People obsess about net worth in the media, but I’d like to introduce you to a much more important concept in personal finance: cash flow.
To be honest, net worth is really just a number, while cash flow is a much better indicator of an individual’s or household’s financial health.
In fact, I would even go so far as to say that net worth is an outdated concept. Whether you’re a middle-class individual or a large business, net worth has practically no predictive power. It’s just an indication of what you have now, as opposed to how much you’re likely to earn in the near future. That’s why banks hardly use net worth as a factor in deciding whether or not to give a loan and how much they’ll be willing to lend.
Besides, cash flow tends to lead net worth: if one’s cash flow increases, so does your net worth in most cases. The opposite is also true: when cash flow declines, net worth tends to follow. And in regard to the value of a company, current cash flow can be measured against cash flow in the recent past, thereby providing a reasonably clear indication of the ongoing financial health of that company. Net worth simply can’t provide that kind of big-picture indication.