Previously, I discussed the benefits of preparing your net worth statement. Your net worth is the difference between the current value of what you own and what you owe. To increase your net worth, you should acquire assets that increase in value over time while paying off debt.
Whether or not you decide to prepare a net worth statement, you should definitely work on increasing your net worth. The statement helps you track your progress. The strategies below will help you build your wealth faster.
Acquire Assets that Generate Positive Cash Flow
The best assets to own are the ones that generate regular income (positive cash flow), such as rental income, dividends, and interest. As Robert Kiyosaki points out in his book, Rich Dad Poor Dad, assets that don’t generate income for you are really liabilities to you, because you must spend money to maintain them, insure them, and probably pay taxes on them (negative cash flow). These types of assets are your home, your cars (and other big toys), and other non-rental real estate. You cannot avoid these types of assets completely (you need to live somewhere and you need a car to get around), but to increase your net worth you should invest in things that generate income instead of expenses.
Keep More of the Income You Earn by Paying Less Tax
Another way to increase your net worth is to pay less tax on your income. Unfortunately, deciding not to pay tax is not an option. However, the rate of tax you pay depends upon the type of income you receive. In 2013, it was widely reported that Warren Buffett, one of the richest persons in the world, paid a lower tax rate than his secretary. Most of his income comes from dividends and capital gains (passive income), whereas his secretary’s income comes from wages (active income). Also, wages and other active income are subject to additional self-employment taxes. You can keep more of the income you earn each year by reducing the amount of taxes you pay on income by increasing the amount of passive income you receive and minimizing the amount of active income you receive. If you own a small business or a rental business, then you may be able to restructure your income so that more of it is considered passive, rather than active.
Build a Wealth Account
Finally, you should set aside a portion of your income in an account to invest in assets that generate additional income. This account is called your “Wealth Account” and should only be used for investments. The secret to making this work is to deposit a specific amount of any money (wages, dividends, interest, etc.) you receive, I recommend 10%, into an account that you use for investments and never spend these funds on anything else. The income you receive from your Wealth Account can be spent, but not the principal of your investments. Remember, 10% of your income from your Wealth Account should be retained in your Wealth Account, so that it continually grows.
© 2016 Norton Accounting Services, LLC. Bob Norton is a licensed CPA and real estate broker in Louisiana. The opinions and ideas expressed in this article are informational only and are not meant as tax advice. Consult with your tax advisor to determine how these ideas apply to your situation.