… I operate under the principle that cash flow, more specifically passive cash flow, is the oxygen of our financial existence. I do not need assets to pay for food, medical, and my kid’s college bills. What I need is cash flow! Net worth without cash flow is like lungs without air – it’s there, but it’s kind of useless. Though it looks good on paper, it does not contribute positively to a person’s capacity of achieving financial freedom unless the underlying assets are of the income-producing variety. I know many people who have high net worth and yet they are paupers, relying on their high-flying jobs to pay the bills every month.
The argument is simple – which is more meaningful, which has more impact Net Worth or Cash Flow?
The formula for net worth is: Assets – Liabilities = Net Worth.
The formula for cash flow is: Income – Expense = Cash Flow
Which is more meaningful; which has more impact? Much as I believe that cash flow is central to the attainment of financial freedom, I think that net worth is the most meaningless concept in all of financial literacy. Why? Because cash flow puts bread on the table, net worth just looks good on paper!
As you know, the vast majority of assets out there do not register any positive impact on the owner’s income statement. The only way to convert such an asset into spendable cash is to sell it, which can be difficult.
I operate under the principle that cash flow, more specifically passive cash flow, is the oxygen of our financial existence. I do not need assets to pay for food, medical, and my kid’s college bills. What I need is cash flow! Net worth without cash flow is like lungs without air – it’s there, but it’s kind of useless. Though it looks good on paper, it does not contribute positively to a person’s capacity of achieving financial freedom unless the underlying assets are of the income-producing variety. I know many people who have high net worth and yet they are paupers, relying on their high-flying jobs to pay the bills every month. In fact, let me introduce you to a couple of friends of mine named Frank and Debbie…