views

Why Interest is Killing Your Net Worth

Debt, Saving8 Comments

Why Interest is Killing Your Net Worth

When you hear the words “net worth”, you may start to think about what your life is worth in a sense. Typically, your net worth is a complete picture of your financial soundness and where you stand when it comes to your assets, debts, and more. If you ever want to learn what your net worth is, you would (and should!) create a balance sheet that will lay it all out for you. Take a look at my financial stats to see how I track mine.

To figure out what your net worth is, you would take your assets and subtract your liabilities. The final number is what your net worth is. For example, if your assets are $350,000 and your liabilities are $300,000, then your net worth is $50,000. Your net worth will increase and decrease over time depending on what liabilities are removed and what is added.

Your assets are divided into current, intermediate, and long-term. Current assets would include your current cash on hand and near cash. Liabilities are also divided into current, intermediate, and long-term.

So, what does your net worth really mean to you? It is a snapshot of your financial decisions and you will find that when you make good financial decisions, your net worth raises and when bad decisions are made, it will lower.

Just like interest can really help you with your savings, it can also kill your net worth when you are charged it. Let’s take a look.

Interest and your net worth

Interest affects your net worth and it can bring it down. In fact, if you have a lot of credit card debt that carries a high interest, you will find that your liabilities may outweigh your assets and this means that you can have a negative net worth.

There are ways to improve your net worth if you are in this situation and that is to increase your assets, reduce your liabilities, or do a combination of both.

Since a liability is something such as debt, your liabilities can easily go over your assets. The more liabilities you have, the less likely it is that you will have a positive net worth.

Any type of loan, from a credit card to a student loan to a personal loan, can cause your net worth to diminish. If these loans have a high interest rate, you should worry about them because they will impact you negatively. The way they affect you is because they increase the amount of your liability.

For example, if you have a $10,000 loan, but the interest rate on it is 10.75 percent, you may end up with roughly $14,000 of debt. This is $4,000 more than the original loan rate. This additional $4,000 is added to your liabilities. Now do this for all of your loans and credit cards and you may need to take a step back. Here is a great resource to help you learn how to refinance credit card debt.

Improving your net worth

The best way to improve your net worth is to increase your assets, reduce your liabilities, or do a combination of both.

If you have the ability to increase your assets, you should. Whether you come into a windfall of cash, you sell something you do not need, or you obtain another job, the additional cash will help you.

While you may be able to increase your assets, you should really focus on reducing your liabilities. Your liabilities are your debt, so reducing it is really the best option. If you do have high interest credit cards or high interest debt, you want to attack it first. This is because these high interest loans and debt is dragging down your net worth.

The best way to reduce high interest debt is to consolidate and refinance it. You can refinance with a private bank or lender and the process will reduce the amount of interest you pay and will rework your monthly payment. Combining multiple loans into one can also make repayment much more manageable as you will only have one payment to worry about. Another good idea is to start sending a double payment instead of a single minimum payment. You will pay off your loan in almost half the time and save thousands on interest. Here is a great resource to help you learn how to consolidate student loan debt.

Sit down and make a plan

If you want to increase your net worth, you will first need to sit down and make a plan for yourself. You should focus on reducing your liabilities and increasing your assets as much as possible. Remember that when you pay down a liability, you will find that your net worth will increase drastically.

– Vincent

What about you? Do you have some high interests loans? Are you planning on crushing them down as soon as possible?

wealthsimple-logoWealthsimple - If you are looking to start investing I highly recommend Wealthsimple. It's a great way to start investing easily, and with your first $5,000 managed for FREE until October 2018 and a $100 BONUS it’s the perfect option to get started. Sign up process takes less than 15 minutes! Check out my complete and detailed review on Wealthsimple.

Related Posts

Enjoyed Reading? Join other people who get fresh content from me.

  • Avatar for Finance For Geek
    Mrs. Picky Pincher
    Mar 31, 2017 at 7:54 AM

    It’s funny how interest can either help or hinder your net worth growth. The rule is to eliminate as much debt as possible to build a positive net worth.

    • Avatar for Finance For Geek
      Finance For Geek
      Mar 31, 2017 at 9:37 AM

      True! But I guess not having any more debt is not a bad thing, but it comes at a price for us .. not having so much invested! Might have been better to invest some while also paying off our student loans.

  • Avatar for Finance For Geek
    Danielle @ The Pennies We Saved
    Mar 31, 2017 at 11:06 AM

    Great info you’ve got here!

    Eliminating debt with the highest interest rates is probably one of the best ways to go, especially if you have a ton of it. Right now, we don’t have loans with super high interest rates (highest is 6.5%)…so for that reason we attack smallest debts first. Although, there have been times where We have veered off path and paid off a high interest loan in full. It felt great LOL!

    We are working on crushing the remainder of our debt by the end of this year which with increase our net worth significantly! Can’t wait!

    • Avatar for Finance For Geek
      Finance For Geek
      Mar 31, 2017 at 11:49 AM

      Yes I don’t think that’s a super high interest either. I would definitely take the same path, starting with the small one first. I’m so glad we finally got rid of all our debts last year. Good luck on crushing the remainders of yours before the year ends!

  • Avatar for Finance For Geek
    Chris
    Apr 11, 2017 at 8:35 PM

    Compounding interest works both ways. I say pay down debt as quick as possible. It feels great to see that net worth number creep higher and higher. Keep up the good work, Vincent.

  • Avatar for Finance For Geek
    Happy Camper
    Aug 02, 2017 at 7:24 PM

    When we finally got down to paying off our mortgage at some ludicrously low interest rate (4.??%), we learned that our amortization schedule would not change unless we paid for a refinancing of the loan. Unless we could cough up the cash to pay it all off, we were going to pay the same amount of interest every month, regardless how much principal we paid down. So, we kept paying ourselves the money, did the math and refinanced when the timing was right. In the end, we saved ourselves GOBS in interest.

    • Avatar for Finance For Geek
      Finance For Geek
      Aug 03, 2017 at 10:27 AM

      Woah that’s great that you were able to do so! I’m not so familiar with all the aspects of mortgages and home ownership (yet?) but I have so many friends which did the same (accelerated repayment or refinancing) and the amount of interest saved is like.. so huge!

Leave a reply

Your email address will not be published. Required fields are marked *