes and intimidated by the answers that I was going to find.
Fight through this. Confronting any mistakes gives you power to finally overcome them. And usually, the answer isn’t nearly as bad as you expected. And finally, chances are that I dug myself a deeper hole than you. If I can start digging out of my hole, so can you!
Like I said earlier, once you know your net worth, you know how to keep score. Now you can start to play the game the right way.
This is a huge first step. Do this and you are financially ahead of most of your peers. I guarantee it.
This is just one of the many simple financial habits that will lead you to financial freedom.
Step #2: Create a budget (or an anti-budget!) with a 20% savings rate (no anti-savings rate though)
My wife and I like budgeting (OK, maybe that is a stretch). But we definitely tolerate it and look forward to it.
I see a budget not as a limiting thing that stops you from living your life. In fact, I see it as an empowering tool that is helping me achieve my financial goals so that I can live the life I want. This comes from adopting an abundance, rather than a scarcity, mindset with money.
With this change in mindset, my wife and I sat together one night a view months ago and created a monthly budget incorporating every dollar that we would make on a monthly basis. We first budgeted out our “needs,” such as food, healthcare, and taxes (yes, make sure you include taxes).
Next, we set aside our savings. Notice that we budgeted this before budgeting out “wants,” like entertainment and such. This is called paying yourself first. If you budget our everything but your savings, you will invariably have nothing left. It’s human nature. We tend to spend up to our budget. Break this cycle! Set a savings rate of at least 20% and then budget the rest as you see fit. You need to make sure you have enough to retire!
All of this is incorporated in our written financial plan.
Hate the budget? Try the anti-budget!
Ok, ok I know that there are people reading this and saying, “I hate to budget” or “If I have to budget, I’m not living.”
Fine, then use an anti-budget. Rather than having no budget, spend your monthly earnings, and hoping you have enough left over for some savings, set a savings rate up front. Make it at least 20%. When you get your paycheck, take 20% out and place it into a different account to be invested according to your plan. Then, spend the rest as you please.
Boom…you just (anti) budgeted.
Whether you budget or anti-budget, just by creating that savings rate, your net worth will increase by that exact amount in the coming month. Invest that money wisely and your net worth will increase exponentially through the magic of compound interest.
If you are looking to get started with a budget, download our budgeting template here for free.
Step 3: Increase your debt pay down
For 7 long years after I graduated medical school, I didn’t pay down a single of my loans. Uninformed people told me that loans would take care of themselves after I became an attending. I’ll burst your bubble – that is not true.
Loans don’t take care of themselves; you have to have a loan and debt plan. That’s what tales care of the loans.
Now that you’ve completed step #2 and created a budget with at least a 20% savings rate, some or all of that savings rate should go towards paying down any outstanding debt in the following order:
- Commercial debt (credit cards, etc.)
- Loans with rates >8%
- Loans with rates between 3-8%
- Finally, loans with interest rates <3%
Since you’ve also completed step #1 and calculated your net worth, you know that all of your debt is in the liability column.
This means that every $1 you use to pay off your debt increase your net worth by $1. That is a 1:1 net worth increase. Nothing else, repeat nothing else, will give you that immediate return. Factor in the interest rate causing your debt to grow by the second when it’s not paid and debt paydown is the best investment you can make.
My student loan debt of >$400,000 is by far the biggest weight on my net worth. My written financial plan calls for me to pay that down aggressively.
I highly recommend that you take the same mindset
Whatever you are currently paying towards your debt, increase it. Even if it’s by $20. That’s a $20 increase in your net worth. Ordering takeout for one night won’t do that to your net worth.
You can review my strategy for paying off my massive debt here or see how I refinanced my loans to accelerate my debt pay down here.
Step 4: Invent wealth on the margins
What do you do with your change? Be honest.
Me? I generally put it somewhere and forget about it. In New York City, I would occasionally scape together $2.75 in coins for the bus. (And let me tell you, the people behind you in line love it when you’re putting in like 30 coins for a bus ticket.)
