Used to reveal blind spots left behind by Savings Rate and Runway.
- Understand your Net Worth, but then optimize for Savings Rate.
- Net Worth is an accounting formula, and uses different definitions for assets and liabilities. Explained in the 'Why Net Worth is Kind of Misleading' section below.
- It is entirely possible to have a fantastic Savings Rate at an awful Net Worth, and you will still be doing great financially because Savings Rate makes up for everything else.
- It is also entirely possible to have a 7-figure Net Worth but only a single digit Savings Rate, and still be doing terribly.
Why Net Worth can be misleading
Net Worth is the metric most financial advisors brag about improving, but it really does not make a difference to your financial picture. The 8 Stages of Financial Independence are defined by cash flow, not Net Worth!
Savings Rate makes up for pretty much everything else in personal finance.
What is the definition of an asset? Or a liability?
In the accounting world, an asset is anything that provides economic value (meaning it's worth something if you sell), but this does mean that that "asset" contributes to solving your cash flow problem.
Investing into false assets reduces available capital to invest in real assets that bring you closer to solving the FFE. Oh opportunity cost, its nice to see you again.
The SR50 Method adheres to the Rich Dad Poor Dad definition of assets and liabilities.
- Assets continually put money into your pocket.
- Liabilities continually take money out of your pocket.
Do you know your Net Worth?
This calculator from NerdWallet is a great free tool.
Increase your Savings Rate