How to protect your wealth and make it grow

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How to protect your wealth

Don't miss important parts of your net worth

As a quick reminder, your net worth is the number you get after adding up all your assets and subtracting all your liabilities.

People sometimes forget to include important components on one or both sides of that equation.

On the assets side, business assets (if you own, or have financial interest in, a business) and real estate assets other than one's primary residence may get overlooked. On the liabilities side of the equation, one thing that's easy to overlook is credit card debt. And overlooking that can be a costly mistake, because high-interest credit card debt is a wealth killer.

How to build a wealth floor

You can't control every aspect of your finances all the time. A market downturn, something you obviously have no control over, may temporarily set you back. That's all right, you can recover from that. Building a wealth floor is about doing the things that you can do to protect yourself against losing ground financially. So, the following are some key practical steps to take to protect the wealth that you've already created.

Step 1. Add more money to your emergency savings

Unexpected financial expenses inevitably come up in everyone's life. The key here is to try and avoid having to subtract from your accumulated net worth gains in order to cover them. Therefore, once you've created a wealth floor, reinforce it by making your emergency savings account larger and larger. That way, when a large, unexpected expense arises, you can handle it with cash rather than, for example, having to take out a home equity loan or increasing your credit card debt.

For example, assume that a stock you own hits your target price and you sell it for a $2,000 profit. Rather than putting all of that profit right back into the market, where it's exposed to risks that you have no control over, take half of it out and add that to your emergency savings. By doing that, you've taken some of your investment profits off the table and made your overall financial foundation more secure.

Step 2. Make wealth building automatic

One of the best and easiest ways of growing your personal wealth is by automating it. Set up regular automatic money transfers from your checking account into emergency or other savings accounts and into investment accounts. View those transfers as part of the regular monthly bills you have to pay, not as optional moves. The sad truth is that when most people take the attitude of, "Well, I'll save and invest what I can when I see how much money I have left over"…they never seem to have any money left over. Automating saving and investing is one of the strongest wealth-building moves you can ever make. It's one of the key differences between people who just want to be rich and people who are genuinely committed to becoming wealthy.

Step 3. Pay off high-interest debt

I constantly try to pound the reality and importance of this next step into people's minds. So, try to get it clear: Paying off a credit card that's charging you 25% annual interest can have much the same impact on your finances as making an investment that pays you a 25% annual return. Either way, you're putting more money in your pocket. And paying off debt doesn't expose you to the risks of investing. Getting rid of high-interest debt is one of the fastest ways to grow and increase your wealth, and to protect it as you keep moving financially forward. Paying down credit card balances both increases your net worth, and also makes larger amounts of credit available if you should need them.

Protecting wealth is as important as building it

The secret to protecting and increasing your wealth continually is that it isn't enough just to get ahead financially. It's critically important to also take steps to stay ahead financially, and to help you keep moving further ahead. Creating and reinforcing wealth floors is a smart way to, first, protect financial gains that you've already made and, second, to lay a solid foundation for more financial gains in the future.

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