I have a friend. Let’s call her Karen. Karen is someone who is doing well. She landed her first job months before graduating. Six months after graduating, Karen is promoted. She’s reached that stage in her career, where she feels she can’t disclose how much she is making. Every few months, Karen and I meet up. Karen is against hangouts on a budget. I save a fortune just to afford to hang out with her for a few hours.
We don’t meet up for a while, I give her every excuse from the book of excuses. Not that we don’t talk often, we do. Just last week, I lent her money for fare. Karen’s behavior has always left me with questions. One minute she is telling you about the luxurious trip she took to Malindi and the next minute she is asking for fare to head to work. My questions deepened when I recently went to see her and realised she may be in debt to everyone on her contact list.
I have a second friend. Let’s call her Vivian. For the four years we spent at the University, Vivian saved money. Her goal was to start a side business after graduation.
After graduation, Vivian opened a small shoe business. For her 9-5, Vivian works a low-paying teaching job that brings in a reasonable amount of money for her to get by. Yet somehow, she has managed to furnish her house fully and is currently saving up to buy her first piece of land.
My two friends are polar opposites in terms of how much they earn. Yet Vivian seems to have a higher net worth than Karen. Why?
Did you know how much you earn doesn’t determine your net worth? For example, Karen could be earning around Ksh100k and Vivian could be making Ksh20k. If Vivian manages to buy that plot of land she’s been thinking of and decides to buy a car too and pay off all her debts, while Karen does nothing but spend her salary and accumulate debt. Then Vivian has a higher net worth than Karen. Wondering how this is possible? Here are three reasons you might have a low net worth despite earning a high salary.
This is perhaps one of the significant reasons why lots of high earners may have a low or negative net worth. According to Investopedia, lifestyle inflation refers to an increase in spending when an individual's income goes up. This may lead to you living an extravagant lifestyle, including going on vacations, purchasing expensive cars, homes and visiting fancy restaurants. The more you spend, the less you have to save or invest and this ultimately hinders wealth accumulation. It also makes it difficult to get out of debt, save for retirement, or meet other big-picture financial goals. Lifestyle inflation may cause some individuals to feel they just have enough money to pay their bills every month.
The saying knowledge is power is an anthem that has been sung so many times that the words might have lost their meaning to some but their meaning still runs true. You could have a job that's giving you a very high income at the end of the month but if you don't have a sound understanding of money management or wealth-generating strategies then you might end up making bad financial decisions or missing out on opportunities to grow your net worth.
You might make the assumption that your current income might be enough to cover your retirement or other future goals. However, without a savings plan, you are more likely to fall into debt. Without a savings cushion, any expense from an unexpected car repair to paying for your child’s college education can put you in debt. In addition, while credit cards and loans are convenient ways to afford more than your bank account, you pay more in the long run because of interest and loan fees.
Read Also: How to Save More Money Faster in 2023
When you reach a certain stage in life you might start thinking of growing your wealth. For younger people, their main focus may be graduating from university and finding a job before they start thinking of accumulating wealth. However, it's not too early to start thinking about growing your net worth. Knowing how much you are worth and ways to improve it can help you determine where you are on your financial journey while you plan for the future.
How do you determine your net worth? Well, there are two types of worth, Positive net worth is when the value of what you own (your assets) is bigger than the things/money you owe (debts/liabilities) A negative net worth results if your total debt is more than total assets.
For instance, if the sum of an individual's credit card bills, utility bills, auto loan bills, and student loans is higher than the total value of their cash and investments, their net worth will be negative. Your assets could be your house, investments in stock, or bonds and cash you have in the bank. Liabilities are things like loans, credit card balances, and mortgages.
Having a high net worth not only gives you bragging rights but it has several benefits like it could be your ticket to financial security or early retirement. How can you grow your net worth? Here are three ways to increase your net worth.
One approach to growing your assets and increasing your net worth is to target debt. Interest-bearing loans are a liability and can hurt your ability to boost your net worth. You could start by targeting debt with high interest rates and then paying off other debts as you go.
If you are for the idea that people only become wealthy by investing in one thing let’s say Bitcoin then consider loosening your stance. Diversifying your investments not only protects the wealth you have grown but puts you in a position to reap rewards even in a market downturn.
The biggest benefit of having an emergency fund is it helps you avoid high-interest debt. You don't know when life will happen, you might need to make an unexpected hospital visit or replace your laptop. Without an emergency fund, you might be forced to put these things in credit cards or take on other loan forms. This could result in a vicious cycle of never-ending interest payments putting a significant strain on your net worth. Having an emergency fund helps you avoid that cycle, which may help you increase your net worth.
Cutting back on your expenses isn't a thought that's received with joy. But it can be an effective way to increase your net worth. If you are struggling to budget, you could always try budgeting software or an app to help you reduce your expenses. Narrowing down your spending to the "big three" of housing, transportation, and food may be an effective way to save money. You could also consider reducing housing costs. However, this isn't always an option if you have a family in that equation.
It's safe to say increasing your net worth doesn’t necessarily mean increasing your job income. A high income does not guarantee a high net worth. It is the combination of smart financial choices and discipline that ultimately leads to wealth accumulation. One of the common mistakes we make is not thinking about our current assets and how they affect our future net worth. By taking control of your spending, reducing debt, investing wisely, and saving more, you can grow your net worth.
It may feel challenging to build wealth in your 20s and 30s when you’re starting your first job and paying your first bills. But the decisions you make and the habits you form when you’re starting out can make a big difference in your financial future.