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February 02, 2010


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Good post. I think that cashflow is the first thing that younger people need to focus on. They should have it ingrained that monthly positive cashflow is what leads to true wealth. And as you say in the investment return part, the sooner, the better.

The only issue I have with tracking net worth so often is that it can lead you to stop thinking about your cashflow! I've had months were my net worth went up by $25,000 because of some stock that I held that tripled. If you start looking at those numbers too much, you get the wealth effect. Same thing for the illiquid assets, there's nothing more damaging to your cashflow then some financial guy telling you that you are a millionaire. Net worth of things that aren't marked to market daily can be very problematic. A lot of people thought they were real estate millionaires long after they weren't. So liquid Net Worth is really what the important figure is.

So I think the primary focus is on cashflow and except for going back to school, unemployment and retirement, your entire working life should be spent in a positive cashflow state.

Rate of Return: I think that this is actually more important than the net worth. Spend some time at Motley Food or other good investing sites and put your money to work in low cost index funds and good individual stocks. Over a long period of time, a 3 to 4 percent difference in return creates a wholly different retirement. But diversification is just as important. You can get great returns for 10 years by investing in a single sector and lose 70% of it the next year.

We concentrate on cash flow and specific investments...our net worth seems to take care of itself that way. I might care about our net worth more in the future, which is why I started tracking it monthly last year, but right now I put more importance on paying off our house and keeping our expenses below 50% of our income.

Crystal, we have followed a similar plan. We focused on cash flow and kept our expense below 60% of our income and our net worth has grown from 14,000 in Feb 03 to 172,281 today.

I track my net worth and expenditures similarly, but don't do as much analysis of the results as you do. It sounds like that might be the missing step for me.

@Crystal: I agree with you. It's funny I wrote a blog post a few months stating that cash flow is more important. Net Worth will take care of itself in the process.

If you concentrate on Cash Flow and ALWAYS save, no matter how little, your net worth will take care of itself. When we were young parents we used to get a lot of satisfaction every month when we sat down at the kitchen table after putting the kids to bed and took care of our bills by writing the first check as a deposit into our savings.

We have been compounding our money since 1956 when we emigrated from England.
Here's what 54 years of compounding can produce without adding to the principal. If you add to the principal every month and avoid taking a loss the results are incredible.
At 5% ===> 1,394%
At 8% ===> 6,381%
At 10% => 17,187%

Unfortunately we are in a low interest rate environment today that doesn't help either young savers or old retirees on a fixed income but nothing lasts forever.

Tracking cash flow is the 1st step but it's what you do with the leftover cash in your flow that creates wealth. Positive cash flow used to buy assets and increase your net worth is good, cash used to buy goods and services (what some call disposable income)not so good.

It's easy to get complacent with your investments and your spending habits.

Because of all this, tracking net worth remains the gold standard of determining financial health.

While cash flow is important, net worth is what is the foundation of a young person's future.

Youth is the best (and only!) time to start investing because time for returns is on your side.

My net worth is negative and my cash flow is zero. (Income is 98 percent of poverty level.)

Pretty much eliminates the need to make financial decisions.

But I'm shooting for a $50 food spending target this month. I've got my daily food spending below $2 (this requires taking advantage of limited extreme supermarket specials which change weekly and might not persist if the economy improves) and have four free church meals planned this month.

Great points. A good reminder for me to calculate my net worth. It's been about a year since I did so.

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