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Building Your Net Worth

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Last week, the Pew study that found that African-American households lost about 53% of inflation-adjusted median wealth during the Great Recession was released. Instead of focusing on what we’ve lost. Let’s take a look at what we can do to build our net worth.

Understand, and agree to, everything you sign.
The biggest asset most Americans have is their home, so when the housing market crashed it took the positive net worth of many with it. The crash was caused, in part, by people not understanding the loan products they agreed to and losing their homes when they couldn’t make the payments.

It is so important to understand, and agree to, everything that you sign before you sign it. If you don’t understand the terms or the language make sure to ask what everything means. If the person doesn’t want to explain everything until you understand or, even worse, tries to make you feel bad for nothing understanding, do not sign anything. There are hundred of companies that are more than willing to work with you. You’re not begging for anything. They need you just like you need them.

Have more than one stream of income.
It’s vital that each of us has more than one way to earn money. It’s even better if you have active income (a way to earn money from your labor) as well as passive income (a way to earn money from not doing anything). Money that you earn from a job is active income; you have to get up do some kind of work to earn money. What happens if you can’t go to work? You don’t earn money. The biggest risk isn’t that you’ll die, it’s that you’ll become incapacitated and won’t be able to work. Having money that comes in rain or shine regardless of what you do is the answer. Passive income is money that you earn from not doing anything; like rental income.

Spend money on appreciating assets.
I’m a firm believer that it’s not how much money you earn that’s important it’s how much you spend that really matters. You want to use your money to buy things that are going to be worth more after you buy them (think real estate) than things that are going to be worth less after you buy them (think clothes).

The key is to think critically about your purchases and then spend the bulk of your money on things that will help you to build up your net worth. Of course, we have to buy things that depreciate over time; however we should be consciously making those spending choices. Every dollar you spend is either helping you to become wealthy or keeping you from wealth.

Once you’re doing these three things you’re net worth will be growing every year. You’ll make great decisions about your money, you’ll have active and passive income coming in, and you’ll be using the money from your multiple streams of income to purchase more assets that will add to your net worth.

Shay Olivarria is the most dynamic financial education speaker working today and the author of three books on personal finance. Visit her at www.BiggerThanYourBlock.com.

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0 # Guest 2011-08-08 14:17
You made some good points, but what can you do to have passive income? I'm trying to rebuild my credit, so that I can purchase my first home. Do you have any saving tips?
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