Net Worth

Increasing Your Net Worth And The Role Of Income

In Financial Freedom, Net Worth by Gen Y Finance Guy21 Comments

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There was a time in the not too distant past that my entire focus was on growing my income.  These days I am more and more focused on building my net worth, which in theory should build my income (or at least my future income). I have read in many personal finance books and blogs that it is net worth that matters more than anything, especially since the government taxes you on your income and not your net worth. In 2015 I plan to increase my net worth by about $69,000 before any appreciation from real estate, stocks, options, dividends, and interest income:

  1. Max out my 401K with the new 2015 limit of $18,000 (picking up an extra $500 this year)
  2. Contribute to an IRA for my wife in the amount of $5,500 (2014 was the first year we started this)
  3. Increased equity in my primary residence through accelerated debt reduction $15,600 (based on the payment we are making we are paying $1,300/month towards principal)
  4. Increased equity in the rental condo $6,000 (We have a solid tenant doing all the heavy lifting here. Now 10 years into this loan)
  5. And general savings of $24,000 (Just adding cash to the stash)

Total = $69,000

In the early days, after graduating college, our net worth seemed to grow so slowly (maybe $5,000 to $10,000 a year)…then all of a sudden we fast forward to six years later and we are looking at increases of $70,000 to $100,000 a year. That, my friends, is a beautiful thing. The effect is exponential if you can be disciplined and consistent. Now obviously, income has also played a very important role in getting us to this point and will continue to do so for some years to come. I have just realized that it is important to make sure we put a good chunk of that income into productive assets that will put our money to work for us.

It is really hard to start building a net worth without income. If you don’t believe me, try it out and let me know how that goes for you.

I can already see that with a few more years of deliberate saving and investing our net worth can and will be growing at $200,000 or more a year.

How to Increase Your Income & Net Worth

It is more than possible to simultaneously increase your net worth and your income (and highly recommended). The more income you can create, the faster you can reach financial freedom. Here are some ways to increase your income:

Get a raise – I am willing to bet that the majority of the readers on this blog have a day job that likely contributes to most, if not all, of the income you earn. The key to consistent and sizable raises from my experience has been a balance between playing office politics (with those that can affect your career) and delivering measurable value to the organization. And sometimes I have even had to get out of my comfort zone to ask for a raise when my employer didn’t initiate it.

But I will share a little trick with you. At the beginning of every year you need to set goals and expectations with your manager…basically something like, “If I accomplished A, B, and C it would be a very successful year.” Once you have your manager’s approval and input you know what you need to focus on. That way when review time comes around you know exactly what you are being measured against and you will have the ammunition to ask for the raise.

Start a Side Hustle – A side hustle is something you do outside of your regular 9-5 to make extra money. Last year I started a digital marketing and analytics consulting business, where I managed all the PPC activities and analytics for a few clients. Other things I have seen people start include: an iPhone screen repair business, driving for Lyft or Uber in your spare time, renting out a room on AirBNB, multi-level marketing, and many others.

Blogging and/or Podcasting – Yes, you can actually make money doing these things. However, this will take a huge investment of your time and effort before paying off. But if you look at guys like Pat Flynn of Smart Passive Income or John Lee Dumas of Entrepreneur On Fire, you will see the kind of income that can be made online if you are willing to put in the time and deliver great content to your community. John Lee Dumas started his podcast in June of 2012 and didn’t make a dime his first 6 months. He barely netted $25,000 in his first year and is now making $300k a month less than three years later.

Rental Income – This one takes capital to get started and rentals typically require 20% down in order to get a loan. To get around this, you could look into Real Estate Investment Trusts that trade in the stock market (there are non-listed REITS as well). This will allow you to get into real estate with far less capital and still produce some income; you just wouldn’t get the leverage you get with buying the physical property with a mortgage.

Dividend Income – Buy stocks and ETF’s that pay a dividend.

