Principal payments make no impact on net worth

To build on this blog posting regarding the concept of the location of assets and liabilities on a household’s balance sheet.  Most people do not realize it but by making a principal payment towards a loan there is no impact to net worth at that specific point in time.  Why?

This is because by making a principal payment towards a loan a person is reducing the amount that they owe by the same amount that they are reducing the balance in their checking account.