When you’re making all (or most) of the “right” money moves—like building a nest egg, and not racking up a ton of debt—it can be easy to ignore your net worth, assuming it will grow as long as you’re being financially responsible.
But it’s important to keep regular tabs on your net worth—and actively try to increase it, says Cheryl Sherrard, a Certified Financial Planner™ (CFP®) and director of financial planning for Clearview Wealth Management in Charlotte, N.C.
Get started with a free financial assessment.
Get started with a free financial assessment.
Your net worth—the difference between your assets and your debts—provides a good bird’s-eye view of your finances. So the greater your net worth, the more likely you’ll be able to weather a rough patch, like losing a job or dealing with a sudden medical emergency.
Boosting your net worth also gives you more financial security, allowing for some risks—like finding a new job or buying a house that looks like a great investment, Sherrard adds.
Kathy Gibson*, 36, from Denver, is one of those people who’s doing everything right on paper. The health care research program director makes a six-figure income, saves regularly for retirement and emergencies, has a decent home down payment fund and has no debt, having paid off her student loans two years ago.
But in order to move on to the next phase of her life with financial confidence, Kathy believes there’s more she could be doing to increase her net worth.
“I often wonder if I’ll have enough money when I retire, and I don’t want to fall into the trap of assuming that I’ll eventually be married and have two retirement incomes to fall back on,” she says.
What’s more, Kathy’s career involves moving from one project to another, with contracts that tend to last two to four years—so there’s always the possibility she’ll have to dip into her savings when she’s between projects.
We asked Kathy to share the details of her budget, savings and investments, so that Sherrard can help her find ways to boost her net worth by at least $40,000 over the next few years—because there’s always room for improvement when it comes to growing your wealth.
What Kathy Says About Her Net Worth …
“After I graduated from college in 2001, I got a job at a science lab that made me realize health care research was my passion—and that I’d need to get my master’s degree in public health to continue climbing the ranks.
Fortunately, I didn’t have any debt from my undergrad years—my parents were awesome and covered tuition for me—but I did have to take out about $45,000 in student loans for my graduate program. That put my net worth in the red, but I anticipated my future career would pay me well enough to be able to chip away at it relatively quickly.
Right out of grad school, I got a job working on hospital research databases, and I continued to get promotions for the next five years. As my pay grew, I put more toward my student loan, taking care of the bulk of that debt during this time—and also started socking away money into a 401(k) and a home down payment fund.
Then I got my current job, which bumped my income up further—but the trade-off was job stability. The projects I work on are steady for a few years, but there’s always a chance that the groups we contract with won’t renew. As such, I’ve tried to beef up my emergency savings, but I suspect the CFP® will tell me I should be saving more.
Overall, I feel like I’m doing pretty well. I put about 4% of my salary into my 401(k), which my company matches. I also have about $66,000 from my old 401(k) rolled over into an IRA, and I’ve saved up enough for a down payment on a home.
My fixed expenses are relatively low compared to my $4,800 per month take-home pay because I’ve paid my student loans and car off—plus, it’s a hybrid, which means low fuel costs. I’m also good about paying off my credit cards every month.
I do anticipate that my $850 monthly rent will become something like a $1,200 per month mortgage if I end up buying a house, so I want to make sure I’m doing everything I can to cover all my financial bases.”
“I’d suggest Kathy consider contributing to a Roth IRA. Over the next five years, that would add almost $27,500 to her retirement savings.”
What the CFP® Says About Kathy’s Net Worth …
Cheryl Sherrard: “She’s doing a great job planning for her future. She also deserves kudos for not depending on marriage for financial stability. She’s taking charge of her own financial success, which is a great attitude to have.
Because Kathy has no debt, her net worth is the total of her savings, a little more than $150,000. To beef it up further, I think Kathy’s first net-worth-boosting goal should be to increase her emergency savings because her income isn’t completely stable, and she doesn’t have another person’s income to rely on as a backup.
My recommendation would be to have somewhere between six and 12 months of pay saved, which is anywhere between $28,800 and $57,600. Even doubling her current emergency fund to get closer to the $30,000 mark would be great.
To build up to that over the next four years, Kathy will need to sock away a little more than $300 each month, which she could do by re-evaluating her discretionary spending.
For example, could she spend $100 on an espresso machine rather than drop $4 to $5 on lattes every day? I’d also challenge Kathy to set aside a certain amount each month for eating out—maybe half of what she spends now—because it’s easy to get into the habit of ordering takeout or going to restaurants without realizing how much you’re spending.
In fact, considering that what she spends on entertainment, food and drinks takes up more than a quarter of her take-home pay, I think Kathy can look for further cuts in these categories in order to boost her nest egg.
As for her retirement savings, it’s great that she’s taking advantage of her employer 401(k) match, but it’d be better if she could find a bit more than 4% to invest. I’d even go a step further and suggest Kathy consider contributing to a Roth IRA, since her income still qualifies her for one.
Currently, the maximum contribution is $5,500 a year, which breaks down to about $458 a month. She’s debt-free, doesn’t have a lot of other expenses, and lives within her means, so I think that’s a reasonable goal. Over the next five years, that would add about $27,500 to her retirement savings.
If Kathy built up a $64,000 down payment in order to put down 20%, that means she's thinking of buying a $300,000 home. I would just caution her not to buy more house than she needs.
If she uses all of that savings, it won’t leave her much wiggle room if she has to, say, fix a broken water heater. I also wonder if she has seriously considered all of the extra expenses that she’ll incur as a homeowner.
Not only will her mortgage be more than her rent, but she’ll also have to think about taxes, insurance—and a utility bill that could be 10 to 15 times more than the $20 she’s paying right now.
I’d suggest that Kathy pretend she’s already purchased this new house and stash the extra expenses in a separate ‘house emergency’ fund. This way, she’s crystal clear on how much she’ll really pay to own a home—and it can help her see where she may need to make adjustments to her flex spending in order to cover those new costs.
My guess is that in ‘practicing’ being a homeowner she’d be putting $600 to $800 a month into her house emergency fund, which could be as much as another $9,600 in savings a year.
Finally, if Kathy wants to make even faster gains on her net worth, she might consider freelancing on the side, if that’s feasible given her work commitments. Some of her skills might translate into a part-time gig that could help her save even more aggressively.”
“I’m close to putting an offer in on a house, and I was considering funneling any down payment money I don’t use into my IRA, but I may put that into a house emergency savings account.”
What Kathy Says About the CFP’s Advice …
“I think these are all things I can start implementing immediately. I know that beefing up my emergency savings is really important, so that’s something I’ll make a priority.
I also like the idea of stashing away a bit more money toward retirement via a Roth IRA—it’ll be nice to add a cushion to my retirement money.
I’m close to putting an offer in on a house, so I definitely need to start calculating my increased expenses—and socking away that extra $600 to $800 a month Cheryl suggested. I was considering funneling any down payment money I don’t use into my IRA, but I may put that into a house emergency savings account instead.
Regarding my ‘fun’ expenses, I had a feeling Cheryl was going to call me out on those. I love going to concerts, and since I live alone, I go out a lot to meet my friends for meals or drinks. It’s no fun cooking for myself!
But there are definitely ways I can still socialize without having to spend as much—and I’ll try to make that happen over the next few months so I can start to build better spending habits.
It’s encouraging to know that I’m making a lot of good financial planning moves, but it’s even nicer knowing what I could be doing better. I don’t want to get lulled into thinking that I’m doing fine when there are ways that I could be saving more and building my net worth.”
*Name has been changed.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the individuals interviewed or quoted in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.