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[Video] To Pay Down Or Save? A Question Of Net Worth.

by Financial Design Studio, Inc. / February 24, 2018

To Pay Down Or Save? A Question Of Net Worth.

MICHELLE SMALENBERGER, CFP®

People ask: Should I pay off a loan or should I save money?  This really becomes a question of net worth.  Let’s discuss what net worth is, why it matters, or if it does even matter.

Paying off a loan, also known as a liability, from cash flow increases your net worth by decreasing an amount you owe.

Saving money, setting it aside into an account increases your net worth, increasing the amount you own.

Assets (what you own)  –  Liabilities (what you owe) = Net Worth

A great first goal as you’re starting out is to have a positive net worth, to own more than you owe.

Here are some examples for ways people increase their worth:

 

Example 1: GRADUAL

This is probably the most common way to increase your net worth.

Increase Assets:  You save money into your retirement accounts each paycheck.

Decrease Liabilities: You pay down your liabilities such as a mortgage or other loans as scheduled and they are paid off over time.

Net Worth Result = Increases gradually as you save each paycheck and pay off loans as scheduled.

 

Example 2: FAST

This is an example of someone who wants to pay off their debts quickly from their income.

No Change in Assets:  You pause your savings into retirement accounts

Decrease Liabilities:  You aggressively pay down your liabilities to get rid of them

Net Worth Result = Increases because you are decreasing your liabilities

 

Example 3: FAST

In this example, again you are paying off debt quickly but using your assets to do so.

Decrease Assets:  You use assets to pay off the debt you want to get rid of

Decrease Liabilities:  You pay down your liabilities owed

Net Worth Result = No Change in Net Worth

What This Means For You

It’s important to understand as you move money around that it affects your net worth.  As you ask the questions of how much to save and when to pay something down, understand how it will affect your worth.  In the end, what you own, minus what you owe, is how much money you really have.

 

 

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Financial Design Studio, Inc.

Financial Design Studio, Inc.

We are financial advisors in Deer Park and Barrington, IL. A team with a passion for helping others design a path to financial success — whatever success means for you. Each of our unique insights fit together to create broad expertise, complete roadmaps, and creative solutions. We have seen the power of having a financial plan, and adjusting that plan to life. The result? Freedom from worrying about the future so you can enjoy today.