NET WORTH IS NET WORTHLESS

I sometimes say in regards to making $ now (vs invest it all for the future) ‘I picked up a bad habit as a child…eating!’

It’s meant to cause a chuckle but also make a serious point — we all have daily/weekly/monthly expenses that we need to pay for. And so, we all need to generate a Flow of Cash consistently and predictably in order to live.

The vast majority of you out there do this through your job/business. A lot (especially lately) don’t have any cash leftover after paying all your expenses and little to no cash-reserves available should the Flow be turned off or down (which showed up a little over a year ago when billions across the world suddenly found themselves in a Cash Flow crisis).

When your Flow of Cash is more than your expenses, you can save, build up your reserves, start to invest.

When you reach a point in your investing that you can turn on more ‘passive’ streams of income…and your Flow of Cash doesn’t need you to work 8 hours a day, 5+ days a week…then you are creating a Freedom structure (which is why you hear so much about Passive Income strategies, courses, programs…).

So understanding that we require a Flow of Cash to be consistently and predictably coming to us…why is it that most Wealth conversations are about Net Worth and not Cash Flow?

For those not familiar — Net Worth is the sum total of all your assets (investments and things of value you own) minus any debts you have.

The easiest example is your home. If my home is valued at $1 million…but I have a mortgage and possibly other debts against it worth $500,000…then the Net Worth to me is $500,000.

If I have bank investments valued at $250,000 but I used up $100,000 of a Line of Credit (or borrowed from relatives etc.) to get those investments…then my Net Worth for those investments is $150,000.

Add those all up ($500k in my house, $150k in investments, let’s say I have a car valued at $30k and no more payments to make…) and my total Net Worth would be $680,000 (as long as I wasn’t carrying student debt or credit cards or any other loans which would have to be taken away from the Value of my assets).

And this is the comparison and scoring system that is used to gauge how Wealthy someone is…but it doesn’t tell the whole story nor is it particularly useful in truly gauging Freedom!

Yet it is a goal that I and many other investors get stuck on as a way to know how well we are doing (and I had this exact conversation with a client recently who has grown tired of constantly hustling and never feeling anymore Freedom…even though he has 4–5 times the Net Worth of the average Canadian).

We hear all the time that Elon Musk is worth X Billion or Bezos just passed him and now has a Net Worth of Y Billion. And we usually hear shortly afterwards that their Wealth is ‘on paper’.

What that means is the Value of their companies, investments, shares in other companies etc. is worth that amount (after taking away any debts they have)…but I promise you if you had the chance to chat with any billionaire they would share that they STILL sometimes get stressed about Cash Flow (either for their own lives or their companies) they have (or don’t have) at any given time.

Billionaires have billion $ expenses they have to pay regularly…just like you and I have our expenses. We hear about people we thought would never have to worry about $ suddenly landing in hot water (Johnny Depp after 41 Pirate movies and goodness knows how much $$ has apparently spent it all).

If you can’t pay your expenses and all your $ is trapped in assets that don’t produce Cash Flow…you are not Free.

Again I’ll go back to the house example. Let’s say I have a house valued at $1 million. Let’s even go a step further and say I have completely paid off the mortgage, no other debt…so it’s Net Worth is $1 M. WooHoo right?! I’m set!!

Well many will make the argument that this is the Cdn dream because now you don’t have a mortgage payment to make every month so pay down that mortgage as fast as you can!! Build up that Equity! You’re a millionaire now.

But does my house help me pay for all my OTHER expenses (including the expenses it has that never go away like utilities, property taxes, maintenance…)?

It doesn’t.

That plan leaves you with all this $ trapped in your house that looks good ‘on paper’ (my house is worth $1M) but it produces no Cash Flow and therefore does not help you pay for any of your other bad habits (eating) that continue in your life…

I read that Jeff Bezos recently sold almost $5B of his Amazon stock. Now I don’t know what he’s up to and it could be…after going through a divorce, his expenses have gone up and he suddenly needs more Cash Flowing into his actual bank account so he can pay for his life.

I’m sure he still gets hefty dividends etc. from Amazon…but then again maybe not now that he is stepping away. So he has had to alter his finances and take a lump sum of $ (possibly I’m just guessing) and move it into some other investment or business that will produce Cash Flow for him to pay his bills.

THIS is the secret to Freedom. It’s not Net Worth (how much $ you are supposedly worth). It’s how much $ Flows to you (with as little work as possible).

I’ll be honest…for the past decade I was in what investors will call Growth Mode where I was focused on investments that generate the highest compounding growth over time…and typically do not produce much or any Cash Flow.

I wanted my Net Worth to grow grow grow! (and all of us will typically have to do this for awhile to get to a point where we have enough $ that we can invest to produce the cash flow we need)

And starting a couple of years ago (thankfully before probably the greatest Cash Flow Crunch we’ll (hopefully) ever see across the globe) I switched that.

I still have Growth investments and I am balancing that WAY more with investments that will produce a consistent and reliable Flow of Cash to pay for my lifestyle (and the Dream lifestyle I am creating) without me having to bust my hump working day in and day out.

This is my new definition of financial Wealth (and it’s one Wealthy families have been aware of for centuries).

What are you focused on and using as your scorecard?