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The Key to Building Net Worth

Fri, 11/09/2012 - 4:26pm | by monicadear

In the United States, it’s commonly known that retirement planning is a good thing.  Many employers offer retirement benefits, government agencies offer pensions, and Americans are generally encouraged to save money for retirement.  If the general public has an awareness that retirement planning is important, why do so few people actually do it?

Before we address that question specifically, let’s examine a few key government statistics.  The U.S. government estimates:

  • The average savings of a 50 year old in America is $2,500
  • 62% of Americans that reach retirement age have less than $25,000 in savings
  • An additional 35% of Americans have less than $100,000
  • That means only 3% of Americans have over $100,000 in savings when they reach retirement

These statistics are quite daunting.  They reveal that most Americans are not financially prepared for a comfortable retirement.  The fact is that most people do not build substantial net worth.  In this article, we are going to discuss why this is true, and we are going to present practical steps a person can take to build substantial net worth over time.  

What is Net Worth?

Net worth is defined as a person’s assets minus their liabilities.  In our U.S. consumer-based society, people are encouraged to accumulate liabilities during their young life.  Let’s follow a typical American teenager through his late teens and 20’s.

Tommy is a bright young man.  His parents are middle-class Americans and cannot afford to send Tommy to college, so Tommy has to pay for it himself.  As an 18 year old, Tommy enrolls in university and begins incurring debt.  By the time Tommy earns his undergraduate degree at age 22, Tommy has accumulated $20,000 of college debt.  Furthermore, on Tommy’s first day at university when he was freshman, he really wanted the free t-shirt that you could get for simply filling out a credit card application, so he got his first credit card.  Of course, no one taught Tommy how to use it, so he used it throughout his college days, and by the time graduation rolled around, Tommy had accumulated $2,500 in credit card debt.  Thus, Tommy graduated from university with $22,500 in debt.

This is how so many of young people in America enter into their young adult lives.  Unfortunately, it doesn’t stop there.  Within the first year of Tommy landing a full-time job, he will most likely purchase a car, and this will add another $10,000 to his pile of debt.  Now, Tommy is in a tough position.  He has laid a strong foundation of debt in his adult life, and he will have to toil to get out from under that yoke for many years.

This entire scenario is normal in America.  Building wealth over time is not a complicated process.  It involves buying assets and eliminating liabilities.




Real Estate Investments

Credit Card debt

Retirement Investments

College debt


Auto and home loans

Paid-off Cars, Boats, etc

Retail store debt



Other investments




The classic definition of liability versus asset is that a liability is something you pay for, while an asset is something that pays you.  This is the power of building substantial net worth.  Buy assets and eliminate liabilities.  The best way to do this is to focus on eliminating liabilities.

Eliminating Liabilities

The most practical way to do this is track your expenses for a single month.  List them all out.  After the month is over, go back and make an honest evaluation of where you are spending your money.  Decide what expenses can be eliminated.  Then, begin to direct every penny that you can each month toward paying down liabilities.  This will not be fun, necessarily, but it will pay huge dividends over time.

Then, once you eliminate your liabilities, you will be ready to begin directing that extra cash flow each month to buying assets.  At this point, riskier investments such as trading currencies like the EUR USD or  commodities   should not be considered without a full consultation with a financial advisor. The most important thing is to preserve this extra captial and change your perception from being in the debt cycle to change your outcome.  Once this extra cash flow is coming in each month, the power of net worth will begin working for a person rather than against them.

picture by amagill

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