Last Updated Apr 4, 2009 5:31 PM EDT
Your net worth is a combination of your assets minus your liabilities. Consequently, you can build your net worth by either increasing assets or decreasing liabilities. Since it has been tough to build assets lately, if you have some extra cash, a good use may be to decrease liabilities.
When you pay down debt, the return you get on your money is basically equal to the interest payments you won't have to make in the future. For example, if you pay down your mortgage, you are probably getting a return of 5 percent to 6.5 percent on that money for the remaining term of the mortgage. If you pay down credit card debt, you may be getting a return of 12 percent or more, depending on your interest rate. By the way, that return is better than the long term average for stocks, which is about 9.6 percent.
Paying down debt also feels good. It's nice to know that your creditors don't have a vise grip on your financial future. You don't have to do it all at once. Set a reasonable goal for yourself and then calculate what you need to do each month to reach that goal.
For instance, if you want to pay off your credit card in three years, you can use a simple debt calculator to determine the monthly payment. Or, if you have 20 years left on your mortgage, but want to retire in 15, then run a debt reduction estimate based on your principal balance and current interest rate.
There are many web based calculators that can help you do this. One good site is www.dinkytown.net. The site has a host of good calculators for mortgages, credit cards and other debt obligations.