Debt Slows You Down as You Try to Build Net Worth - Try to Get Out of Debt to Build Wealth

One of the latest trends in personal finances is to move into a "net worth" mentality. Rather than simply making a monthly budget, many people are starting to look at financial goals in terms of net worth. A budget is about managing your monthly income and expenses. New worth is about building wealth and striving for financial independence. And when you switch to a net worth mentality, it becomes apparent that debt can slow you down as you try to reach your new worth goals.

What is net worth?

In simple terms, your net worth is how much you have in assets after all of your debts are taken out. This means that you add up your cash, investment accounts and the value of your home, along with other assets, and then you add up all of your debts -- car loans, mortgage, credit cards, etc. If your assets total $350,000, and your liabilities total $200,000, your net worth is $150,000. If you are looking to achieve greater financial freedom, it becomes necessary to increase your assets, and to make efforts to decrease the liabilities that detract from your net worth.

Debt slows you down when building net worth

The more debt you have, the lower your net worth is. If you keep amassing debt, it will eventually negate your assets. If you are trying to reach net worth goals that will give you financial freedom, debt will hold you back.

Interest. In many cases, credit card debt can be especially damaging. This is because credit card interest rates are often higher than the rate of return you can get on investments. This means that your interest charges reduce the effective amount you earn from your assets, slowing the growth of your net worth.

What you can do

If you want to get back on track with your net worth goals, you need to pay down your debt as quickly as possible -- especially consumer debt like credit cards. Take "extra" money that you have in your budget, and apply it to debt reduction. You can also try debt consolidation, which works well in some cases. The "economic stimulus" tax rebate that is coming might be well used if you reduce your debt.

Once you get rid of your debt, you will be surprised at how much faster your net worth can grow.