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Growing Net Worth Boils Down to These 3 Things

In my first post, I gave you some background on me and the CliffsNotes of how I got to now. I noted that my and my wife’s net worth has increased substantially over the last handful of years, now closing in on $1 million. But how did that all happen? What caused it and how can you do the same?

Well, there are three important building blocks of personal finance and growing your net worth: maximize income, minimize expenses, and invest the difference as wisely as possible. These three building blocks probably seem like common sense (they should), but your financial success will come down to how well you master them.

Maximize Income

Of the three building blocks I’ll discuss, maximizing your income may be the most important since there is almost no limit to how much money you can make. The more money you make, the more money you can save, and the more you can invest to generate even more money for you. This building block gets the ball moving.

My salary at my first job out of college was $50k/yr. I was thrilled with this since the most I’d ever made up until that point was $10/hr. Now, about nine years later, I’m into the six figures and have grown my income every single year since my first professional job.

Maximizing income is the most difficult of the three and comes with tradeoffs. Generally, higher paying jobs come with more responsibility and stress. I’m currently in a situation where I received a promotion a little more than a year ago, but I’m not sure it was worth it as my expectations and responsibilities have increased significantly more than my pay.

To get promotions and pay increases, you need to either be smarter and / or work harder than your colleagues, which requires commitments of time and energy. I’m glad I’ve put in the work to get to where I am as it’s enabled me to save, but I’m at the point where I’m not sure how much further I want to progress / whether additional promotions are worth it.

Each year that my wife and I can hang on puts us that much closer to our financial goals and will give us an ability to dictate the terms of employment. One of the beauties of financial freedom is having the ability to set up your life however you want, and maximizing your income can supercharge your way there.

Minimize Expenses

Once you’ve maximized your income, minimizing your expenses will dictate how much money is left for the last step. Some people love to spend money and have a hard time pulling back. I am not one of those people.

I definitely fall in the camp of naturally frugal people. My parents were both frugal (by necessity). Growing up, my mom probably talked to me about money problems a lot more than a parent should, but it has certainly made me into a very financially responsible person (and maybe a bit neurotic).

When it comes to minimizing expenses, there are three big buckets you need to focus on: housing, transportation, and food.

Housing is usually the largest bucket of expense for most people. Whether you rent or own, keeping this to a reasonable level is going to dictate a significant portion of your recurring expenses.

Transportation, i.e. owning a vehicle and the associated expenses, is usually next on the list. This is one where I cannot understand why some people spend so much. Vehicles have many costs: buying or leasing it, gas, insurance, registration, maintenance, etc. At my office, most people drive relatively newer vehicles and don’t seem to bat an eye at spending tens of thousands on a car. My vehicle is more than 15 years old and I plan to run it into the ground.

Food costs round out the big three buckets of expense. You have to eat, so there’s always going to be a baseline of expense here, but there are ways to keep this in check. My wife and I love food and love going out to eat, so this is one of the areas where we are willing to spend because it brings us joy. We keep that in check by being conscientious with our grocery store spending, like doing most of our shopping at Aldi. I’ll have more in a future post about Aldi and why you need to shop there.

In an upcoming post I’ll discuss the simple method we use to track our expenses.

Investing the Difference

Once you’ve maximized your income and minimized your expenses, you’ll have money leftover…but what do you do with it? You invest it! But what do you invest in? And how?

If you’re into personal finance or financial freedom, you’ve probably heard about index funds. What is an index fund? It’s a mutual fund that tracks an established index (e.g. S&P 500) by owning all the assets in that index. Thus, your fund’s performance will mimic the performance of that index.

Index funds are a great place for most investors to put their money and let it compound for decades. Whether you’re funding a 401k, IRA (Roth or Traditional), or a brokerage account, index funds should be at the top of your list. You can’t really go wrong with Vanguard, Fidelity, or Charles Schwab as they will all have plenty of low cost index funds from which to choose.

My wife and I put most of our money in index funds (we happen to use Vanguard), whether it’s through our 401k, Roth IRA, or brokerage account. We have also automated a portion of our investing in the last few years, which is something I wish we had done much earlier. One of the many mistakes I’ve made that I hope you will learn from.

We also invest in individual stocks as I’ve always loved the stock market and need to scratch that itch. I wouldn’t suggest for most people to invest in individual stocks, but if you do, keep it to a limited percentage of your overall portfolio.

Once you’ve done these three things, how do you know where you stand? You track your net worth via a personal balance sheet. In a future post I’ll cover why you need to have a personal balance sheet to track your net worth regularly (we track it on a quarterly basis).

Well, there it is. By maximizing your income, minimizing expenses, and investing the difference, you can become financially independent. It’s simple, but not easy. It takes time and effort to make these things happen, but over time it becomes second nature.

Let me know what you think. How have you fared with the three building blocks? Which is the hardest for you?

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