What’s More Important? Cash Flow Vs. Net Worth

Cash flow vs net worth are both financial metrics, but they measure completely different things.  If you want to be financially free, especially if you are over 40 and your window of earning is getting close to half over, it’s important to understand the nuance between the two in order to answer the question, what is more important, cashflow vs net worth.

First, some definitions between the two:

What Is Net Worth?

Net worth is the sum of your assets minus the sum of your debts. Having a high net worth is the typical metric that most people look at in order to determine their wealth, but it certainly isn’t the only one.

If you have a high net worth, but also high expenses each month, you still are stuck in the rat race.

Traditional financial planning focuses on increasing your net worth through accumulation of things such as stock, mutual funds, maybe even bonds.

In the context of retirement, you are generally relying on an accumulation of your net worth to “spend down” over the course of your non-working years.

Slowly but surely your net worth decreases over your golden retirement years.  Typical planning relies on what is referred to as the 4% rule for retirement, meaning you know you have enough money if, when you start drawing down your assets you don’t need to withdraw more than 4% of them each year.

Example Calculation of Net Worth

Let’s say you are 45 and own a home, drive two cars and have roughly $150,000 saved in retirement funds.  Even more typical might be having just a bit of credit card debt.  Here is what it would look like

Asset Calculation:

Home Value = $300,000

Car Values = $40,000

Retirement Funds = $150,000

Asset Value = $300,000 + $40,000 + $150,000 = $490,000

Liability Calculation:

Mortgage Debt = $200,000

Car Loans = $30,000

Credit Card Debt = $10,000

Liability Total = $240,000

Here is where we get to your net worth calculation.

Net Worth = Assets – Liabilities

Example Net Worth = $490,000 – $240,000 = $250,000

What is Cashflow?

Cash flow is the more important metric and measures the money coming in versus out each month. Most people only have a fuzzy idea about what this is and this this only applies to businesses.

People like you and I can have cashflow in their own personal financial world.

Cashflow can come from anything really.  Investments kicking off money each month.  Businesses that are running profitably and sending you money.  It could even be a book you wrote long ago which pays you royalties month after month.

Cashflow comes from assets that you own that provide you income.

Let’s use an example of the same person above, but he/she invested for cashflow instead of trying to grow their net worth.  Using the $150,000 in retirement funds.

$150,000 would purchase roughly 5 cash flowing turnkey rental properties (our favorite cashflow asset here at 40PlusFinance.com)

Each rental property can kick off roughly $250 per month in positive cashflow (as an example)

Cashflow calculation:

5 properties X $250 per month = $1250 in cashflow per month.

It’s important to keep in mind that cashflow from rental properties aren’t always consistent, but those numbers are an average.