Understanding Your Net Worth and Cash Flow

As much as people love to watch the markets and monitor their investments, two of the most important areas of your finances to monitor are actually net worth and cash flow. Both can provide valuable information about your overall finances, and understanding your net worth and cash flow can help you plan for your future.

Net Worth

A personal net worth statement is simply your personal balance sheet. Add up the value of everything you own (assets), subtract the value of everything you owe (debts), and the difference is your net worth.

  • To prepare your net worth statement, write down everything you own and assign it a value. Include your home (if you own it), bank accounts, investments, cash value of life insurance, value of your car, etc. Some people include personal property, but we only include it if there are collectibles or other items that would have value if sold at auction.
  • Next, list the value of your debts. If you have a home mortgage, car loan, or other loans, include them. Do you pay off your credit card balances each month?  If not, write down the balances. Do you owe anyone money?  If yes, include it.

Over time, your net worth should increase.

If you are saving to your 401(k) but also increasing your credit card or loan balances, your net worth may actually be decreasing. Similarly, if you focused on paying off debt, your net worth will increase even if are not adding to your investment accounts.

Monitoring your net worth periodically will help you keep track of your overall financial position. We recommend updating your net worth at least annually.

Cash Flow

Cash flow is the net amount of your incoming cash versus your outgoing cash. Add up all of your cash inflows, subtract your cash outflows, and the difference is your net cash flow.

  • For cash flow, start by writing down all of your income. Include your salary, bonuses, tax refunds, and any other sources of income such as child support and rental income. If you receive trust income or gifts from family on a regular basis, include it.
  • Next, write down all of your expenses. Assuming you used gross income above, include deductions from pay. Also include taxes owed, if you did not receive a refund. Do not forget to include irregular expenses like ski passes, summer camps, and vacation.
  • If you do not use an online money management system, go through your bank and credit card statements to help ensure you included everything. Your annual credit card statement can be a great for helping you catch irregular expenses.
  • Subtract your expenses from your income. Is the number positive? If yes, that is your cushion. If your cushion is large, are you accurately counting expenses?  Did you save or spend your cushion?  If your cash flow is negative (deficit), it means you had to borrow to make ends meet.

In planning for this year, use your surplus or deficit to help you plan.

If you ran a deficit last year, how can you cut spending or increase income this year?

If you had a cushion, can you save more?

If your savings and net worth are at appropriate levels, maybe you can use the surplus for one of your dreams. Maybe you can afford a vacation, or even a vacation home. Maybe you can switch to a new job that pays less but provides more meaning to you. Think of the cushion as your opportunity fund!

The size of your investment portfolio is meaningless if you aren’t tracking overall net worth and cash flow. Understanding your net worth and cash flow should be an important piece of your financial planning process.

Schedule a meeting for an introductory session if you’d like to begin or update your financial plan, now that you better understand your net worth and cash flow.