need your opinion on "net worth" - Posted by rebeccax

Posted by Drew on June 06, 2005 at 13:26:58:

I am not sure WHAT I was thinking when I wrote this, except I obviously was trying to simplify a (somewhat) complex relationship, and failed pretty spectacularly at that. ROIC and free cash flow are obviously not the same thing. Oh, well. Feeling dumb now.


need your opinion on “net worth” - Posted by rebeccax

Posted by rebeccax on June 02, 2005 at 10:31:03:

I am reading a book by Gary Keller called the “Millionaire Real Estate Investor”. He is one of those guys who focuses primarily on increased net worth as his end all goal. (He does not really explain why although I think this idea was planted early on in him by his financial advisor). He suggests you keep a personal monthly balance sheet so you can tract assets and liabilities, hence your net worth.

My instincts tell me that “net worth” may not be what I should be focusing on… I don’t quite get the feel that I should be striving for this as my ultimate goal.

I know many opinions have been given on this board before regarding this subject, but often times, peoples’ opinions change as they become more learned. I would appreciate your updated comments on whether you feel increasing net worth should be your ultimate goal as an investor.

Re: need your opinion on “net worth” - Posted by Mark(SDCA)

Posted by Mark(SDCA) on June 03, 2005 at 09:18:27:

Net worth is a long term goal. I think long term. Nuff said.

Re: need your opinion on “net worth” - Posted by Mr. Big

Posted by Mr. Big on June 02, 2005 at 15:29:19:

What are your goals? What is your plan? It could be net worth is not important to you, but it is to me.

You need to plan long term, like 5 10 or 20 years ahead. If you have a good job and are planning your retirement then net worth is really all you have to worry about. But in any case, even if you need the cash flow to live on, net worth should be part of your plan.

If real estate is appreciating at 10% a year in your area, that invisible addition to your net worth could actually be a larger sum of money than the cash flow that you can see. Don’t overlook the power of procrastination to make you rich, simply by keeping your real estate for 10 years or more.

And “net worth” relates directly to cash flow. For example $1,000,000 invested at 8% gives you $80,000 a year. So if you can live on $80,000 a year, and you have a net worth of $1,000,000 in real estate maybe you should sell out and invest the proceeds in first mortgages at 8% for an easy retirement income. And if you don’t have a net worth of $1,000,000 maybe you should think about getting it.

And net worth is an important factor when it comes to getting financing. If you have enough net worth and income from your investments it doesn’t matter if you don’t have a job.

So net worth is only one factor in your investing program, but it is an important factor and should not be overlooked.

Layers of Planning - Posted by JT-IN

Posted by JT-IN on June 02, 2005 at 14:52:32:


We all need minimal cash flow for substinence; food, shelter, and basics.

We then move into discretionary income, above and beyond your basic needs. This will allow you some frills in life, or more funds to invest.

Once you have mastered the basics and the discretionary income, then it is all about building one’s net worth. The broader your net worth the wider the opportunities become when it comes to dealing with Funding. If you can show a Banker that you don’t need their money, they will give you all you want… So the deeper you become financially, the more doors that open up to you… generally speaking.

Net Worth is the measure of how the rest of the financial world keeps score.


Net worth doesn’t pay your bills… - Posted by Levi

Posted by Levi on June 02, 2005 at 14:04:23:

cash flow does. Concentrate on creating cash and net worth will follow.

Re: need your opinion on “net worth” - Posted by Sean

Posted by Sean on June 02, 2005 at 12:09:44:

The end goal absolutely should be increasing your net worth… why the hell else are you investing if not to make yourself wealthier? NET WORTH is the means by which you measure your financial position.

If you are investing, and you don’t see your net worth increasing… well then you aren’t investing very well now are you?

I have read this book as well, he’s one of the principals that founded Keller-Williams Real Estate… its a rather dry read, and sort of a mix of Dave Ramsey and Fundamentals of REI… but the information is solid… He also has a book called the “MILLIONARE REAL ESTATE AGENT” or some such… Haven’t read that one.

Your goal in investing is to make money… you measure your fiscal standing at any point by your net worth… if you aren’t improving your Net Worth you aren’t producing wealth.

Re: need your opinion on “net worth” - Posted by ROI

Posted by ROI on June 02, 2005 at 12:05:07:

Look at it this way: Somebody has a paid-for SFH, net worth of 100k, and it rents for $500 a month. Someone else has a tri-plx, net worth of $100k, and it rents for a total of $750 a month. (Say appreciation is flat.) Both have the same “net worth” value but the cash flow is better on the tri. Which is more valuable?

ROI (return on investment) is another factor you need to consider. Real estate has the advantage of producing much higher returns on your “net worth” than many other types of investments.

Of course increasing your net worth is always nice.

Re: need your opinion on “net worth” - Posted by Greg(NJ)

Posted by Greg(NJ) on June 02, 2005 at 10:34:44:

I don’t think increasing ones net worth can hurt. Net worth = A - L.

Net worth is only one point in time. - Posted by Drew

Posted by Drew on June 02, 2005 at 16:59:30:

Your net worth is a measurement at one particular point in time. If you want to maximize that metric for some point in the future, or if you want to focus on your progress across time, you need to look at the drivers of changes to net worth.

Changing net worth is a function of your ROIC, or return on invested capital. So, to maximize net worth, you should focus on your free cash flows.

Cash flow and Net worth are thus inter-related.


Re: need your opinion on “net worth” - Posted by rebeccax

Posted by rebeccax on June 02, 2005 at 11:13:00:

I agree. However, the question was “should this be your end all goal as an investor”? What is YOUR ultimate goal?

Thanks for taking the time to respond.


Re: Net worth is only one point in time. - Posted by Mr. Big

Posted by Mr. Big on June 02, 2005 at 19:38:50:

That’s one way of putting it. For non accountants it is easier to think of appreciation as increasing your net worth over time, without any obvious cash flow although as time goes on you should be able to increase your cash flow as well through rent increases. In this sense, the statement “to maximize net worth, you should focus on your free cash flows.” is wrong or at least incomplete.

Re: need your opinion on “net worth” - Posted by Tarheel T

Posted by Tarheel T on June 02, 2005 at 13:46:06:

For the first goal, I would substitute creating enough cash flow to live comfortably.