Money doesn't buy happiness. How long will we keep quoting that 2010 Princeton study? It's 2023. Inflation has gone up significantly. What used to cost $75,000 back in 2010 costs considerably more now and that study was done for a particular demographic living within the United States.
So, does that really hold water across the globe?
Money is definitely not the sufficient condition for being happy, But I do think it's a necessary condition. So, increasing your net worth can actually make you happier because money allows you to do more things in life, like buying experiences which are proven to make you happier in life.
But What is net worth?
Net worth is the difference between your assets and your liabilities. So, if you have a house or a stock portfolio, that's your asset. If you have some car loan, student loan, credit card loan, that's your liability. The difference between the two would be your net worth.
Let's talk about how you can improve your net worth--
what you want to reduce,
what you want to consider, and
what you want to start doing.
1. Reduce Your Debt
The first thing you want to reduce is your debt, and the first place to reduce your debt is your credit card debt. Credit card debt is charged at 22 to 30 plus percentage depending on your credit score. If you don't pay it off month on month, it just balloons and compounds in a way that human minds simply cannot comprehend. So, go pay off that to start with, and then consider paying off your next highest interest debt.
So, typically these will be your personal loan, student loans and so on.
2. Reduce the Amount You Spend On Car Ownership
The second thing to reduce is the amount you spend on car ownership. Most people don't realize that car ownership is one of the biggest drains on your personal finance. Not only because you have an interest rate on that car loan that you took, but also because there's a tremendous amount of maintenance and upkeep that you have to do on the car. Additionally, fuel costs, insurance, road tax and so on, also add on to the total cost.
So unless you are a car enthusiast, to the point that actually driving fancy cars makes you more money, like if you are a Formula One racer, then that's okay. But, if not, then that car ownership is costing you money.
So, reduce that expenditure as much as possible because frankly, I think a lot of people buy a car thinking that it's an investment, but a car is actually a depreciating asset. Meaning, the moment you take the car out of the dealership, it loses its value.
3. Reduce is playing status games.
Status games cost a lot of money. There are so many people who are looking at a lavish wedding or buying a huge house or buying a luxury car that they can't afford, because their friends and family are buying those things.
Don't get me wrong. Your friends and family are obviously important, but they're important for the emotional connection. Not because you want to keep up with their lifestyle, because you don't know what their bank account looks like. You know what yours looks like.
Make a decision for yourself, instead of competing in the societal status games.
Next up are a couple of things that you want to consider.
1. Do you want to buy a house or do you want to rent a house?
I know there's this saying that goes, if you are renting, you are paying for your landlord's mortgage. So what, if you are paying for your landlord's mortgage? If it makes sense for you financially and with your current lifestyle, pay your landlord's mortgage. What's wrong in that?
I know a lot of people, look at a house as an investment. But, I don't think most people realize that the house that costs them 300 K actually could end up costing them 450K. A house is very likely going to be the biggest purchase of your entire life. Run the numbers. Look at whether it makes sense for you to buy or to rent.
2. Consider lifestyle inflation.
Now, I know a lot of influencers out there who will tell you that your lifestyle should remain at the same level as when you are earning a much lower income, even after your income has doubled, or tripled. Frankly, I don't agree with this because I think your lifestyle should go up with the increase in your income because you want to train your brain to get the reward to make a higher income.
However, what you do want to consider is the proportion of your increased income that you end up spending. So, say for example, your income has gone up by 50%, whether or not you choose to inflate your lifestyle by 50% is absolutely up to you. You could choose to uplift your lifestyle by 10% or 20% or 25%, or the entire 50%, but hopefully you won't go to the entire 50%.
You would stay at 25% or so of lifestyle inflation, and that is how you get to keep a lot more of that savings while actually incentivizing your brain to improve your income over time.
Things you need to Start Doing
1. Think about How you can Improve your Income.
A lot of people will tell you, if you want to save, save as much as possible. While I agree that you want to save, I don't think that should be the primary agenda of your financial life. The one important success factor that determines whether you'll be wealthy or not is how much you earn. So, you need to absolutely consider how you can improve your earnings.
The only two ways of improving your earnings are --
i) Improving your salary in your day job, and
ii) Starting a business.
So, it might be a side hustle or you might want to start a business from scratch and give up your day job. That's up to you.
2. Automate your Savings and Investments.
Say, for example, your salary hits your bank account on the 30th of the month, by the first of the month, automatically pay your credit card debts. Save some money for your investment pots automated to the point that it's directly hitting your pension or your ISA if you are in the UK or your Roth IRA or 401k if you are in the US.
Once you are done with paying your bills and your loans and saving some money, spend the rest guilt free. Reward yourself for all of that hard work that you are doing to actually improve your income.
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