I see all of these financial blogs focusing on their net worth progress. My question is, do I care? Not do I care about what is their net worth, but do I care about monitoring my net worth? It's kinda neat being a voyeur, watching people discuss their net worth to the world, and maybe that's the fascination. It's what the general public and media focus on. I think they are focusing on the wrong goal.
Let me ask you a hypothetical question. For simplicity, assume taxes and debt are not part of the equation. Let's say you want to get out of the rat race, and you need $60,000 yearly to survive.
|Option #1||Option #2|
|$1,000,000 that you must take out $60,000 yearly. It generates no interest.||$1,000,000 generating 6% interest and compounds yearly. You cannot touch the principal.|
Which would you choose? Both options give you a $1 million net worth. The answer is easy; you would choose option #2, it gives you $60,000 income for the rest of your life. With option #1, you would run out of money in year sixteen. Not bad, but not good either. If you started collecting at age 50, based upon average lifespan, you would out of money before you die.
Cash flow is a much more important metric to measure; how much is left at the end of the month after subtracting expenses from income. This becomes obviously important when you have low or negative net worth. If you have no savings (net worth) to fall back upon you're dead, you need cash flow to keep you going. This is the same as owning a business; the income/expenses report. If you have constant negative cash flow, you won't be in business for too long. As your net worth grows past a specific point, the interest alone can keep you going without doing anything else.
The interest is otherwise known as cash flow, or at least adds to your monthly cash flow. While it's nice to have a high net worth; it's useless if it doesn't generate any cash flow. Why do we hear of lotto winners, rock stars, athletes, who after hitting it big, are broke a few years later? It's because of bad management of their cash flow; net worth wasn't an issue. Constantly increasing your cash flow will automatically increase your net worth. This is why everyone says live within your means. If you don't have the cash flow, don't purchase it! That might seem like a no-brainer, but remind me how the housing crisis started?
Your goal should be about acquiring income-producing assets:
What I care about is how much money my active and passive investments generate for me monthly. Are they helping add to my net worth, or are they depleting it? If you focus on consistent positive cash flow, and ways to increase your cash flow, you most certainly will acquire a high net worth. This blog discusses ways of increasing income, and some smart ways in decreasing expenses.
So what's more important to you, cash flow or net worth? While I may devote posts discussing net worth from time to time, it's not the core reason for this blog and shouldn't be in your life.