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Cash flow vs. net worth

By
Hannah Glenn
January 17, 2018
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Do you the know the difference? Which is better? The age old battle of young money versus wealth.

First things first, let’s define the terms

Cash flow is the net amount of money moving into and out of your accounts. Positive cash flow is when your assets are increasing – money you can use to pay debt, invest, increase your savings, and upgrade your lifestyle. Simply put: More coming in than going out. Negative cash flow is the opposite. Simply put: When there’s too much month left at the end of the money.

Cash flow is different from income, which is money you haven’t received yet.

Net worth is the amount by which assets exceed liabilities. Financially speaking, it’s how you determine your ultimate value. Simply put: It’s what you own minus what you owe.

So now that you know what each of these concepts means, take a look at your own finances. Which do you have and in what proportion?

What life is like with high cash flow, low worth

When you’ve got lots of money flowing in and sitting around for you to access easily, it probably feels pretty good. However, the low worth bit of this equation is troubling. While you’ve got lots right now -- remember, income isn’t counted as flow! -- you might not have it in the future. Then what? You’ve only got your worth to rely on, and it there isn’t much that’s an issue.

What life is like with low cash flow, high worth

The phrase “house poor” pretty much sums up this scenario: When you’ve saddled yourself with a huge home that requires so much money to maintain that you’ve got nothing left to save or invest. Sure, the house has value and, in turn, increases your net worth, but without the liquid assets to live your day-to-day life, how valuable is that really?

Which is more important?

There are several schools of thought, of course, and there is no “right” answer – though I can make a pretty strong case for cash flow. Cash flow fuels your lifestyle, pays your bills, funds your investments, and get you to your goals. Net worth represents goals you’ve checked off your list. Flow is the future, worth is the past.

Turn your net worth into cash flow

Examples of high worth that generate cash flow are easy to find and are usually referred to as passive income. Investments that pay dividends, rental properties, and a creative resource that you’ve created for consumer use (think educational materials or YouTube videos) are all accessible and solid ways to increase your cash flow. A one time investment, be it in money or time, that creates “set it and forget it” income is the goal.

How to grow them both simultaneously

When you’re at the beginning of your financial journey, it is key to grow both parts of this equation – with the goal of cash flow always on your mind. Set your goals accordingly. So, yes, buy that starter house, but make sure it’s in an area that will be attractive to renters when you outgrow it. Now you can benefit from the equity in the property, adding to your overall net worth, but also glean passive income from renters, increasing your cash flow.

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