Have you ever looked up the ranking of the richest people on the planet? The metric used to determine ranking is the individual’s net worth, which makes sense when trying to determine wealth among the wealthiest in the world. But does this make sense for the average person?

What is Net Worth?

The metric used by the average person to track wealth is their net worth. Net worth is the total wealth after taking into account equity and liabilities. For example, a person with $10,000 of student loan debt, $10,000 in credit card debt, $25,000 in savings, $5,000 in their 401(k), and $3,000 in their IRA has a total net worth of $13,000. 

Net Worth = Assets – Liability 

Why Net Worth Isn’t THAT Important

Net worth fluctuates over time. Think about the ranking of the top 5 richest people in the world. Within a year, the wealthiest person changed from Elon Musk, Jeff Bezos, Bernard Arnault, and Bill Gates. Why? Because most of the net worth is tied to their equity stake in companies they own.

The stock price of Tesla and Amazon has been through a rollercoaster while Microsoft and Moet Hennessy Louis Vuitton has been a lot less volatile. Is Tesla at risk of going out of business because their stock price has fallen significantly? No. The Model 3 and Model Y have received so much demand that a buyer had to wait over a year for certain models. The Tesla factories couldn’t produce vehicles fast enough to keep up with demand. In January 2021, Tesla reported its first full profitable year. Since then, Tesla’s profits have been increasing. It’s safe to say that they’ll stay in business as they have a majority share of the EV market and with the consumer and regulation shift favoring electric vehicles. 

Here’s another way to look at it. There was an interview with Jeff Bezos who mentioned that during the dot-com crash, he saw the stock price go from $113 to $6, he viewed the company’s business metrics that measure performance were getting better. He knew that the stock price didn’t matter and that the company would continue to thrive. 

Net worth is just one metric in your personal finance dashboard. If I had to create a dashboard to track my personal finance and my goals, I would put monthly or annual cash flow at the top left of the dashboard and net worth on the top right because the cash flow number is what my goals are focused on.

Would you be more impressed when someone says they have 10 rental properties but they’re still stuck in their job or someone who says they have 4 rental properties that allowed them to quit their job? 

Why Cash Flow Is More Important Than Net Worth

If you’re on my website, you’re probably interested or already pursuing financial freedom. The financial independence and retire early movement is more focused on building your wealth and taking 4% each year to pay for living expenses. 

A possibly unpopular opinion of mine is that this is inefficient if you’re willing to do more than just invest everything into index funds. The lazy slow way is to just keep investing your earned income into index funds until your portfolio reaches its target goal to live off of 4% a year. The faster, more efficient way is to focus on cash flow from multiple streams of income.

Say you need $10,000/month in cash flow to quit your job and be financially independent from a salary. Imagine you have 3 short-term rentals that produce $2,000/month each, 4 long-term rentals that produce $250/month each, dividend stocks that average $500/month, and a side hustle/small business that averages $2,500/month. Each of these are diversified income streams and a better hedge than pulling all your eggs in one basket (index fund) that can fluctuate 20% within a year. 

The issue with building a nest egg to retire off of takes a long time. How long will it take you to amass a portfolio of $1.5M? If you make $100,000 and save 50% of your net income (after tax), that’s about $35,000/year. It’ll take you over 15 years with average yearly appreciation to have a portfolio of $1.5M. I have plans to achieve financial independence within 5 years of me starting this journey. That results in more than a 10 year difference between the two strategies. 

I’m Team Cash Flow!