I have already written earlier here how 2018 was one of the best years of our lives. This year changed our personal finances forever.
We were able to achieve a lot of things in 2018 that has laid a solid foundation for our personal finances. We find ourselves on a solid footing in 2019 to continue our wealth building journey. I was featured on the podcast – Marriage Kids and Money Podcast in their Money Master of the Week segment. Check out around 41:24 mark. I was so happy to share our money wins on the podcast.
Today I will share with you 5 steps we took which helped us double our net worth in 2018. You can apply the same techniques to your life and see your net worth double.
1. Pay Off Your Auto Loans
We carried consumer debt of about $15,000 at the beginning of 2018. It was basically 2 auto loans we carried on our cars and paying them off helped us increase our cash flow by about $425 per month. We then repurposed the money towards our savings. When we finally paid off our cars, they moved from being liabilities column to the assets column in our net worth. Their current value stands at $14,000 combined.
Paying off auto loans not only freed up money we were paying towards car payments, but it also transformed cars from being a liability to an asset. Don’t bring home a car payment, bring a paycheck. Avoid car payments and pay cash to buy a car.
3. Avoid Credit Cards
Unless you are in one of those introductory offer periods of a credit card, chances are, the interest rate on your credit card ranges anywhere from 14-20% APR. If you don’t pay off your credit cards in full every month, you will end up making those credit card companies rich.
I have written extensively about why I hate credit cards and have closed 7 out 8 credit cards I used to carry. This helped me curb my impulse purchases and overspending by 30-40% annually. With credit cards, even though we paid off the monthly balances in full, we were simply spending more than usual. I would highly recommend you to quit using your credit cards and move to cash or debit cards for all transactions.
Switching from credit card to a debit card in 2018 helped us look at our purchases in a different light. We looked at every purchase from a “Need vs Want” perspective and it has helped us cut down our spending by 30-40% per year.
3. Give Every Dollar A Mission To Accomplish
“What Gets Measured Gets Managed” – This is so true when it comes to the money you earn every paycheck. Before 2018, we used to spend money on random stuff and that included Amazon prime, Shopping at Costco, Dining out, etc. Starting in 2018, we decided to become debt free and straighten out our finances. One of the biggest reasons why we were able to accomplish this goal so quickly was because of budgeting. It helped us plug all the leaks in our spending and we mercilessly cut down on items we didn’t care about. So every dollar that wasn’t spent made it ways back into our wallets.
With the use of a budgeting app like Every Dollar, we were able to increase our savings rate from a meager 10% to almost 60% by the end of 2018. That’s the power of budgeting. If you are not already budgeting, I highly recommend you start doing it immediately. You’ll be amazed to find money you didn’t know existed!
4. Max Out Your Retirement Account Contributions
Your best friends that can help you increase your net worth are Time and Compound Interest. I would not waste a single day and lose the power of compounding. If you have an employer-sponsored 401(k) or 403(b) start investing right now. The first step would be to start investing the minimum amount required to get a match. Always get the match. It’s free money!
If you have a Roth 401(k) plan offered, I would consider investing into only if you are in a lower tax bracket. If you happen to have a household income of $150,000 – $200,000 or more I would lean towards a traditional 401(k) plan. This can help you save money on your taxes and help you grow your money tax-deferred. Typically people end up being in a lower tax bracket in retirement and a 401(k) works out very well in that case. Once you max out your 401(k) and if you still have more money, invest in a Roth IRA.
If you have an employer match like me in 2018, you would have a total investment of $18,500 + $3300 = $21,800 in 401(k) and $5,500 in Roth IRA. These numbers are even better if you are 50 years or more where you have extended limits to do “catch-up” contributions.
Make full utilization of your retirement accounts by contributing at least 15-20% of our household income every year. This should put you in a very good spot financially in the long run. You’ll thank yourself later for doing it.
5. Max Out Your HSA Account
If your employer offers an HSA account through a High Deductible Health Plan (HDHP), I would highly recommend you to opt in for that plan. I have written a detailed post earlier about why you should consider an HSA. There is no other tax-advantaged account that beats an HSA in terms of the preferential tax treatment it gets.
For 2019, the maximum allowed contribution limits are $7,000 for a family. Fortunately, my employer matches up to $4,000 every year and I can contribute a maximum of $3,000 myself. I would make sure I utilize this tax-advantaged account to meet my current and future medical expenses.
As a rule of thumb, I typically keep the max out of pocket expenses as liquid and start investing the remaining amount in low cost index funds or other good investments inside of an HSA account. It might take a year or two reach a point where you have full deductible in cash. You can cash flow any interim expense and reimburse yourself later. Make sure you keep your receipts handy.
We began our journey in 2018 with a net worth of $56,486 and by the end of 2018, we ended up with a net worth of $129,255.67.
I hope these tips will help you boost your savings rate and help you double your net worth this year. Good Luck!