Wealth Generation 101

Now that we know how to calculate  Net Worth, the next question is, "How do I increase my Net Worth?"

We have to deal with 4 important terms here ( would help to know them well and understand the differences) - Income, Expense, Assets and Liabilities. All of them are related.

We have seen a list of Assets and Liabilities under the calculation of Net Worth
Here are some examples of Income and Expense, before we move on to the math that holds it all together.

INCOME: Salary, Interest earned on assets, Rent earned, Profit from goods/services sold, Welfare checks

EXPENSE: Most payments and bills - Rent, Mortgage, Grocery, Medical, Car loan, Student loan

Example 1

Last month, my friend Tim's finances looked like this :

                                  Salary                                         : $2,000.00

                                  Interest from Savings                   : $       5.00

                                                                                     ------------

                                  Total  Income (Aug 2012)           : $2,005.00

                                                                                     ------------

His monthly expenses added up to                                 : $1,500.00 

Total Income - Total Expense                                       :$  505.00

It is a positive number. Tim had surplus income!

This can now be used to :

• Buy gold 
• Buy shares in a mutual fund 
• Leave as surplus cash in a Savings Account ( or a host of other similar things)

If you remember from the calculation of Net Worth, all of the above are what we listed as Assets. So Tim's Total Assets increased in Aug 2012 and if his Total Liabilities did not change month over month, his Net Worth will now be higher by $ 505!

Alternatively, he could have used the money to pay down his student loan/car loan. Then his Liabilities would have decreased and his Assets remained the same. Still, he would be richer by $ 505!!!

Example 2

My neighbor Carol, on the other hand had an unexpected medical expense in August 2012 and had a very different report

Income                      : $1,000.00

Expense                     : $1,300.00

                                  ------------

Income - Expense      :    - 300.00

                                  ------------

A negative number is not good news. She will either have to take money from her savings accounts or borrow $300.00 to pay her bills

Either way, her Net Worth is now lower. She is poorer by $ 300.

What do we conclude from these two examples?:

To increase net worth, one has to

1. Increase Assets

•     By increasing income
•     By reducing expense

2. Lower Liability

•     By increasing income
•     By reducing expense 

It all comes back to the same two methods.

The math is simple. The choices straightforward. But the options are plenty. Keep reading!

Related Links:
What is your Net Worth?
Plan Your Retirement
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