Should You Focus On Net Worth Or Cash Flow?
Most people focus on their net worth in one of two ways:
- Wealth accumulated in bank accounts/stock market
How is net worth actually calculated?
Net worth is the difference between your assets and liabilities; the number at the bottom of your balance sheet.
Yet, net worth can be tricky. For example, unless your investments yield significant dividends, you could have a net worth of $1 million, yet derive little to no income from it. Due to inflation and TAXES, your cash accounts can yield so little that you actually lose money.
What’s the difference between net worth and cash flow?
Consider the following example: think of your net worth as a water container. Regardless of size, the water just sits there; it doesn’t flow. The water stored in the container is merely potential energy. It can create a lot of good, but only once.
Sometimes, for completely uncontrollable and mysterious reasons, a bunch of the water disappears (small stock market correction or big crash.) Or, once you drink some of the water, it’s gone forever and you have to go buy more water.
Compare this water container to a running faucet. The faucet is a constant, replenishing source of water, yet you are not doing the work to produce the water. Other people are doing the work on your behalf; the only way the flow of water would stop is if you shut the faucet off.
The faucets are just like your cash flow; when you need more cash flow, you open more faucets (streams of income.) Once you have multiple, steady streams of income you can slow down or retire, without worrying about turning your faucet on or off.
For more on this topic, check out Garrett Gunderson’s “Killing Sacred Cows”.
Here’s another analogy to tie it all together:
Trading time and effort for dollars is similar to hunting; if you want to eat, you need to hunt. You need to find the game, kill it and dress it, then depending on the size of the animal, you may be able to feed yourself and your family for a day or longer. Once you’re done eating, you need to go out and hunt some more, and if you want to eat every day, you need to hunt every day. Talk about a full time job!
Now, imagine if you’re on a vacation, out sick, or just want to slow down — how will you make sure you have enough food to survive? Or, how about when you can’t find any game? How will you eat? It’s not a sustainable routine for a fulfilling life.
Your money should be working for you.
Learn how to invest in ways that generate a passive income whether you do your day job or not; whether the stock market goes up or down; whether interest rates fluctuate or economy takes a turn.
As we say in our world: “Don’t buy eggs, buy chickens.”
When you’re ready to learn more about Smart Asset Opportunities, we’re here.