Cash Flow vs Net Worth


Today I invite you to engage in an exercise to find out more about yourself.


Many of our decisions are influenced by our beliefs and mindsets. What we feel is right versus wrong, better for me or better for thee, right now versus in the future. The way we look at and feel about money is not any different. We tend to fall into two mindsets on which of two overall strategies are better, more cash flow or more net worth.


Cash flow involves having your investments bring in money regularly. Having cash flow into your accounts. This can be done with rent-generating real estate, dividend producing investments, or being a primary shareholder of a profitable business. Those that value cash flow are not so concerned with leverage (debt) on their assets as long as the incoming cash is greater than the amount needed to service the debt and keep the investment in working order. This can mean repairs on the real estate or time spent in the profitable business. If you find yourself looking at many different ways to build a bigger income, regardless of whether debt or other leverage is involved, you probably are a cash flow type of person.


Net worth is at once a calculation of the value of your assets (what you own) minus the leverage on those assets (what you owe). Having assets that have a large amount of value compared to the leverage against them. This can be done also with real estate like a cash flow strategy, but net worth investors tend to value little to no debt on the asset so their overall net worth is higher. Retirement savings are also very valuable to net worthers. Stocks, bonds, mutual funds are all investment vehicles that usually don't have any leverage and thus contribute totally to one's net worth. If you find yourself adding up the total value of your assets minus any debts, you probably are a net worth type of person.


Neither of these is necessarily strictly better than the other. The value comes with knowing which strategy you are inclined toward. When you know that, you can move forward to learn more about that type of strategy instead of splitting your energy toward doing both. If you are a cash flow person, it may be better to focus on building that cash flow until and unless you find that you value net worth more. Likewise if you are a net worth person, focusing on that can help you drive your net worth higher until and unless you decide you want to be a cash flow type of person.


Today, I encourage you to think on your decisions and what, financially, is generally more appealing to you. More cash flow or a higher net worth? Talk it over with your spouse. Discuss where you would like to go together. Perhaps most importantly, use this knowledge to filter out the messages you get trying to drive you in a different direction. Focus on your journey forward, though do let me know what kind of person you think you are!