Then about a month or so ago, I discovered an app called Acorns.
The app is an investment tool that invests your spare change. You link your card to the account and with each purchase, it rounds to the nearest 0 and invests the extra change. For instance, buy a sandwich for $5.50. Acorns will round up to $6.00 and place the extra $0.50 in your chosen investment account. The app offers a variety of broadly diversified, low cost investment options.
I know that you’re thinking, “How in the world is this going to ever be enough to move the needle on my net worth?”
If you were most people, I would agree. But, you’re not. You’re a high-income earner. Go through your last month’s bank statement. Yup, that’s right. You generated a lot of change!
Now, in your Acorns account, you can create a recurring investment. I invest $20 every Sunday. You can also add a multiplier to your round-up investments. I add a 2x multiplier to mine so that now if I bought that sandwich for $5.50, I invest $1.00 instead of $0.50.
Doing this for about 6 weeks has increased my net worth about $500. Not a ton I grant you. But now multiply that across my life span. Add in the effect of compound interest. Now we’re talking about hundreds of thousands of dollars.
And the best part is, I noticed that I really don’t miss any of the money. I don’t even realize that it’s left my checking account/slush fund.
Step #5: Increase your earnings
This seems like obvious advice and I’m sure will induce some eye-rolling from some readers.
But this is a step that should not be overlooked. Many will be tempted to overlook it because they will say, “I don’t have enough time” or “Passive income is not for me – I can’t do that.”
Those, my friend, are limiting beliefs. They are also uninformed beliefs.
There are two ways to increase your net worth. We already have spent a lot of time on one of the ways – save more money. The other way is to make more money.
That’s how wealth is created. Increase income, decreasing spending, and investing the difference.
Increasing your earnings does not mean you need to start a side hustle, however (although I recommend it).
There are a ton of ways to increase your income:
- Get a pay increase
- Invest in index funds
- Invest in real estate – passively or actively
- Start a side gig by becoming an expert witness or reviewing charts among myriad other options
- Do paid medical surveys
- Form a relationship with industry partners
- So, so many others!
Physician Side Gigs to Make You Passive Money
I’ll touch on a few of these.
Negotiating your contract
If you are employed, this is the most obvious but overlooked way to increase your income. This is one time when you have the ball in your court and leverage on your side. Yet many physicians end up with undervalued contracts simply because they don’t ask for more.
You bring and create value for your employer, learn what your value is in financial terms and seek that value. I guarantee that your employer has taken the time to know your real value. Why shouldn’t you? Meet with your finance department to check your billings. Ask others in your field in your area what they make. If you are negotiating your first contract, ask what your mentors make.
This is allowed. I did it and no one got mad at me. They were all happy to share, they just needed to be asked (obviously in a respectful manner).
If you own a practice, evaluate your business model regularly
Look for ways to increase net profits.
You are a business owner and should act like it. Your patients will be best cared for in an efficient practice with partners and employees that are happy and compensated to their value.
Invest in index funds or real estate
When I first started my financial education, I was still a fellow making a much lower salary than I am now.
I knew this and so I immediately opened a Roth IRA account with Vanguard before my salary changed and I would be phased out of the tax benefits of this account. I put as much savings that I knew I would not need for 20 years as I could into it. This decision has already made me about $1000 in passive income, increasing my net worth.
I also closed early in my career on my first real estate investment property. Through cash flow, equity paydown, and forced appreciation, this will increase my net worth for years and but passive money in my pocket. That’s an asset. We now have 3+ of these assets.
Start doing these things now and your net worth will increase immediately. But the biggest increase will be in the years to come.
These 5 steps will set you on the path to financial well-being, security, and independence
However, one-off maneuvers to increase your net worth will not get you there.
You need to formulate your strategies into a written personal finance plan that you can follow day after day, month after month. This is how you take action, set goals, and reach financial well-being.
What do you think? Have you taken any of these steps? What effect did they have on your net worth? If you haven’t taken these steps, what is stopping you? Did I miss anything?