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.
- Net worth is the sum of assets minus debts, while cash flow is the money coming in versus out each month
- Traditional financial planning focuses on increasing net worth, while creating cash flow is more important for financial freedom
- Cash flow can come from any asset that provides income, such as investments, profitable businesses, or royalties
- Cash flow is more critical for those who want to be financially free as soon as possible
- Cash flow can be created quicker than generating net worth, and net worth becomes a by-product of generating cash flow
- Acquiring cash-flowing assets is the cornerstone of creating financial freedom
- The importance of cash flow versus net worth depends on personal goals.
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
Home Value = $300,000
Car Values = $40,000
Retirement Funds = $150,000
Asset Value = $300,000 + $40,000 + $150,000 = $490,000
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)
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.
Cashflow vs Net Worth, Which Is More Important?
Now let’s get down to the nitty gritty here. Which is more important?
Well, it really depends on what your goals are.
Robert Kiyosaki states that your goal should be creating cashflow in your life rather than net worth. Cashflow is what will allow your to exit the proverbial rat race and start living life on your own terms.
If your goal is to be financially free as soon as possible, like our own goal here at 40 Plus Finance, then cashflow is more important to me.
But exactly why is it more important to me?
For me, it’s a personal preference, but I can create cashflow in my own personal financial life quicker than I can generate net worth. Net worth become a by product of generating cashflow.
How can I do that? By utilizing other people’s money (banks, private lending) I can accelerate my purchasing of cash flowing assets.
Acquiring cash flowing assets is the cornerstone of my own financial freedom plan. My own goal is to be financially free in 10 years, but it’s not a race and there is no winner here.
If I become financially free in 11 or 12 years, I still win.
What about your, which is more important to you, the reader? Let me know in the comments below!
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