Your net worth equals what you own minus what you owe. It is commonly referred to as the difference between your total assets and your total liabilities.
Here’s a simple illustration:
Home Value = $350,000
Mortgage balance = $150,000
Investments = 100,000
Credit cards = 20,000
Auto = 45,000
Auto loans = 30,000
Savings = 15,000
Bank loan = 4,000
You Own = $510,000
You Owe = $204,000
Therefore, your net worth would be $306,000.
You can own more things or you can reduce your debt obligation. This article will focus on reducing your debt first because it is the fastest way to generate more money and, then, buy (own) more things.
In our example, you have $204,000 of debt. If you’re like most people, you pay less attention to the mortgage and car loan balances because you consider them to be rather normal (necessary) to your way of life.
The credit card companies are probably charging somewhere between 12 to 18 percent (forget those slick, short-lived introductory teasers) and the bank loan is probably around 6 percent.
Now, before we go further let me ask you a question. Which is faster? Create $204,000 (in other words, own more) … or reduce $204,000 of debt? In both instances, the result is the same because your net worth will have increased by the same amount.
To create $204,000 in 15 years, you would have to invest $6,956.69 each year for 15 years and receive a guaranteed 8 percent rate of return. Where can you find a guaranteed rate of return this high in today’s marketplace? No where!
To reduce $204,000 of debt in 13.5 years, it takes only $100 extra each month. Now, let’s make sure.
To increase your net worth by $204,000 you must invest almost $7,000 each year for 15 years. You hope and pray you’ll receive no less than 8 percent average every year.
Or… you can come up with only $100 each month to reduce 100% of your debt (to include your mortgage) in only 13.5 years — guaranteed! Hard to believe isn’t it?
Go ahead and check it out yourself. First, use a compound interest table to compute the investment requirement. Then, print this
“http://personal-finance-on-the-net.com/support-files/debtchart.pdf”debt reduction chart. You’ll need an Adobe Reader, which is probably already installed on your computer. Otherwise, go to adobe.com for a free download version.
In every instance, it is faster and more reliable to eliminate your liabilities than to increase your assets. Why? Because the interest you pay on your debt is excessively higher than the guaranteed interest you can earn.
By following the debt chart and adding an additional $100 each month to the minimum payment requirement, you can dramatically compound the effect of your payments and expedite the complete elimination of all your debt.
It’s a lot easier to come up with $100 extra each month than it is to find $6,956.69 each and every year for the next 15 years.