Just yesterday, Amanda Page Tweeted, “Anyone in the personal finance community actively NOT track their net worth? I’d love to know why/why not. At or DM me.”
I replied, “I don’t actively track Net Worth as I see Positive Cash Flow as something to look at more closely. Postitive or negative networth doesn’t mean much if there isn’t positive cash flow. Positive cash flow makes EVERYTHING better.”
Here’s my thinking.
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Cash Flow
According to Investopedia:
“Cash flow is the net amount of cash and cash-equivalents moving into and out of a business.”
Okay, how’s this business description apply to personal finance? Well, how about this?
According to Schindler:
“Cash flow is money moving in and out of one’s collective accounts.”
It all comes down to income and spending. I’ll talk more about Cash Flow later.
Net Worth
Again according to Investopedia:
“Net worth is the amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth.”
I don’t completely agree with this definition as it speaks of assets exceeding liabilities. The word Positive is not included at the beginning of the sentence, as assets exceeding liabilities is indicative of Positive Net Worth.
According to Schindler and others:
“Net worth is the amount by which assets are offset by liabilities.”
Basically, if you have $250,000 in assets such as cash and a home, but owe $200,000 on the home, then you have a Net Worth of $50,000. A positive Net Worth, which is what everyone should shoot for.
On the other hand, if you happen to have a house worth $120,oo0 and still owe $110,000 and you owe $30,000 on a new car, plus $10,000 in credit card debt, then you have a Net Worth of -$30,000. In this situation, you “Are In The Hole,” as your Net Worth is negative.
Cash Flow is More Important Than Net Worth
I’m making a bold statement here, as I’ve never seen any official determination that Cash Flow is more important then Net Worth, but I firmly believe that it is.
“Negative Cash Flow can Destroy Positive Net Worth”
Looking at the two examples above, if you have a Positive Net Worth of $50,000, but don’t have enough money coming in each month to cover the bills, then you have to pull from that $50,000 to cover them.
Do this long enough and you’ll end up depleating the $50,000. Once it’s gone and you still have negative cash flow, you’re going to have to borrow money, or sell things, to make ends meet.
Doing so will put you in the hole, going from Positive Net Worth to Negative Net Worth.
“Positive Cash Flow can destroy Negative Net Worth.”
On the flip side, let’s look at the example of Negative Net Worth of -$30,000. If you have more money coming in each month than you need to pay bills and don’t spend all of the left over, you have money to start throwing at your debt.
Each time payment is applied to the principal, the liability amount goes down. As long as you don’t keep adding debt, your Net Worth starts moving towards the positive side.
As soon as your liabilities are equal to your assets you’ve hit Zero Net Worth, or “Ground Zero” as I refer to it, and you’ve just destroyed your Negative Net Worth.
From there, as long as you don’t add more debt, or increase your assets above your liabilites, you’ll Positive Net Worth
Kick Positive Cash Flow Into Overdrive and Really Grow Your Net Worth
Okay, I mentioned earlier that I strongly believe that Cash Flow is more important than Net Worth, so why am I now talking about really growing your Net Worth? Well, Net Worth gives you and idea of your “Financial Health” at the time that it is calculated.
Positive Net worth is what EVERYONE should strive to achieve. Outside of marrying into, winning, inheriting, or receiving a bunch of money as a gift, the only way to grow Positive Wealth is through Positive Cash flow.
Want to kick your Positive Cash Flow into “Overdrive”? Here’s a “Team of Two” that will help you do it.
Control Spending – The less money that goes out, the more that can be put towards building Positive Net Worth.
Increase Income – Here’s the biggie. Make more money, plain and simple. Get a better paying job. Start a Side Hustle. Invest in avenues that allow your money to make money.
Although Dave Ramsey says, “Cash is King,” my thoughts are “Positive Cash Flow is King.” You can have cash and spend all of it and then you have no more cash.
You have Positive Cash Flow you’ll have more and more money, as long as your liabilites are less than your assets.
I learned a LONG time ago that they only way I was going to dig out of the “Hole” of Negative Net Worth was by having Positive Cash Flow. We went from the negatives to Zero, which I refer to as Ground Zero, and have steadily increased our Positive Net Worth.
You can read more about our story in my guest post at Life and My Finances,
“Proof that Anyone Can Retire Early…Even a Middle School Teacher.”
I’d love to share where we are at right now, but I promised that I’d keep many things within our house, and our Net Worth is one of those things.
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So, that’s my take on Cash Flow vs Net Worth. It’s not the only view, so here’s a few more for you to take a look at.
Why Cash Flow is More Important than Net Worth (Investor Junkie) – “When it comes to personal finances, a small business, or a large company, cash flow is generally more important than net worth. If you doubt this, try applying for a loan at a bank. Unless it is an entirely asset-based loan, the bank will only be mildly interested in your net worth, but virtually obsessed with your cash flow.
The reason for this is simple — when you have a loan, repayment comes out of your cash flow, not your net worth.”
Cash Flow – How It Works to Keep Your Business Afloat (The Balance) – “Cash flow is the money that is moving (flowing) in and out of your business in a month. Although it does seem sometimes that cash flow only goes one way – out of the business – it does flow both ways. “
Cash Flow and Net Worth – From Debt to Wealth (Better Business Bureau) – “Keeping track of your budget and credit are important steps in building a strong financial foundation. However, in order to stay out of debt and build wealth, learn to control your cash flow and divert money into assets that build your net worth. “
Net Worth vs. Cash Flow (Bigger Pockets) – ” If you could focus on growing your passive cash flow or your net worth, which would you choose? How you answer this question could greatly influence your future.”
Net Worth vs Cash Flow (One Million and Beyond) – “Unfortunately I believe that I’m like a great many people out there where I don’t pay as close attention to the money going in and out of my account as I should and the net result is I know I’m spending more than I should be and than I have so I float along kind of treading water.”
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There you have it, my view and a handful of others.
So, which do you think is more important, Cash Flow or Net Worth?
Let me know, I’d love to hear your thoughts.
Until next time, Peace! Shin
