Sometimes we hear people brag about their new car, new home, luxurious apartment, expensive jewelry, designer clothing, or high tech gadgets. These boasters enjoy bragging about their prized possessions to communicate that they have achieved a certain social status. In the mind of the untrained financial professional, these people are “Doing It Big!”, “Flossin”, and “Shinin”. The sad truth is that many of these people are “Smelling Good, Looking Good, and Broke!”. Why? Because it’s Not What You Have, it’s What You’re Worth.
Whether you are a business expert or you have trouble balancing your checkbook, life requires that you participate in business transactions (such as: financing a new car, leasing an apartment, buying a home, or purchasing insurance). But the sad truth is that most people lack the required education and experience to make sound business decisions. The result of the lack of business expertise leads to major confusion between assets and liabilities. In simple terms, some people think that they are financially “getting ahead” when they are actually setting themselves back. Before the economic crisis of 2008, the average American thought they were “getting ahead” with the purchase of their new home. But, in reality, they were setting themselves back because many people purchased homes at peak prices, over-financed their home purchases (because they put down little or no money), and did not have a plan to pay off their home loans. Buying real estate can increase your financial worth but the use of bad money (ex: high interest rate sub-prime loans or pick-a-payment loans) decreases your financial worth.
When I say, “It’s What You’re Worth”, I am referring to a financial term called Net Worth. Forbes Magazine uses Net Worth to determine the richest athletes, business executives, and entertainers. To calculate your net worth, total all of your assets (such as: cash, bank accounts, stocks and mutual funds, real estate, and personal property) and then subtract all of your debts (such as: credit cards, student loans, home loans, auto loans, and personal loans). The result is your net worth. In 2009, according the Pew Research Center, the median Net Worth for African-American households was $5,677, $6,325 for Latino-American households, and $113,149 for White-American households. The Economic Policy Institute’s 2009 report disclosed that 25 percent of American households had zero or negative net worth and 40 percent of African-American households had a zero or negative net worth.
Many people are trying to purchase a financial status when they are really burying themselves in debt. If you want to aim higher than the “Smelling Good, Looking Good, and Broke!” crowd, you should consider developing strategies that increase your Net Worth. Below are some simple steps to increase your Net Worth.
- Pay Off Your Debts! Start with High Interest Rate Debts
- Reduce Your Monthly Expenses
- Increase Your Savings
- Create an Emergency Savings Account. (So you don’t have to use a credit card for financial emergencies)
- Pay for everything with Cash, Check, or Debit Card
- Keep Your Car for 8 to 10 Years! (Increase your savings when don’t have a car payment)
- Start an Investment Portfolio (Invest after you have reduced your debts).