DataDrivenInvestor
Sep 30
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There’s a fundamental difference between rich and wealthy people. The former makes and spends money, the latter saves and invests it. This means that not all rich people have a high net worth, but all wealthy people usually do.
In purely economic terms, your net worth is the sum of your assets minus liabilities. So if you borrow $1 million to buy yourself a house and car all the while repaying your loan at a 4% interest for the rest of your life, you’re rich but not wealthy. People who live above their means by definition have a negative net worth, while rich people who spend money responsibly and look like your average Joe may very well be sitting on millions of dollars in assets and investments.
As an entrepreneur, your net worth is a very important metric to take into consideration, because it will determine everything about your financial life:
The thing is, increasing your net worth is easier said than done, especially in times of crisis. But if it was easy everyone would do it, and while it’s not extremely hard either, understanding how money works is key to reaching new financial heights. You’ve probably already heard all the “classic” advice before: max out your 401K, compound your money in the stock market, save whatever percentage of your income…
In this article, we’re focusing on ways to increase your net worth you may have not thought about before, but which can be very efficient if you stick to them and play the long game.
Note: none of the insights included in this article should be considered investment advice.
If you’re lucky enough to own the place you live in (whether a home, an apartment, or even your own offices) you probably have a mortgage to pay off, and therein lies amazing potential to increase your net worth much faster than people who don’t own real estate.
Many people don’t understand the power of equity versus debt. Sure, you owe money to a bank and you might have even gotten a bad rate on it, for whatever reason. But borrowing money in order to buy the place you live in gives you the option to gradually increase the equity in your real estate.
“Home equity is the value of a homeowner’s financial interest in their home. In other words, it is the actual property’s current market value less any liens that are attached to that property.”— Investopedia
In the simplest terms, your home equity is the difference between how much your home is worth and how much you owe on your mortgage. The quicker you pay off your debt, the faster you increase your equity in your home, and consequently your net worth.
Let’s say you buy a house for $300,000 with a 10% down payment ($30,000). At the time of purchase, your equity in your house is equal to the down payment, because you haven’t paid anything towards the mortgage yet. As soon as you make your first repayment, you increase your equity (and thus your net worth) by the amount of your payment. If you manage to repay your mortgage quicker by saving more cash to invest in your house every month, you’ll increase your net worth quicker.
Not all banks will allow you to repay your mortgage faster than they had planned (unless your financial situation increases drastically). Usually, you will have to either re-finance (agree on a new monthly repayment and have it fixed for a set period), or pay a lump sum towards the mortgage.
If you can manage to create your own business and drive recurring revenue from it, I have great news: your business could be worth a lot more than your revenue, all thanks to an amazing capitalist invention called: earnings multipliers.
In the 1980s, companies started buying each other more and more, sometimes at a loss. A company would buy another non-profitable company in fear that it could become a bigger competitor, or in the hopes of turning the business around and making it profitable. The problem was that nobody had any idea how much they should pay for a business that wasn’t making any money. That’s when EBITDA was invented.
“EBITDA is an acronym that stands for earnings before interest, tax, depreciation, and amortization. EBITDA is an indicator that is often used by investors or prospective buyers to measure a business’ financial performance.” — Source
When looking to put a price on a business, potential buyers look at the EBIDTA and multiply it by a number based on which industry your company fits in:
As an example, Adobe recently announced the purchase of Figma for $20 billion, while the company is “only” making $400 million per year (that’s a crazy 50x multiplier).
On a much smaller scale, you can look at marketplaces like flippa.com to get a feel of how much small online businesses can sell for based on how much they’re making. Again, it will depend mostly on the industry and the health of the company.
Always remember that at the end of the day, your business is worth what a buyer is willing to pay for it. This is true whether you own an online blog or a physical plumbing business.
