No grashoppers, conundrum is not about practicing safe sex. It is a word that describes the confusion that many have discerning the difference between CASH FLOW and NET WORTH.
I described cash and it’s nature last time. Now it is on to NET WORTH. It is the most important concept I will discuss on this blog. As all of you toil to become rich, the measure of that WEALTH is financially described as NET WORTH.
Net Worth is the concept of taking everything that belongs to you and putting it on a pile. Then you reduce the pile by the amount that you owe to other people. Anything that is left is NET WORTH. That is different than cash. For example, you could be making $100,000 per year but have so many debts that the income won’t cover all the payments. Cash flow is very good. Net Worth stinks.
The assets that you put on your pile are money in savings accounts, equity in insurance policies, 401k plans at work and your first born. Just kidding about the first born. The only way a first born would be important to net worth is if they promise to support you in your old age. Even your car. Actually you put your house on the pile at market value. Say it is worth $100,000 and you only owe $50,000, that asset actually contributes $50,000 to you wealth or NET WORTH.
Everybody should sit down and list all your assets. Then you should list everything you owe. Then close your eyes and pray. Do you have a positive NET WORTH? You can see that cash is only one component of net worth and the only cash that really counts is money you don’t need to live on. Do it. Calculate your net worth. If you need help, let me know. This is another key to your getting rich. Always know your net worth.
Some people calculate the net worth annually. Some do it monthly. Some are so sophiscated that the numbers are updated daily for things such as stocks, bonds, and retirement programs. Being anal retentive, I check it weekly.
Your assignment if you should accept the challenge, is to calculate your NET WORTH. It is the most important term in finance. Hopefully you are worth something. Notice the clever play on words.
Love,
Dad (Just Chas.)