Cash is King. Period.
Okay, net worth is queen. Second period.
It is that simple. Always, always think about cash flow when it comes to your money. If all the big businesses are looking at cash to make sure the business is doing okay, why shouldn’t you do the same?
Cash flow matters, no matter what your net worth is. But you still have to know your net worth (Assets – Liabilities). But what pays your bills is cash, not your net worth.
It your monthly cash flow is negative, it doesn’t matter even if your net worth is $1 million dollars. And If you don’t do anything, you will eventually go broke before your broke point.
Every financial decision you make, think about your cash flow. A lot of people buy real estate that end up making a hole in their pocket. [Note: If you're deciding whether to buy or rent, use this calculator to see if the number makes sense.]
Net worth is important in the sense that it gives you an idea of what your overall financial situation is. And when you run out of active job income, you can convert your remaining assets into income.
For illustration, say both Smart Johnny and Dum Dum have a positive cash flow of $200 every month, but Smart Johnny has a net worth of $10,000, while Dum Dum has a net worth of $0.
Now, if they could keep the cash flow consistent month to month then it’s okay. But Dum Dum would easily go broke if 2 things happen:
- 1) He gets laid off for a month, and he is totally surprised.
- 2) He spends more than his income for a month, after going wild in a party and spending 500 bucks on booze.
On the other hand, Smart Johnny is cool because he can rely on his emergency fund if something bad happens.
There’s also an opportunity cost for Dum Dum. If a great money making opportunity comes along, Dum Dum would not be able to take advantage of it, whereas Smart Johnny can use his savings to invest in the opportunity.
It’s true that Smart Johnny might have to take some level of risk in the venture, but he has a better shot at getting rich than not doing anything at all. And because you’re smart, you will not be satisfied with just being safe all the time anyway!
So…focus on the dollars, then your net worth. You will get rich faster than most people.
The Personal Finance School Series:
1. Personal Finance School: An Introduction to Effective Personal Finance
2. Cash is King, Net Worth is Queen
3. Why and How You Should Kill the Debt Monsters
4. Personal Finance Automation: The Art of Doing Nothing with Your Money, or Not?
5. How You Can Spend, Save, and Earn Half A Million Dollars
6. Your Money Will Work for You 24/7, If You Are Willing to Work FIRST
7. Why Investing Deserves Another Round of Lesson
8. The Most Important Personal Finance Lesson of All…
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Ken,
An interesting post; I like how you’ve applied a business finance function to personal finance. Your post explains the concept very clearly, thank you for sharing.
Regards
Paul
Paul, thanks for dropping by! If businesses are doing a certain thing and they are earning millions or billions of dollars a year, I’m sure there’s something we can learn from them.
Too many people focus on hoping the stock prices will go up next day, and the house prices will be much higher when they sell, they often lose track of what’s really important – your cash flow every month. What if the prices go down? Then you’ll be in trouble.
[...] 2. Cash is King, Net Worth is Queen [...]
I like the word “Positive Cash Flow”. It is an integral element of my works, and almost always whatever projects I create or jobs I create I try to ensure that it becomes an asset for me and my businesses, to produce a positive cash flow.
You are right, cash flow (positive) is king, and will always be, but i think queen should be How We Utilise The Positive Cash Flow, and the net worth will go up.
What say you, Ken?