As your income grows, it might afford you a bit more wiggle room in your budget. But higher incomes don’t always translate to financial health or lasting wealth.
If equally high debt payments and living expenses eat into your earnings, it can be challenging to build up savings, invest for the future, and grow your net worth — no matter how much you earn.
The good news is you can work toward a six-figure net worth, even on a five-figure salary. Here’s how.
Growing a six-figure net worth
Setting yourself up to achieve a six-figure net worth starts with a few basic steps.
Build a budget and stick to it
Building a budget can help you better understand exactly how much you’re bringing home each month and where that money is going. Rather than thinking of your budget as limiting, use it as a roadmap to get to where you want to go financially.
With a budget in place, you can more easily identify spending categories you can afford to cut back on and reallocate money toward debt payments and investments. Plus, you’re better able to plan your savings into your budget, treating it as a line item just like all of your other obligations. Taking a “pay yourself first” approach ensures you prioritize your future before other spending eats into your extra cash.
Prioritize paying down high-interest debt
Carrying debt — particularly high-interest debt such as credit cards — holds you back from increasing your net worth. On the other hand, paying down high-interest debt quickly can free up cash flow to put toward savings and investments.
“[Having] debt is like swimming upstream, and the interest rate you’re paying is the speed of the current,” said Scott Hefty, CFP, senior wealth manager and founding partner at Serae Wealth. “It’s almost impossible to make progress when you’re swimming against a 20% or higher interest rate.”
Hefty added that prioritizing debt repayment may involve some sacrifice, but once you’re able to eliminate high-interest debt, you’ll see the benefits snowball over time.
Take advantage of compound returns
After paying down debt, your biggest priority should be to invest. The sooner you start, the more time your money has to grow thanks to compounding. For example, if you invest $500 per month at an average 7% annual return, you’ll have $100,000 in about 11 years. Increase it to $800 per month, and you’ll hit six figures in under eight years.
Think carefully about where to park your funds and make your money work for you. And be sure to automate your retirement and brokerage account contributions. Even if you can’t afford to contribute a significant portion of each paycheck, it’s still well worth the effort — a little each month adds up over time.
Don’t leave employer benefits on the table
If it’s been a while since you reviewed your workplace benefits, you could be missing out on perks that can help you grow your net worth, such as tuition reimbursement, student loan repayment assistance, or 401(k) contribution matching.
Review your available benefits, and ensure you’re doing your part to qualify for financial help, such as contributing enough to your retirement to receive the full match. Otherwise, you’re leaving any free money on the table.
Common pitfalls to avoid
When growing your net worth, it’s important that your mindset and financial habits are working with you and not against you. Here are a few common pitfalls you should avoid to stay on track.
Lifestyle inflation
The No. 1 reason people struggle to build their net worth? Experts say it’s lifestyle inflation.
“Net worth is simple: assets minus liabilities. Yet people sabotage it constantly by mixing identity with spending,” said Eric Croak, CFP and president of Croak Capital, an Ohio-based fiduciary financial firm.
For example, maybe you buy a new car to appear more successful, even though a used vehicle would just as easily get you from Point A to Point B. “Over time, it is death by 1,000 upgrades: nicer apartment, daily coffees, premium streaming, random vacations. Those are just micro-luxuries disguised as progress,” Croak said.
Rather than trying to “keep up with the Joneses,” ask yourself if the purchases you’re treating yourself to are worth the financial progress you could be sacrificing. This isn’t to say you must deprive yourself of every splurge. But it could be worth rethinking some of your discretionary spending that could be keeping your net worth from growing.
Expecting to get rich quick
Attaining a six-figure net worth takes time and patience. Most people don’t build lasting wealth by discovering the next hot stock or buying up fly-by-night cryptocurrencies.
“Most people who hit significant pitfalls try to get too fancy too early,” Hefty said.
The reality, he explained, is that for most people, wealth building is a pretty boring process. “They sacrifice and save to pay down debt and begin investing in modest amounts.”
Not tracking your progress
If you want to stay motivated and make more informed make more informed decisions about your finances, find out where you stand now and track your progress going forward.
“If you really want to grow, track your net worth monthly,” Croak said. “Even if it’s negative. Even if it hurts. Seeing that number creep up, even $250 a month, does something to your brain. You go from reactive to intentional.”
