Wednesday, February 11, 2009
Net Worth vs. Cash Flows
By Ryan Dennin
It seems many people have different ways they may measure how “well off” they are with their personal finances. To some college students it could be how much cash they can bring out to the bar each weekend, or if they have enough to put a down payment on their own apartment or vehicle. It seems as people evolve in their finances however that there is some debate as to what the best measure of a healthy financial situation.
The rationale of keeping up with the Jones’s isn’t the best way to measure how successful a person or family is with their personal finances. A person’s ability to own nice cars and a big house doesn’t mean someone is successful in fact it could mean the exact opposite.
When looking at some metrics some people say net worth is the best gauge for your finances. Net worth looks as assets – liabilities. The problem with looking at this alone as outlined by an article in Personal Money Tips is that “You might end up with assets that don’ generate income. If there are unexpected changes in your income or expenses i.e. the cash flow, you could be in trouble.” Another good metric to gauge is cash flows. An article on Amateur Asset Allocator suggests that “Cash Flow is King” and goes on to say that Cash flow is the only true measure of wealth. It’s not how large your wad of cash is that matters, but rather the amount of income it produces. In the end I think it’s important to look at a combination of the two snapshots to get a clear picture as to someone’s personal financial picture.