Net Worth: Is it really the Best Measurement of Wealth

Net Worth: Is it really the Best Measurement of Wealth?

We count the wealth by Net Worth Formula. Here is the formula of Net Worth.

Net Worth = Assets – Liabilities

It means that, what you own (Assets) minus what you owe (Liability). Assets include the valuation of everything you own starting from your home, stocks, bonds, gold, real estate, mutual funds, Music System, Car, DVD Collection, Furniture of your home and everything else.

And liability include your Mortgage payment, credit card bills, personal loans and every other outstanding debt.

But here is the problem with this method of measuring wealthy status. Let me give you 2 Examples of it.

Example: 1 Suppose if you own a Home worth of $ 1 Million and someday you loose your job. Than will you sell your home to put a food on your dining table? And if yes, than will it call the financial freedom or the wealthy state? Owning the Asset of $ 1 Million makes your net worth $ 1 Million and this level of wealth is considered wealthy but if you have to sell your Home if you loose a job than it’s not the wealthy state at all.

Now suppose another person living in the rental apartment and have the $ 1 Million invested in the Portfolio of Stocks And mutual fund looses his job. But he will still make a living on his investments unless he finds the next job.

Example: 2 Ok. Let’s discuss the another example. Suppose you have outstanding credit card bills of thousands of dollars and you have a nice DVD Collection worth of $ 2000 and your home furniture worth of $ 6000. Now, will you sell your nice DVD Collection and your home furniture to repay this bad credit card debt? And if yes, than will it call the financial freedom or the Wealthy Status? I think This will not called the financial freedom.

The problem with measuring the wealth with the Net Worth Measurement standard is that, this standard considers everything you own as the Assets. This standard considers your car as an Asset. And I have already told you in my previous articles that, your car is not your Asset but it’s your liability because the day you buy a new car, it will depreciate more than 60% within first 4 years.

What Should be the Ideal Measurement Standard of Wealthy State? -

Well, the ideal wealthy state measurement standard should be – The Passive Cashflow.

It’s how much Passive Cashflow your Assets generate for you will determine weather you are wealthy or not? 

Say for Example, if your Monthly Passive Cashflow is $ 5000. It means that your Assets are generating $ 5000 every month without your any effort. You may do a job. But even if you loss your job or stop working today, this cashflow will still flow into your bank accounts.

Remember, the more the Cashflow you have, the more wealthy you are. It should not have any relation with the valuations of your Asset.

Take the Example of this Blog. This Blog is my Asset. It’s an Internet Business which generates $ 100 per month steady Cashflow for me. Now, how much you pay in the stock market to acquire the income stream of $ 100 per month? We consider the Yield of Dividend paying stocks 5%. This is also higher.

Well, to generate $ 100 Cashflow from the Dividend Paying stocks each month considering the Yield of 5%, you have to Invest $ 24,000 in the stock market…..!!!!

It means that, if this Blog is giving me $ 100 monthly Cashflow than, it’s valuation should be $ 24,000…!!! But who cares? It’s the Cashflow that is important. If I need $ 2000 in emergency than Will I sell this Blog? And if yes, than Should I Call Financially Free?…..!!!!

What’s your Opinion about the Net worth measurement standard of the Wealthy Status?….

Please Comment on this Post…!!!!