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 this 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(NW)
Maybe you are a business owner and can relate this to keeping the balance sheet in the positive. A great first goal as you’re starting out is to be in the positive, to own more than you owe.
To Pay Down or Save: Examples of Net Worth
Example 1: GRADUAL
This is probably the most common way to increase this.
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.
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 net worth. In the end, what you own, minus what you owe, is how much money you really have.
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Two things that never lie are your calendar and your checkbook. These are two things you can analyze to see if you’re spending them well.
I have a passion for helping others develop a path to financial success! Through different lenses on your financial picture, I want to help create solutions with you that are thoughtful of today and the future. I have seen in my life the power of having a financial plan while making slight changes of direction from time to time. I believe you can experience freedom from anxiety and even excitement when you know your finances are on track.