Peer to Peer Lending – This has been an alternative investment that has really blown up in the past 5 years. You can be the bank and loan people money on platforms like Prosper. The loans are anywhere from 3-5 years and typically having a maximum of $35,000 per borrower. The great thing about this is you can invest as little as $25/loan and really spread your capital around. I have seen others saying they are earning around 7% doing this. I personally have just started getting back into this.

Selling Option Premium – This is one of my favorites. You can go and open up an account with TD Ameritrade to get the best investing platform available for FREE.

There are many other ways than the ones listed, but the point is that with a little creativity and effort you can compound your efforts with additional income to pour into other investments that ultimately increase income and net worth. I chose the 7 different income streams above because these are the ones I am focused on and will be talking about a lot on this blog.

The important thing to remember is that you need to put that income to work for you. A really high income with no investment is a foolish and poor financial decision. Unless you want to be forced to work until 65 or maybe older, be sure to invest a sizable percentage of your income. (yikes, looks like I need to start taking my own advice, given I have $63K sitting on the sidelines)

Lastly, I would point out that income early on in your journey will likely be the most important factor in reaching financial independence (you do need money to make money, unless you inherit it). Because let’s be honest, your income is what allows you to build your net worth at a much more rapid pace by acquiring assets and paying down debts (if you have any, like a mortgage).

What are you doing to increase your net worth in 2015? And what kind of side hustles or activities are you doing to increase your income?

– Gen Y Finance Guy



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Comments

  1. There is no question that income is an important factor in building your overall net worth. Like you, my wife and I both completely max out our retirement accounts every year to reduce our taxable income, then devote more into another none-tax advantaged retirement account that we will live on later (and we will probably use a Roth rollover pipeline technique to more evenly disburse our savings when the time comes).

    To further increase our income, both my wife and I have small hobby-like initiatives now that we are both trying to build into something profitable. I also have a small business that I am starting with a couple buddies. We’ll see how this all plays out. At the very least, it’ll be a nice learning experience for us. At best, it’ll flood our pocketbooks with cold hard cash.

    Either way, I’m happy. 🙂

    1. Author

      Sounds like you guys are doing all of the right things.

      Will be interested to hear more about your different business ventures.

      Cheers!

  2. In 2015 I will max out my 401k, HSA and 2014 and 2015 Roth IRAs to increase my net worth. Anything after that will funnel into debt reduction (small student loans) and after-tax brokerage account. My main source of income that I am concentrating on is from my day job. I’m at the point in my career where raises are increasing at a pretty good clip, and jumping to another firm in the future would give me another bump as well.

    1. Author

      Nice FF! I just switched over to an HSA, but I don’t have any plans as of yet to max the thing out this year. Right now I am just contributing the savings between the old plan I was on and the new plan. Then my employer is also contributing $425 bi-annually for me as well.

      Any plans for any side hustles in your future?

      1. My employer contributes $500 spread over the year to my HSA, so I only have to contribute $2,850 to max it out which isn’t bad especially since it’s pre-tax.

        I’ve had some ideas for side hustles but with work, I already have limited time for reading, gym, blog, spending time with family and friends, so I’m not willing to give up any of those at this time for a side hustle. Maybe down the road if I decide to get a true 9-5 job then maybe I’d get more serious about a side hustle, but right now I’ll concentrate on the day job to increase income.

        1. Author

          You have to love FREE money!!! I am covering my wife and I so in order to max out I would need to contribute $5,300. I will probably look to start maxing that out as a part of my 2016 plan.

          Ah,I remember we have had this discussion in the past about side hustles. Totally get it.

  3. As mentioned recently, using credit card rewards augments my income for travel. I am on pace to max several accounts this year: 403b ($18k), 457b ($18k), Traditional IRA ($5.5k), 2 Roth IRA ($11k), plus some cash savings and debt repayment on the mortgage. I also started using an FSA this year for our family medical/dental expenses (sadly I had an HSA once, but used it all up- before i knew how powerful that account could be!).

    I am expecting to have my best net worth increase ever in 2015! This assumes the market goes relatively sideways (or at least not straight down).

    1. Author

      Yes, the credit card rewards king! And you thought you didn’t have a side hustle.

