Building Wealth

Building Net Worth

There are only two ways to increase your net worth:

• Decrease your debts (Especially consumer debt that carries a high interest cost which is not deductible).
• Increase your assets through saving or investing.

Most financial advisors believe that before you begin to increase your assets, you must first reduce your debt. The debts that should be reduced or paid off are (in order of importance):

1. Credit card obligations, because they have the highest interest costs and the interest costs are not deductible. When inflation was running wild in the 1980s, and credit card interest was tax-deductible, it made sense to avoid future price increases by buying on credit. Now, inflation is low to moderate and credit cards are no longer tax-deductible. Add to that the fact that the cost of credit card borrowing is at one of its highest points in years and you have multiple reasons to enhance your net worth by retiring credit card debt. Don't fool yourself into thinking that if you are making the minimum payment required each month that you are servicing the debt. The chart below shows just how ineffective paying the minimum monthly payment is. It takes forever to pay even a small balance off. You have to make extra payments to get anywhere because credit card lenders have lowered the minimum payment in many cases to just 2% of the balance.

A couple of extra moneysaving recommendations from Bankcard Holders of America are:

• Send in your payment as soon as you get your bill. The sooner the bank receives it, the less interest you will pay.
• Pay more than the minimum payment. If you pay only the minimum amount due, it can take you decades to pay off your balance.
• Refuse a card issuer's offer to make no payments for one month. That just digs you deeper into debt.
• Consolidate your cards. The fewer you hold, the easier it is to keep track of them, avoid impulse spending, and reduce your risk if the cards are lost or stolen. Obviously, it also pays to drop a card charging a higher rate in favor of one with a lower rate.
• Beware of "teaser rates," - very low initial rates that surge after a number of months. Read the fine print. Cash advance fees can be steep to compensate for the low rate. A card from First USA carried a minimum of $5 per cash advance, even if the advance was for only $20.

One simple strategy to get you started on improving your net worth is to switch your credit card debt to card carriers that charge lower interest rates. Kiplinger's "Best Deals in Credit Cards" are as follows:

1. Installment debt on cars, boats, appliances, etc., where the interest cost is not tax deductible either.
2. First and second mortgages. (Paying off a mortgage before investing, however, may not be the best strategy unless you are a very conservative investor because the interest paid on mortgages is normally tax-deductible and because the interest rate on most mortgages is lower than the yield on many types of investments.)

By paying off credit card and installment debt, you are giving yourself a guaranteed return on your money. Make a list of all such debts and list them by the interest rate you are paying on them. If the highest is a Visa card with $2,000 owing and the interest rate is 17.9%, you will guarantee yourself a return of 17.9% on the $2,000 you use to pay the debt off. That's a great return on your money.

The strategy is to keep paying debts off in the order of their interest rate. The highest remaining is always where you want to focus your attention.

Cherry Creek Mortgage
4301 Hacienda Dr. Ste. 120
Pleasanton, CA. 94588
Phone 800-325-2062
Fax 925-520-0231

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