Since the beginning of the year, I’ve been obsessed with my net worth and how it changes from month-to-month. I checked my 401(k) hourly and adjusted my month-end balance forecasts every week. I meticulously analyzed every dollar entering and leaving my accounts. And I came to a conclusion: My “net worth” doesn’t matter.
Really, net worth doesn’t matter. It’s just a number on a spreadsheet and is meaningless when trying to describe my true personal finance health. Yes, you read that correct: It’s meaningless. The only thing that really matters on a day-to-day and month-to-month basis is my short-term financial health.
Yes, my 401(k) is dropping and my house’s value is fluctuating, but none of that affects my life today. And if you’re not currently withdrawing from your 401(k) and you’re not trying to sell your house, it doesn’t affect you either. The true indicator of your current financial health can be described in a simple flow chart:
Personal Financial Health Flow Chart
That’s it! If the money coming in every month exceeds the money going out, you’re experiencing financial growth; if you’re spending more than you’re making, you’re falling victim to financial loss. It doesn’t get any simpler than that.
And this rule applies no matter what the stock market, the credit market, or the housing market is doing at any one moment. Cash flow is the true indicator of your month-to-month financial health. As my pastor loves to say, “Healthy things grow,” which means a healthy cash flow will help us grow our savings and grow in our financial independence.
So from now on, I’m not going to share my net worth. An arbitrary number on a meaningless spreadsheet isn’t going to tell me or anyone else how my financial health is changing. What I will do is to figure out our budget (yet again) based on what I’m really bringing home and share with you what I’m doing to return to living within our means and what we learn as we return to a positive cash flow.
It’s not going to be easy, but I’ve already proven that I’m making more than we need to survive and thrive if not for our debts. But if we’re to have any hope of prosperity, our cash flow is going to have to pull out of the red and stay there.
This article was featured in the Carnival of Personal Finance #177 at The Sun’s Financial Diary.
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I like to know my net worth, but I only check it every couple of months. I just consider it interesting fact, not something to watch hourly. My house has dropped in value by somewhere in the neighborhood of $30K, but I am not worried about it since I am not planning on selling for at least 3 years. By that time I predict my neighborhood will turn around (it is an area being revitalized.) I agree with you though, the important thing is to watch your regular budget and make sure more is coming in than going out.
Net worth is like a balance sheet. It does matter when your cash flow goes negative.
great website and I think net worth is all relative. As a young adult, it is extremely important to me, but I am sure as I age, it will not mean as much with more responsibilities or maybe not!
Jesse W.
As a twenty-something PF blogger, I’ve noticed that a lot of people like me are really interested in their net worth, but it’s not something I’m really concerned about at this point. What matters to me is making sure that I don’t carry a lot of debt, that the debt I do have is getting paid off, and that my expenditures don’t outweigh my income. I’m glad to see I’m not the only one who thinks this way. I was starting to think there was something wrong with me!
That flow chart is just PERFECT!
I do calculate my net worth, but it’s more of a ‘while I’m at it’ kind of thing. I keep track of my debts and the progress I make on them. I keep track of my accounts and the progress towards various savings goals. Put that together and you’ve got my net worth. I don’t count the value of ‘things’ in mine. If I refuse to sell something, how much is it really worth? In paper, $X, in reality, nothing.
The flow chart just updates Dickens:
“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
Charles Dickens (1812 - 1870), David Copperfield, 1849