      Those are some healthy contributions 🙂

      What kind of % increase are you looking at for 2015 for net worth?

      Right now I am projecting a 38% to 48% increase.

      Cheers!

  4. GYFG,

    It takes a lot of thrust to get the space shuttle (us) to reach escape velocity (financial freedom)! Unfortunately right after launch (the initial decision to reach freedom) that large jet engine takes a lot of fuel (time, family and other personal sacrifices) and also has to fight the pull from gravity (taxes, expenses, daily fighting through other obstacles). Once you finally reach that escape velocity, the things that held you back actually work in your favor!

    It is not an easy journey, but the end results certainly justify the means!

    MDP

    1. Author

      MDP,

      Love the rocket ship analogy.

      To Infinity & Beyond!!!

  5. Just want to put my vote in for the side hustle. Getting a raise at one’s place of employment is often complicated and requires planning. Rentals are also very complicated and can be a time sink if people are inexperienced. Peer to peer lending requires a minimum investment of at least $5k if they want returns north of 6%.

    The side hustle, on the other hand, can be done right away. You don’t even have to ask anyone’s permission. It’s initial investment is just a notebook and pen and a cup of coffee to brainstorm ideas. The barriers of entry to start some side income have never been so low! Increase that revenue stream and increase that net worth!

  6. To increase my net worth I am trying to pay off my debt by the end of the year. When it comes in increasing my income, I’m looking into some possible side hustles that only happen during the summer. Hopefully I get the one I want. It involves going with the tourist on their adventures through out the island. My goal is to get an extra $1000 per month.

    1. Author

      That’s awesome Sylvia.

      I hope the side hustle works this summer. What island would it be?

      Cheers!

  7. Great list of ways to increase income. As a guy who used to chase passive income (cash flow) heavily, I would agree with your views on net worth since these days I’ve shifted my focus on acquiring appreciating assets.

    If you build the net worth, you can always convert those assets to cash flow at a later time. In general, it’s tough to avoid capital gains taxes, but I know with real estate in particular, there are wonderful tax shelters in place that allow for that, no matter how significant the gains.

    And never underestimate the value of a good side hustle. I still gotta find a way to figure out this whole blogging for income thing 😉

    All the best!

    1. Author

      Thanks FI Fighter.

      I think one of the most powerful things about real estate is the 1031 exchange.

      You and me both on the blogging for income thing!

      Cheers!

  8. Good job with those goals. We’re trying to max out our 401ks and IRAs but don’t see that happening this year. We will definitely increase that contribution though. I’m almost in the process of buying rental property out-of-state which will cash flow. I have a small amount in Lending Club but am unsure whether I should add more funds or stick with index funds. Blog income is minimal to non-existent…I should work on that as well.

    1. Author

      Thanks Andrew!

      What’s holding you back from maxing out the retirement accounts?

      Where out of state are you potentially buying the rental property? If I recall correctly you are living in NYC right?

      I have a small amount now with Prosper, and I am struggling with allocating more capital their or the new Commercial REIT I just started investing in. It’s not listed on the exchanges but I kind of like it more than the P2P.

      Cheers!

      1. What’s holding me back is mainly the expensive housing costs, childcare costs, etc in NYC, and student loan debt. Hopefully we will increase the contributions as we increase our income. I’m looking into rental property in Kansas City, Missouri.

        1. Author

          Thanks for sharing Andrew!

          Looking forward to reading about the rental property if it works out.

          Cheers!

  9. Really like your goals. I firmly believe that those who create goals are more likely to achieve them. You’ll be in great shape if you save $69,000 this year (and you already are in great shape!).

    I started P2P lending early this year. My annualized return thus far has been 12%, but over the course of time, that should go down to about 7%. I like it so far because, like you, I’m wary of putting money in public equities, and P2P lending seems more stable. It’s not very liquid, though.

    1. Author

      Thanks Professor!

      I tend to believe that STATED goals turn DREAMS into REALITY! As long as they are SMART goals: Specific, Measurable, Achievable, Realistic, and Timely.

      12% sounds like a pretty good return with your P2P lending.

      Cheers!

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