Saturday, November 14, 2015

HIGH NET WORTH VERSUS HIGH MONTHLY CASH FLOW

You might think it's not one or the other, but it is possible to have a high net worth and a negative cash flow.  The ideal situation would be to have both.  However, if you're just starting out or rebuilding (as in my case) which should you concentrate on first?  I decided that it's more important to build cash flow and then concentrate on improving net worth.  The main reason being that you can own a lot and have a high net worth but it may not be generating any income.  Take for example someone who owns gold bars or gold coins.  If they have enough of them, they might be quite valuable.  However, unless they sell the gold, it's not really putting money in their pockets.  It may go up in price which would increase net worth, but the only way to unlock net worth is to sell something or to borrow against it.

If, instead of a high net worth, you have steadily growing cash flow and use the cash flow to pay off debt or increase your holdings, then you will build net worth.  That was the idea I had when starting to rebuild my investment portfolio after losing most of it to pay off medical bills.  So far it's working out quite well.  While my net worth is nowhere near what it used to be, monthly cash flow is increasing rapidly and I expect to see a turnaround in the next few years.  As cash flow increases, my net worth improves along with it.  But I still concentrate all my efforts on improving monthly passive income.  In my case the passive income is from dividend stocks, but it would be the same principle with real estate or a business.  Build cash flow every month and you've set yourself up for success.

1 comment:

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