Simply put, net worth is the difference between what you own and what you owe. This figure provides a clear snapshot of your financial health and can give you insight into your ability to achieve long-term financial goals, whether that's buying a home, saving for retirement, or achieving financial independence.

In other words, building up your net worth is an important part of securing your financial future.

How to increase your net worth

If you aren’t sure how to increase your net worth, here are some key steps to take.

1. Build an emergency fund

Building an emergency fund is one of the most important steps toward increasing your net worth. There’s no hard and fast rule around how much money you should have in your emergency fund, but experts typically recommend around six months’ worth of living expenses.

The reason it’s so important to have an emergency fund is because the unexpected inevitably happens — you lose your job, break a bone, or the water heater dies. In any of these cases, you will need cash quickly. Without an emergency fund, you may need to rely on debt such as credit cards or personal loans. However, interest on these debts can be high, making it difficult to pay off. And outstanding debt reduces your net worth.

2. Reduce your debts

Debt can severely hamper your ability to build net worth. According to the Consumer Financial Protection Bureau (CFPB), the average credit card holder paid over $250 in excess interest charges in 2023. Interest charges can make saving difficult if you have several credit cards and loans.

If possible, pay more than the minimum payment on your debts to avoid this situation. Some lenders don’t allow this or may charge a fee for pre-paying. But if you have the option and it won’t cost you extra, paying more than the minimum is one of the best ways to reduce your debts.

3. Cut your expenses

Another way to increase net worth is to reduce your spending. This can go hand-in-hand with creating a budget, which can help you identify areas where you are overspending. Popular budgeting methods include the 50/30/20 rule and the zero-based budget, and budgeting apps like Quicken's Simplifi are available to do the heavy lifting and help you identify your largest spending areas.

Hot tip: Yahoo Finance readers can try Simplifi free for 90 days. Act now!

Once you see where you are spending the most, look for areas to cut back. This might include negotiating the rates on utilities, canceling unused streaming services, or eating at restaurants less often. Any area where you can cut back without lowering your quality of life is a win.

4. Increase your income

Although reducing unnecessary expenses is a good practice in general, there is only so much you can cut. At a certain point, you may need to increase your income to build your net worth.

One of the easiest ways to do this is often to increase your salary at your current job. You can request a promotion by highlighting your recent performance or achievements or pursue additional training and hone skills that increase your value.

If this isn’t an option, you can consider looking for a higher-paying job at another company. You may find it easier to increase your salary if you leave your current employer rather than looking for a higher-paying job internally.

If these strategies don’t work for you, there are also side hustles you can try. For instance, you can try freelancing using your existing skill set or gig economy jobs. Anything that can give you some extra income is worth a try, even if it’s just a few extra hours per month. You can then put those extra funds into a high-yield savings account as well as various investments to help grow your wealth over time.

Read more: High-yield savings account vs. investing: Which is right for you?

5. Invest wisely

Investing is one of the best ways to build your net worth, but you must choose your investments wisely. This means choosing the right investments based on your goals and risk tolerance. For instance, various investments are available, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), which all come with varying levels of potential risk and reward.

Everyone has unique needs and concerns when investing, but younger investors can typically handle more risk than older investors since they have more time to make up for market fluctuations. No matter your stage in life, it's a good idea to reevaluate your investment strategy at least once a year.

It’s also important to take full advantage of your employer’s retirement plan, such as a 401(k) or IRA, if available. Many employers offer matching contributions, which is essentially free money you receive for contributing to your plan. Retirement accounts also have tax advantages, so it’s helpful to contribute the maximum annual amount if possible. If it isn’t, try contributing at least to the maximum amount eligible for matching contributions.

6. Protect your assets

Most things in life aren’t guaranteed, including the wealth you’ve worked so hard to build. To maintain your net worth, you must protect your assets. There are many ways to do so, but some of the most effective tools are insurance and estate planning.

Many types of insurance are available, but some of the most important to consider are health, life, home, and auto insurance. These policies will help you avoid footing a costly bill if there is damage to your home or car, or you get sick or injured. Life insurance will help pay for necessary expenses when you pass away, which can help your family build generational wealth.

Estate planning is also useful in building generational wealth. Many people don’t have a will and trust, which can create problems for families when someone passes away. For instance, it may force them to fight for the family member’s assets in probate court. They may also need to decide who should assume the person’s debts if they have any.

Read more: What happens to a bank account when somebody dies?

Review your accounts, such as retirement accounts and life insurance policies, to avoid this unfortunate situation. Then, designate beneficiaries on each account. You can also name secondary beneficiaries in case the first beneficiary can’t take over the account.

Naming beneficiaries will ensure your accounts transfer smoothly and prevent your family from having to go to court at a time when they are experiencing the pain of losing you. It isn’t pleasant to think about this situation, but naming beneficiaries is undoubtedly better than the alternative.