I’ve been tracking my net worth since 2015. Typically, a growing net worth is a good indicator of progress and a large net worth shows someone is in a good financial position. However, a large net worth does not equal financial independence. Consider these two individuals:
Mark is 45 years old and has a net worth of £1.2 million. His house is worth £900,000 and he has £300,000 in a pension.
Sarah is also 45 years old and has a net worth of £600,000. Her house is worth £200,000, she has a rental apartment worth £120,000 and has £280,000 invested in a stock market index fund.
Mark has a large net worth, on paper he’s a millionaire. But is he financially independent? Almost certainly not. The majority of his net worth is tied up in his primary residence, which does not produce any income. Not only that, the cost to maintain an expensive property is typically higher than a cheaper one. The income from £300,000 will not cover his property and lifestyle.
Sarah has a much cheaper home, amounting to 1/3rd of her net worth. The other 2/3rds are invested in cashflow producing assets. This information alone does not tell us whether her income covers her outgoings but she is far more likely to be financially independent than Mark.
The point of this thought experiment is to illustrate that cash flow producing assets enable financial independence, not net worth.
Tracking my income sources
I’m still tracking my net worth but I’ve also started tracking my income streams. Here’s the spreadsheet I’m using:
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