As we’ve seen earlier, your net worth is based on a simple formula:
Your assets are what you own, your liabilities what you owe. People often look at ways to make more money in order to increase their wealth, but getting rid of debt is also a great way to do just that. If you manage to remove debt from your net worth, you’ll automatically increase it.
Say you have a $100,000 net worth but $10,000 in repayments left on a bank loan. This means you’d be worth $90,000 if you had to liquidate everything because your bank is missing $10K from you:
But if you manage to get rid of that loan by paying it off faster, you’ve increased your net worth by $10,000:
It’s simple maths, but many people overlook debt when looking at ways to make money. The same goes for any assets that are costing you more than it’s making: a house, a car, a monthly subscription… If you can decrease your debt on those things, you increase your net worth, whether in cash or on paper.
Note: debt can also be used as leverage to invest more than what you could borrow, but that’s usually risky and not recommended unless you 100% know what you’re doing.
Here are the world population projections from the UN website:
This is going to cause 2 main issues: resources, and space. In developed countries, the land is usually not needed to build more housing infrastructures, because the population is declining:
Instead, it is sought after to extract resources from the ground or set up factories for booming industries. But as a land owner, you don’t have to worry about any of this, you just have to buy a plot of land, and wait for it to increase in value. Even in countries like the Netherlands, where the price of one hectare of arable land averages an insane €69,632, buying a plot of empty land is still cheaper than buying a house, so if you have extra cash to spare or have room for some leverage with your bank, it’s a great way to increase your net worth.
In developing countries, the land is needed both to extract resources from the ground and to house the booming population. If you can get your hands on a piece of land in places like Africa, the Middle East, or Southern Asia, you just have to wait for a few years to sell it for a profit or invest more locally (in a world dominated by profit at all costs, helping local populations is important too).
The current economic crisis is setting up a massive investment opportunity in low-cost index funds across the market. Things like the Vanguard S&P 500 ETF, Schwab U.S. Large-Cap ETF, iShares Core S&P Small-Cap ETF… are all poised to regain in value over the next 3 to 5 years, though we most likely haven’t seen the bottom of the current dip yet.
It’s hard to anticipate the right moment to invest, but with the S&P 500 having lost 20% since the beginning of the year, investing in it now wouldn’t be a huge risk. Even if it drops an extra 10 to 20%, you would probably break even within the next 1 to 2 years.
This opportunity is here because we’re going through unprecedented economic times (at least in our modern world and for the past 30+ years) but it doesn’t mean it’s the only opportunity ever. There have been tons before and there will be others in the future. There are buying opportunities every year, every month, they’re just really hard to spot.
The best way to spot them is to choose one area/industry of expertise, and do your homework on it. What companies are losing value in that niche? What are the headlines saying? What technologies are about to change the game? There are dips everywhere, every time, you just have to think forward to spot them.
“Don’t worry about the world coming to an end today. It is already tomorrow in Australia.” — Charles M. Schulz
Here is an example. 5 years ago I bought my first E-reader, and I became fascinated by the e-ink technology. Then came e-ink tablets, and I also started to notice more and more grocery stores switching to e-ink displays to show prices in shopping isles. Last summer I even saw an e-ink “mini-billboard” in a Swedish supermarket for the first time. Ever since I came across the e-ink technology, I have believed it will change the way we interact with everyday devices like never before. I researched about it and learned that one of the biggest manufacturers of e-ink-based components is E Ink Holdings Inc, which is listed on the Taipei Exchange in Taiwan. Since I’ve started researching this buying opportunity, this is how the company stock has performed:
Unfortunately, I was never able to buy this specific stock because it is listed in Taiwan (not a lot of brokers offer to trade on this market unless you live in the country), but you get the point: pick something you’re interested in, and study the opportunities that lie there. This will give you an edge over other people in a specific field, and you don’t even have to be the best. You just have to put in the work.
Once you see a dip (aka the right moment to buy), go for it, play the long game, and watch your net worth increase.
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Thanks to Alessandro Butler
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