Stocks are down about 30% to 40% this year. Money Market rate are hovering around the inflation rate or next to nothing. Home prices are still slipping. Lets face it…it is a depressing financial market out there. And, everyone’s net worth has been taking a royal beating.
But, there is one surefire way to raise your net worth despite the bad economy….
Pay Down Debt. Most people forget that there are two sides to the net worth equation. Like the classic accounting equation, assets minus liabilities equals equity (or net worth). So, there are two ways to increase your net worth, increase your assets or reduce your debts.
Increasing your assets this year is kind of a wash. I continue to buy stocks and shares in mutual funds every month through automatic investing or dollar cost averaging, but the additions to my portfolio have been offset by the stocks and fund’s share price reductions that have been constant over the last six months or so.
In today’s economic situation, paying down debt is the best way to increase your net worth. Paying off credit cards or a car loan adds that exact amount to your net worth. Paying off your debt is also the equivalent of earning a return that is equal to what you would have paid in interest. For example, if you have $1,000 in credit card debt that charges you 18% in annual interest, you will have earned $180 that would have spent in interest charges if you paid that debt off.
So, do not forget the liabilities or debt side of your net worth equation. You can become richer in this depressed economy by paying off your debts.