All of the following will increase net worth, except:
A. saving more of your salary each pay day.
B. reducing your spending and directing the money toward saving and investment.
C. taking $1,000 cash from your liquid assets and paying down $1,000 of debt.
Answer (2)
Saving more salary increases assets, leading to a higher net worth.
Reducing spending and investing the savings also increases assets, thus increasing net worth.
Taking cash from liquid assets to pay down an equal amount of debt leaves net worth unchanged because both assets and liabilities decrease by the same amount.
Therefore, the action that does not increase net worth is taking $1,000 cash from your liquid assets and paying down $1,000 of debt.
Explanation
Understanding Net Worth Net worth is defined as the difference between assets and liabilities. We need to determine which of the given options does NOT increase net worth.
Saving More Salary Saving more of your salary increases your assets. Since net worth is calculated as assets minus liabilities, an increase in assets leads to an increase in net worth.
Reducing Spending and Investing Reducing spending and directing the money toward saving and investment also increases your assets. Again, this leads to an increase in net worth.
Paying Down Debt with Cash Taking $1,000 cash from your liquid assets and paying down $1,000 of debt involves decreasing both assets and liabilities by the same amount. Let's analyze the impact on net worth:
Net Worth (NW) = Assets (A) - Liabilities (L)
If we decrease assets by $1,000 and decrease liabilities by $1,000, the new net worth (NW') is:
NW' = (A - $1,000) - (L - $1,000) = A - $1,000 - L + $1,000 = A - L = NW
Therefore, taking $1,000 cash from your liquid assets and paying down $1,000 of debt does not change your net worth.
Conclusion Based on the analysis, saving more salary and reducing spending to invest increase net worth, while taking cash to pay down debt does not change net worth. Therefore, the option that does NOT increase net worth is taking $1,000 cash from your liquid assets and paying down $1,000 of debt.
Examples
Understanding net worth is crucial in personal finance. For example, imagine you are managing a small business. If you save more revenue each month (saving more salary), your business's assets increase, boosting its net worth. Similarly, cutting unnecessary expenses and investing the savings wisely further increases assets and net worth. However, using cash reserves to pay off an equivalent amount of debt doesn't change the overall net worth of the business, although it can improve its financial stability by reducing liabilities.
The action that does not increase net worth is taking $1,000 cash from your liquid assets and paying down $1,000 of debt, as it decreases both assets and liabilities equally, leaving net worth unchanged. In contrast, saving more salary and reducing spending to invest both increase net worth by adding to assets. Therefore, the correct answer is option C.
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