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April 17, 2012


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Simple and to the point advice most people could care less to track. I feel the example you gave showing how paying down debt and saving the cashflow annually can add up to make a huge difference in Net Worth. That was visually inspiring to see.

Isn't "cash flow" = the change in net worth from one month to the next? So really there is just one number to keep track of: net worth.

MC --

Nope. They are as I have described above.

One example of how this is not true:

1. You spend all you earn, so cash flow = 0.

2. An asset you own (land, house, gold, investment) appreciates during the month by $10,000.

3. Net worth goes up $10k while cash flow is $0.

Net worth can also go the opposite direction of cash flow. For example, cash flow may be positive but net worth can go down because (most likely, especially the last few years) because of a drop in the stock market (an investment asset.) Or you can have negative cash flow but an increase in net worth (because the value of an asset goes up more than the loss of cash flow.)

The then final simple calculation of Net Worth divided by annual expenses is the single most telling number to me for tracking overall financial progress for both myself through time and for comparing different households.

I think it may be debatable for people like myself that have been retired for 20 years, are in their late 70's, have lived in their home for 35 years, and never plan to sell it, to include the value of their home in their net worth.

Likewise we have a condo that is fully depreciated taxwise, and worth about 5 times what we paid for it so selling it would generate a huge tax liability. In this case we allow our son and his family to live in it rent free and have left it to him in our will. Thus when we expire he will get a brand new basis for the condo, and our daughter will get a brand new basis for our home which is worth about 10 times what we paid for it and would also generate a huge tax liability if we were to ever sell it. As immediate family she also will be able to keep our low property tax assessment which will be a huge advantage.

The assets that matter the most to us are our investment portfolio and our credit union accounts, since any of them could be quickly liquidated if necessary.

One other thing that I have done is to consolidate our financial assets at a single institution, in our case it's Fidelity Investments with a Service Center a few miles away. This makes it so much easier for whoever will have the task of settling our estate. I have practiced the "Keep it Simple" approach my whole life and I want to keep it as simple as possible for our daughter who we have designated as the executor of our will.

I have been tracking my net worth now for about 16 months, and it is a great metric. At this point it's a pretty basic excel sheet with 4 categories of accounts - cash, debts, market-based investments (stock and mutual fund accounts), and equity-type investments (investments in private deals through LLCs, real estate holdings, etc.). Because cash is one of those categories, I'm able to track "cash flow" through the same spreadsheet.

Using this, I can see whether our spending is remaining in check, track our net worth trajectory, know our "gap", etc. It's very gratifying to see our NW grow rapidly through our efforts.

I think to have financial success, you must set goals and achieve them. Spending less than you earn is always good advice, but if you do not set goals such as saving $5000 in 12 months, then you are just stuffing money away with no target, and then you sort of forget why you are saving the money.

In my college years and for my first hard-working years, cashflow (deposits coming in and tracking monthly bills) was king since I avoided bouncing checks. Back then, the effort to move my Net Worth number was Herculean; stock-market drops which was something completely outside of my control seemed to influence those numbers more than maintaining my monthly budget.

My how times change. Now that college students are racking up student loans and credit card balances have become problemmatic, I can see how tracking Net Worth is a critical number to track. I could even imagine that results of doing "what-if" scenarios might actually drive decisions on where college hopefuls select their campuses based upon what Net Worth levels they are willing to uphold.

These days I find Net Worth meaningful to track when viewed over time ( is helpful for this). I've slowly cultivated a "portfolio" of assets over the decades. However, if I take my eye off cash flow, I find that I can quickly fall into sloppy habits (monthly expenses creep up, etc).

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