Net worth is essential for a successful financial plan. But for FI Seekers, income streams and low expenses matter more.
Net worth (NW) is an important number to be aware of when it comes to managing your personal finances.
However, it is not necessarily the best indicator of an individual’s financial situation. And for those seeking financial independence, there are more important financial priorities.
In this article, I will explore why additional income streams and low expenses matter more.
What is Net Worth?
Before I argue why additional income streams and low expenses matter more, let’s discuss what net worth is.
Net worth is what you own minus what you owe.
It is what you have left after you subtract your total debt from your total assets.
To know your net worth, simply add up all your assets:
- Real estate equity
- Stocks
- Cash in savings accounts
- Bonds
- Mutual funds
- ETFs
- Index Funds
- Gold
- Vehicle value
- Any other valuable items worth money
Then add up any debts:
- Amount outstanding on mortgage
- Credit Card debts
- Loans
- Student loans
- Amount owed on vehicle
- Overdraft
- Personal debts
After you have added up your total assets and total debt, simply subtract your total debt from your total assets.
Sunlife has a fantastic Net Worth Calculator if you don’t feel like creating your own chart.
Should you monitor your Net Worth?
Yes, in order to establish a successful financial plan, you must monitor your net worth.
Knowing your NW number determines whether your focus should be on debt repayment or on investing.
I would highly recommend that you begin tracking your assets and liabilities to know where you stand.
What else does a High Net worth Accomplish?
A high net worth is extremely beneficial for bragging rights, status, and to make yourself feel better.
Not.
So what does a high net worth accomplish?
Well, it is a good indicator on how much assets or debt an individual has. Knowing your net worth is essential to building a successful budget and financial plan.
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Also, it increases purchasing power. A high net worth individual may qualify for larger loans and mortgages because of their ability to pay the money back.
And in all seriousness, it does provide status. Even in the personal finance blogging community, we respect the Bloggers that have high net worths and high incomes.
Personally, I like to track mine to make sure it is going in the right direction. That provides me with comfort. Financial security and stability are also benefits of a high net worth.
Otherwise, it can provide financial independence depending on the assets.
It depends on the Assets
My philosophy on assets and liabilities is based on Rich Dad Poor Dad
Mainly this concept:
“Your house is not an asset” -Robert Kiyosaki
Some assets are illiquid assets that actually cost money. Assets such as homes and vehicles have interest costs and payments. Because of the payments and interests costs incurred by these asset types, expenses increase.
Meanwhile, assets like dividend stocks, advertising income, affiliate income, or rental properties, if the renter’s payment exceeds the mortgage payment, increase income. These asset types create additional income streams rather than new payments.
In short, an asset can either become an expense or an additional income stream. Multiple income streams and low expenses are more important.
Why Additional Income Streams + Low Expenses Matter More: More Freedom
Now that we have established that knowing your net worth is essential for building a successful financial plan, it’s time to go over why income streams and low expenses matter more.
To put it bluntly, a high net worth number will not change your life. Your 1 million net worth moment will be another fleeting moment just like your birthday. Then it will be gone.
Moreover, a high net worth does not necessarily indicate a great financial situation, since the assets may consist of illiquid assets that create payments.
Therefore, a better indicator of wealth is how long an individual can afford to not work. Ultimately, income streams and keeping expenses low provide more freedom.
If that’s the case, keeping your expenses as low as possible and building additional income streams matters more.
This is because those choices provide more freedom.
Cash Flow is more important – Extra Income Streams + Low Expenses = Independence
Let’s say an individual loses their job but their only asset is their mortgage. They could be in trouble without an income for the mortgage payments.
On the other hand, if someone with alternative income streams and low expenses loses a job, they can likely survive longer. Their income streams and low expense lifestyle provide time and options.
If an individual has liquid assets like cash, it’s possible to still afford rent payments and basic necessities without a job.
In other words, passive cash flow from assets is more important than net worth because it provides more independence.
Proper money management, low expenses, and building up extra income streams provide more financial stability.
A High NW is an impressive achievement and is very valuable. I am not trying to undermine its significance.
Obviously, the best combination of all is a high net worth, additional income streams, and low expenses.
I am not trying to overlook its significance.
I’m simply saying that pursuing a high NW will not lead directly to happiness, nor is it the faster way to achieve a more flexible, financially independent lifestyle.
Concluding Thoughts
Ultimately, I wrote this post because of my own experience.
I know that additional streams and low expenses provide more freedom for FI seekers because I took a year off and now work a part-time job.
Even though I don’t have the most assets and I am still carrying a student loan debt, I am still able to attain more free time by working a part-time job and keeping my expenses low.
Related Post: Save Money and Avoid Fixed Expenses to have Options
On the other hand, a home and vehicle owner may have more to their name on paper. But, if they quit or lost their job, they may not be able to last as long without finding another job or selling something. Their net worth is locked into illiquid assets.
In summary, it’s important know where you stand financially. Understanding assets and liabilities is essential to any successful financial plan. But if you are trying to reach financial independence or a more flexible lifestyle, focus on acquiring income producing assets and keeping your expenses as low as possible.
I am not a licensed investment or tax adviser. All opinions are my own. This post may contain advertisements by Monumetric and Google Adsense. This post may also contains internal links, affiliate links to Amazon, Bluehost, and Questrade, links to trusted external sites, and links to RTC social media accounts.
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