One of your most important financial goals is to increase your net worth. Your net worth is defined as your assets minus your liabilities. Your financial stability depends upon increasing your net worth over any time period you care to track it: weekly, monthly, quarterly, or annually.
There are two common ways to increase your net worth:
- Pay down debts of any kind
- Add to savings, investments, or retirement accounts
If you are already performing these two tasks, that is a good start. From my experience, one of the biggest impediments to increasing your net worth is purchasing what I call, financial ice cubes. These are physical objects that excessively melt with time or use, just like ice cubes on a hot day. When you purchase these items, you are getting something in hand of value for your money. But these are items whose worth devalues with wear or time; faster than you’d expect. When these items are necessities for you, how you purchase them and maintain them can dramatically slow the melting process.
Some sample items that are melting ice cubes include:
Cars, laptops, televisions, recreational vehicles, computers, smartphones, jewelry, tablets, boats, and game consoles. There are many hobbies and sports that require buying ice cubes, for example collecting, hockey, bicycling, hunting, skiing, and any type of racing.
When you purchase these consumables, do you buy them brand new at the highest price or used at a much lower price? Do you pay in cash or buy on credit, paying interest? These ongoing financial decisions will place you on one of two financial paths. One of them has a dramatically higher net worth than the other. Which path are you currently on?
Along with financial ice cubes, another financial mistake that impairs your net worth is failing to consider all of the expenses when you are evaluating whether to rent or own something. For example, my friend bought a financial ice cube. A new Polaris snowmobile for a little over $9,000. I asked him how much it would have cost for a 10-year old model that was similar. He replied around $1,200. I told him this implies that his snowmobile is depreciating by $780 per year ($9,000-$1,200)/10 years. I then asked him how many times he uses it a year. He said at least twice but no more than 4, depending on the snowfall. OK, the $780 divided by 4 is $195 and divided by 2 is $390. So his cost, depending upon whether he uses it 2-4 times a year costs him $195 to $390 per use. However, he could rent a snowmobile for $40 an hour, for a lot less money, and not have to maintain or store it himself. (Of course, he may get a lot of satisfaction putting on aftermarket parts and tinkering with it as a hobby). However, that isn’t always the case and glaring financial mistakes like this can be clarified by doing this simple renting vs. owning financial analysis. For another example, an acquaintance is a pension manager and she was considering buying a vacation home until I slowly went over how it was colossally cheaper and more convenient for her family to rent a place instead.
Day by day, you are making financial decisions that have a dramatic impact on your net worth. How well you approach and evaluate these decisions can make a monumental increase or decrease of your net worth. Please take the time to evaluate them carefully.