The number one question that Brad, Ryan, and Jimmy get asked is the topic of this week’s episode. We’re discussing cash flow vs. net worth. Essentially, how can we become financially free? When coming up with a financial plan, several things have to be evaluated. Oftentimes there are a series of misconceptions revolving around financial independence and to get on the right track those misunderstandings have to be cleared up.
There is one important question that we address and help people to reframe. We ask them what they are trying to accomplish. Usually, people mention wanting to increase their rate of return. This isn’t an inherently wrong approach but we do believe that it isn’t the most effective strategy.
We find that the biggest challenge most people face in their financial plan is that they have no way to determine if they’re winning or losing. They don’t have a target for what they are trying to achieve. This is because the traditional way of keeping score is based on an almost arbitrary value. It is based on net worth which doesn’t give us any insight as to where we stand.
So, what is the goal of all long term savings? How do you keep score and know if you are winning inside of your financial strategy? We will cut right to the chase and outline the most important thing to be measuring and tracking in your financial game plan.
What’s the Deal With Net Worth?
The technical definition for net worth is your assets minus your liabilities. It is the most commonly used indicator to calculate how much wealth an individual has. But in reality, it isn’t the most accurate.Net worth is a pretty poor way to measure how free you are.
That is not to say that it’s valueless. It can help point you in the right direction. But we view it as more of a compass as opposed to a detailed map.
For instance, if you were to add up all of your assets right now and combine it with your income you might get a seemingly comfortable number. But it is finite. You need to continue doing what you’re currently doing to keep that number. If you were to stop working for a year suddenly your net worth would plummet. You would be forced to go back to trading time for money.
With that scenario in mind, it shows that net worth doesn’t correlate with living freely. And unfortunately, when we start to use a scoreboard that doesn’t serve us, we start to play a game that doesn’t serve us.
It isn’t about how much net worth you have. It’s about how much cash flow(income) your assets produce. When your cash flow exceeds your expenses then you cease trading time for money.
“Cash flow is the indicator of how free you are”- Ryan D. Lee
How Ryan and Jimmy Began to Understand that Net Worth Isn’t the Answer
Growing up, Jimmy believed that the only way to riches was through a career in entertainment or sports. His outlook shifted when he read Rich Dad Poor Dad where he realized wealth was about so much more than bringing in a large paycheck. He could generate enough income to become financially free as long as his cash flow exceeded his expenses.
“Every time you don’t hit your target is an opportunity to learn”- Jimmy Vreeland
Ryan had a similar epiphany. He was spending a lot of time away from his family traveling for work. He read the book, Creating Wealth which helped him outline his initial game plan. If he could focus on buying two properties a year he would be able to cover all of his expenses in a predetermined amount of time.
Shifting Your Focus
When you begin to align with the Core Four and the Four Pillars and start to focus on cash flow from assets it eliminates most of the distractions. The point is to not get caught up in arbitrary value sets such as net worth but to adopt the lifestyle of living free.
The only thing stopping you from where you are now and where you want to be is the ability to ask yourself powerful questions. What do you want? Why does that thing matter? And how many assets do you need to have to make that happen?
Ryan, Jimmy, and Brad are committed to shedding the ill-suited advice that is so often touted by traditional financial advisors. They don’t offer advice, they don’t tell anyone what they do with their money. They encourage others to ask themselves important questions and not rely on outside sources for financial stability.
If you’d like some more insight on where you are financially, then our free 5-day challenge is something you don’t want to miss.
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