Having a negative net worth may seem like an impossible valley to climb out of, but you might be surprised at how common a position it truly is. According to a report by the Wall Street Journal, gathered from multiple other sources, the average net worth for individuals between 18 and 29 is negative. Perhaps unsurprisingly, the low point here is at age 21, right after graduating from college, with an average net worth of -$38,915.

Are you feeling better about your own position yet?

You'll feel even better when you discover it's possible to build wealth, even if you have a negative net worth. Here's how.

What Is a Negative Net Worth?

Your net worth is the sum of all your current assets (including your home, car, stocks, business, and antique coin collection) minus all your debts (including college loans, credit card debt, mortgage, and anything else you owe).

If you have more debt than assets, your net worth will be negative (and you can calculate it here). It means you'll be fighting an uphill battle if you want to build wealth, but that doesn't mean it's impossible--not by a long shot.

The Key Challenges

If you want to be successful climbing out of a valley of debt, you first need to recognize the key challenges you'll face:

  • Compound interest. Compound interest refers to the accumulative potential of an interest rate that is engaged consistently over time. If you're in debt, paying a high interest rate on that debt, you'll end up paying far more than your initial principal over time, which is going to significantly reduce your chances of eventually building wealth. Preventing compound interest from increasing your debt, and instead using it to build your wealth, is key.
  • Credit. You'll also need to build and/or improve your personal credit score. Your credit will affect your ability to get a loan, buy a house, and possibly even get an apartment. Getting this score in order should be high on your list of priorities.
  • Debt payments. If you're required to make monthly payments on your debt, your money will be tied up--which means you can't use it to save for emergencies or invest in long-term securities. The sooner you're rid of debt, the better.

How to Climb out of Debt and Start Building Wealth

Now, let's look at the actionable steps you can take to start building wealth:

  1. Consolidate and negotiate. Debt reduction needs to be your first step, and the first thing to do to make that debt more manageable is to consolidate it and negotiate your rates. If you have multiple credit cards or loans, try to consolidate them onto your account with the lowest interest rate. Then, work with your creditors to negotiate a lower rate (if you can). Even a few points of interest can save you hundreds to thousands of dollars in the long run.
  2. Draft a cutthroat budget. Next, you need to develop a cutthroat budget. Find out exactly how much money you're making each month, and where you're spending that money, then figure out a way to cut as many costs as possible--especially luxury and entertainment items, which you don't really need. Your end goal should be living well below your means, even if that means moving to lower-cost housing or making significant lifestyle sacrifices.
  3. Focus on eliminating debt. With the extra money you have every month from your cutthroat budget, start paying down your debts, starting with your account with the highest interest rate. It may take months or years to climb out of that hole, depending on how deep it goes, but it's necessary if you want to get rid of that "-" at the beginning of your net worth figure.
  4. Enroll in a retirement program. Your brain is conditioned to make decisions for the present, so it's hard to make present sacrifices to build a better future, but that's what it takes if you want to be wealthy. If your company offers a 401(k) program, you should enroll--especially if it offers a company match (which is basically free money). If that's not available, open a Roth IRA. Either way, start investing in index funds, bonds, and other assets meant to help you grow your capital over the course of years.
  5. Supplement your income. Finally, find a way to improve or supplement your income. As long as you're living below your means and investing wisely, you can build wealth eventually, but the more income you have, the faster and more stable that path will be. Search for promotions and raises within your current line of work, and pick up side gigs as additional streams of revenue whenever you can.

Follow these steps, and you'll be well on your way to turning that negative figure into a neutral one, then turning that neutral figure into an enormously positive one.

As long as you maintain these habits, and start making compound interest work in your favor, you'll be well on your way to becoming wealthy, retiring early, or just living a more comfortable lifestyle.

Published on: Jul 24, 2018
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.