Paying Off Debt Will Increase Your Net Worth

In my opinion, personal finance is 80% about the behavior and 20% about the numbers.  However, this is one example of how looking at the numbers can cause a behavioral change.  Everyone wants to increase their net worth, and many people try to come up with a 101 get rich quick schemes to boost their net worth.  I am going to show you a 100% guaranteed method for increasing your net worth!  There is NO start-up fee, and I do not run info-mercials at 4am on sunday morning.

Calculating Net Worth:  Assets – Liabilities = Net Worth

Seems simple, but it can get complicated with taxes and all of that junk.  For the sake of the example, calculating your net worth is basically adding up all of the things you own that have value such as your cash, investments, furniture, cars, propety, and so on.  Then subtract all of the debt that you owe.

So here is the magical, guaranteed way of increasing your net worth (drum roll please) — pay off your debt!!  Every time you pay off debt, you are increasing your net worth!  Many of us know this in an intellectual way, but we do not embrace this concept emotionally when we use our disposable income to pay off debt rather than buying new stuff. 

The challenge for today is to go and calculate a rough estimate of your net worth, then look at what your net worth could be if you had a 0 in the liabilities column. 

Published or updated: February 22, 2006

Categories: Credit and Debt, Random

  • Geeps

    Paying off your debt is usually a good idea, but it doesn’t increase your net worth. It only keeps your net worth from going down due to the interest you may have to pay. Any money you send towards paying off your debt has to come from your assets, so your net worth actually stays the same.