Net worth Vs Cash Flow

Why Net Worth Is Not The Best Indicator Of Wealth

The concept of net worth is mistakenly worn as a badge of honor. In simplest terms, the definition of net worth is assets — your savings, home equity and investments — minus liabilities, or what you owe. Let’s say you own a home worth $200,000, and you have a
mortgage of $150,000. Your net worth is $50,000. Seems simple.

Yet, many people believe that when they buy a home (even if they have a mortgage), the total value of that home is included in their net worth. So, in the same example, one person could correctly calculate that they have $50,000 in net worth, while the other may mistakenly believe they have $200,000 in net worth.

In both cases, the dollar figure doesn’t matter as much as you might think, for both are paper gains based on fleeting numbers. For example, the net worth of your primary residence is an illusion based on what you think its value is today based on the value of past sales of a similar property. Net worth is a focus on retroactive or past-oriented information.

The value is an assumption until the property is sold. Finally, the equity or net worth of the property is not liquid — meaning you couldn’t get the money today or as quickly as if the money was in your bank account. The point is, net worth is an estimate of your wealth based on the best guess of value.

Cash Flow As A Better Measurement Of Wealth

Business owners understand cash flow. Cash flow is the money coming in and going out of your personal and business accounts on a monthly or annual basis. The money coming in could be from income, sales, profits, new investment and debt payments. Cash flow is a real-time measurement of financial health.

Unlike net worth, cash flow is liquid and stable. It is also predictive and future-oriented. If you have positive cash flow, you can pay expenses, have a cushion in the event of an emergency or plan for future investment opportunities. These wealth streams are cash, and cash is king.

So, how do you increase cash flow to increase your wealth?

Diversify Your Income

To capture a steady stream of profits, you must diversify your income streams. The average multimillionaire has at least seven streams of income. Diversity historically comes in three ways: earning, portfolio and passive investments. The earning is self-explanatory. You provide labor, sell a service or a product and earn an income (or profits). The second is where you traditionally save or invest.
Then there is passive income. Passive income is where your money makes money while you sleep. It can come from traditional methods; however, savvy investors are now earning these types of returns through crowdfunding, venture capital, syndications as wellas other mainstay investment methods like real estate.

Considerations When Building Cash Flow

The velocity of money, or how fast money changes hands, is a key consideration when building a cash flow stream. You want to make sure the money you earn is quickly reinvested into more income-producing opportunities. Also, you don’t want to have too many eggs in one basket. Spread your money around so if one investment or stream of income dries up, you still have others to fall back on.

Also, consider your risk tolerance for income streams. Some income is more stable than others. For example, dividend-paying stocks are more stable than stock options. However, you may want to consider taking on a bit more risk for the potential of higher returns.

Five Steps To Increase Your Cash Flow

1. Maximize your earned income.
2. Create a source of portfolio income with standard and alternative
investments.
3. Create multiple sources of passive income with the above
4. Optimize tax efficiency.
5. Double down on your financial and investment education.

Finally, consider my article a piece of financial inspiration, for knowledge that leads to action is wisdom. Creating a financial fortress may require time and energy, but success loves speed, so
make sure to act on the ideas you have read above: Set a cash flow goal, choose a vehicle and get started now.