Feeling Rich on a Modest Income

You don’t need a six figure income to build net worth. Here’s how.

net worth

For the last two weeks, my column has focused on two little words but one super-important concept: net worth. First, we looked at Hannah, just starting out her career with room to grow. Then, we looked at Kate, a high earner in a lot of debt — and at risk for depleting her net worth. Now, let’s go down the middle path.

Teresa is divorced, 48, earning $55K. She rents her apartment and tries to save $300 a month.

She has $20K left in grad school student loans, $4K in credit card debt, and $150K in her 401(k). She drives a 5-year old Nissan and has an emergency fund with two months of expenses ($8K). In a windfall, her Aunt Carmen left her a $240K IRA when she passed a few years ago.

Here’s how Teresa’s net worth breaks down:

Retirement savings:
IRA: $240K
401(k): $150K
Emergency fund: $8K
Car resale value: $12K
= $410K

Student loan: $20K
Car loan: $8K
Credit card: $4K
= $32K

Total Net Worth:
$410K – $32K = $378K

In this scenario, Teresa’s net worth is slightly lower than Kate’s even though she earns 1/5th, with more access to cash. She can manage curveballs. She has a 401(k) and an IRA, and she’s making conscious choices: she rents, not owns, to increase her cashflow. She takes one vacation a year to see family in Rio de Janeiro, but likes chilling on her back porch on Labor Day.

What steps should Teresa take to improve her net worth?

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