There’s a reason people don’t have enough money when they retire. They contribute to their 401k each year, but they never pay attention to their net worth. Actually, your net worth determines how comfortable you will be when you retire.
What is net worth? It simply the value of your assets minus your liabilities. Since your financial security depends on your net worth (and NOT the size of your 401k), it’s important to understand why using a mortgage accelerator, like the Mortgage Magic System, is probably what you should be doing. That’s because a mortgage accelerator builds net worth faster than your current retirement plan.
A family buys a house for $300,000, with a $250,000 mortgage at 4-1/2%. How does it affect their net worth?
| ASSETS | LIABILITIES | NET WORTH |
|---|---|---|
| House: $300,000 _______________________ Assets: $300,000 | Mortgage: $456,013 _______________________ Liabilities: $456,013 | Net worth = $300,000 - $456,013 = -$156,013 |
The family’s liability is their total mortgage obligation, which is almost twice as much as the amount they borrowed. So, immediately when purchasing the house, the family’s net worth has decreased by -$156,013.
The family also invests $3,000 in a 401k earning 6%. After a year, with inflation at 2%, the house appreciates, but the 401k decreases in value. Their net worth after a year:
| ASSETS | LIABILITIES | NET WORTH |
|---|---|---|
| House: $306,000 401k (inflation-adjusted): $2,940 401k Interest: $176 Mortgage Interest: -$11,200 ______________________________ Assets: $297,916 | Mortgage: $456,013 Less principal paid -$4,000 _______________________________ Liabilities: $452,013 | Net worth: $297,916 - $452,013 = -$154,097 |
A year after buying the house and investing in their 401k, the family’s net worth is -$154,097, an increase of $1,926.
But if they accelerated their mortgage by $3,000 instead of funding a 401k, how would that affect their net worth?
| ASSETS | LIABILITIES | NET WORTH |
|---|---|---|
| House: $306,000 Mortgage Interest: -$11,041 ______________________________ Assets: $294,959 | Mortgage: $447,685 Less principal paid: $7,160 _______________________________ Liabilities: $440,525 | Net worth: $294,959 -$440,525 = -$145,566 |
A year after buying the house and accerating their mortgage, the family’s net worth is -$145,566, an increase of $10,447 !
By accelerating their mortgage, the family increased their net worth far more than the 401k, AND they also cut 8 months off their total mortgage payments.
If they did this every year, they would pay off their mortgage in only 21 years. They would then have much more money to build up a large 401k and it would have more time to grow.
