CreditKarma Survey Findings

[jazz4cash]

WRT the original survey, I’m not comfortable with CreditKarma as a sponsor of the study. I could see them offering a service to monitor net worth as they do for credit scores. I’m sure they could find plenty of buyers for that data.

 

[rmorris50]

NW has nothing to do with cashflow because certain assets simply cannot generate cash flow.

For example, DW and I inherited some valuable artworks. They are a nice line item in our NW but they generate zero cash flow (and in fact cost us money to insure and store).

Another example: DW and I own some gold. They are a line item in our NW but they generate zero cash flow.

One more example: DW and I own a nice plot of buildable lot on the coast with 180 degree clifftop ocean views. It's a valuable property and looks great on our NW, but generates zero cash flow and in fact costs us money in property tax, insurance and maintenance.

I get that some real estate can be mortgaged/leased/rented out to generate income, but then you'll have to structure it just right to make sure that the resulting income more than offsets the property tax/interest payment/insurance/maintenance you'll have to pay (not the mention the hassles of dealing with tenants and navigating local rental laws and regulations). Sounds great in theory but getting the execution right is quite another matter, and I certainly wouldn't recommend this as cashflow generating strategy for primary residence (as you suggested in a post up thread).

FWIW---DW and I own multiple land, residential properties, rural properties and shares in industrial properties + alternative (cashflow negative) assets, so I'm speaking from extensive experience.

Saying NW funds cash flow was a short hand way of saying you will look to your assets to raise cash to fund future cash flow needs. There is a linkage between tracking your NW, or more fundamentally understanding your balance sheet, and the options it provides to raise cash. I personally don’t think you should view NW and cash flow as having nothing to do with each other, or having no linkage to each other.

I mean you could choose to potentially sell your artwork or properties, subject any liquidity constraints, to then create a one time cash flow to your bank, and then tap those proceeds for future cash flows. You’re just choosing not to do that, for now at least.

 

[luckydude]

Saying NW funds cash flow was a short hand way of saying you will look to your assets to raise cash to fund future cash flow needs. There is a linkage between tracking your NW, or more fundamentally understanding your balance sheet, and the options it provides to raise cash. I personally don’t think you should view NW and cash flow as having nothing to do with each other, or having no linkage to each other.

I mean you could choose to potentially sell your artwork or properties, subject any liquidity constraints, to then create a one time cash flow to your bank, and then tap those proceeds for future cash flows. You’re just choosing not to do that, for now at least.

Understood. What you describe is an asset allocation strategy, which I agree is critical to successful retirement planning.

When I think of NW, it's simply a snapshot of the market value of my assets MINUS my liabilities at this point in time. It has nothing to do with how my assets are structured and how much cash flow they generate.

When I think of asset allocation, it is exactly as you describe in your post (#35):

"asset composition, risk profile and degree of leverage is absolutely critical to understanding the impact your to cash flow and liquidity profile, and how to manage your assets"

"It’s much more that just summing up market values to get a NW dollar amount."

So your post sums it up perfectly: NW dollar amount is just that---summing up market values to get a NW amount. Asset allocation/composition then takes it a step further to do all the important retirement planning that you describe in your post.

So I guess we're in agreement

 

[rmorris50]

Agreed, while NW by itself it’s just a static metric that can be nice to track but by itself may not mean much, the balance sheet information it captures is very valuable, and understanding how it influences how you manage your finances is where it’s true value is. It seems common to me that most people don’t separate NW and cash flow projection analyses and understand how the two are linked. Instead people just look at their investments and rules of thumb that leverage their investments.