Here’s Why Wealthy People Don’t Focus on Paying Off Debt

A wealthy woman stand inside her house.
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Debt freedom is overrated — so says Tiffany Aliche, founder of The Budgetnista.

Her advice? Think bigger.

“Debt freedom is a goal, debt freedom is not the goal,” said the financial educator. “The goal should be wealth.”

Rather than tracking only how much you owe, Aliche noted it’s important to know how much you own, too, when making financial decisions. Combine those two numbers, and you can get a view of the bigger picture: your net worth.

“That’s what I like about net worth — it forces you to look at both sides of the equation,” she said.

If the phrase “net worth” sounds intimidating and banker-y, it doesn’t have to be. We asked Aliche to help us break down what exactly net worth is and why it’s important for helping you achieve your financial goals.

What Is Net Worth?

When it comes to numbers in personal finance, it’s easy to become hyper focused on a single aspect.

Your credit score, for instance, tells a lender how likely you are to pay a bill — but it says nothing about how much money you have to pay that bill.

But your net worth includes a more complete, current picture of what you owe vs. what you own.

“It’s almost like taking your financial temperature,” Aliche said.

Ready for a checkup of your financial health? We’ll explain what you should include when calculating your net worth and how to use that number to help you.

How Do You Calculate Your Net Worth?

Here’s the formula for calculating your net worth:

Assets – Liabilities = Net worth

Put simply, your assets are what you own, while your liabilities are what you owe.

Let’s start by digging into liabilities, since you probably have a better idea of what they might be.

Liabilities include the remaining balance for the following:

  • Mortgages.
  • Home equity loans.
  • Auto loans.
  • Student loans.
  • Personal loans.
  • Credit cards.
  • Outstanding bills, including medical debt.
  • Income tax payments.

Assets include the following:

  • Cash (checking, savings, money market accounts, CDs).
  • Current value of any investments, including your 401(k) and IRA accounts.
  • Market value of real estate, like your home.
  • Automobiles that have equity (here’s how to figure your car’s equity).
  • Cash value of any insurance policies (typically whole life and universal life policies).
  • Collectibles like art, jewelry and furniture — anything that you can potentially (and reasonably) sell. Your mint-condition Batman #1 comic book may count, for instance, but your IKEA desk is less likely.
  • Business interests — this can include the value of a business you own but also can include intellectual property, like a book or song you wrote, that can continue to earn money.
A professional headshot of source Tiffany Aliche. Here she is smiling and wearing a green shirt.
Rather than tracking only how much you owe, Aliche noted it’s also important to know how much you own when making financial decisions. Photo courtesy of Tiffany Aliche

And yes, an item can be both a liability and an asset — if your home has a market value of $300,000 and your mortgage balance is $200,000, your home ends up adding $100,000 to your net worth.

Aliche dedicates two days to helping you assess liabilities and assets in her free Live Richer Challenge, but essentially “it’s money in your pocket, money out of your pocket,” she said.

Why Is Net Worth Important?

Net worth is more than a static number on a ledger since assets and liabilities can change in value. It’s a good idea to check in with it at least once a year so you can change direction if needed.

If you only focus on debt, for instance, consider what you’re missing from the big picture. For example:

Mortgage $200,000 $177,000
Car loan $20,000 $11,000
Total liabilities $220,000 $188,000

You reduced your debt by $32,000. That’s good, right?

But maybe as you focused on paying off debt, you neglected to notice that the housing market took a turn during those five years, and car values generally depreciate 60% in the first five years, so your assets changed accordingly:

ASSETS Year 1 Year 5
Home value $200,000 $175,000
Car value $20,000 $8,000
Savings $10,000 $6,000
Total assets $230,000 $189,000

Your assets decreased by $41,000 during that time. So your net worth dropped from $10,000 in year one ($230,000 – $220,000) to $1,000 by year five ($189,000 – $188,000).

This is only a snapshot of your net worth — you might have investments or credit cards to factor in, too — but you get the idea: Debt is only part of the equation.

Knowing your net worth allows you to better track your struggles and successes long term, so you can make necessary changes more quickly.

In the example above, if you realized the value of your home was decreasing every year during those five years, you might have reassessed your goal of paying off the home by year three and cut your losses by selling.

“If we’re wanting to do better with our finances, [net worth] will give us a way to see where we were and to goal set for where we want to be,” Aliche said.

By understanding your net worth, you’ll also see how the other side of the equation — your assets — are more than the money currently in your pocket.

Which brings us to how you can increase your net worth.

How Can You Increase Your Net Worth?

Aliche said she knows from experience what it’s like to focus on what the next paycheck can buy instead of how it can increase your net worth long term.

When she worked as a preschool teacher just after graduating from college, she lived with her parents so she could save money — but it always seemed to be for a short-term goal that would drain her bank account.

“I thought I was a good saver, but I was just a good delayed spender,” she said. “I used to save, save, save, go on a vacation. Save, save, save, buy a car.”

Rather than saving only for short-term goals, Aliche changed her mindset to thinking about long-term wealth, including launching her Budgetnista business.

She recommended starting incrementally if it seems like you’re using every dollar for paying bills and saving for short-term goals like a vacation.

“Get to a state where you can eke out $1, $2, $10, $20 to set aside for investing for wealth,” she said. “In the beginning, your $10 is not going to be enough, but you’re setting it aside for when it can join its other brothers and sisters.”

Once you start investing in long-term strategies, those investments can start to earn you money passively. The money can come from making investments that accrue interest, buying real estate that increases in value or, like Aliche, launching a business that becomes profitable.

“I no longer have to work as preschool teacher TIffany because my business does the work,” Aliche said. “The things that you own — these are your assets — will one day work for you so you don’t have to.”

Using your net worth as a gauge for measuring what you own against what you owe can help you see how small changes — like saving the money you’d typically spend on takeout — to make a big difference.

“You budget so you can save, and you save ultimately so you can invest, and you invest so you can grow wealth.”

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.