March 2026 - Money Machine - Net Worth Vs. Cash Flow

We sometimes think net worth is king! It’s the gauge we use to rank individuals by wealth. We’ve all seen postings on Facebook showing us the top wealthiest individuals on earth. Or the number of billionaires in Canada. Those numbers are based on net worth. And if you recall, net worth is the difference between the value of everything you own and the total of all the debt you owe. But net worth doesn’t tell the whole story. It makes a great deal of difference what type of items comprise your net worth. Let me explain by way of a personal example. I own a 4-acre island on a small lake in the Highlands of Haliburton. Nothing was constructed on it. Just essentially a park-like setting, which I’m glad to let the local cottagers enjoy. Let’s say it’s worth $500,000. At least it was before the latest real estate downturn. If that was all I owned in life, we would say my net worth was $500,000. Sounds nice. But with that net worth, I couldn’t even buy a ham sandwich. In fact, in some ways, it’s a liability. I have to pay a few hundred dollars in taxes on that island every year. And last year, after a severe ice storm took down several trees, I had to spend close to seven thousand dollars in cleanup. Now, let’s suppose I owned 10 such islands. Now my net worth would be around five million dollars. Sounds great. But now the total taxes are in the thousands, and I still don’t have the money for a ham sandwich. So that brings me to the topic of cash flow. And by that, I mean the disposable income that comes into my hands on a regular basis. That’s necessary for groceries, clothing, shelter, transportation, and yes, the occasional ham sandwich. For most people, cash flow comes in the form of a weekly pay cheque. And that principle works for people even if they have zero net worth. They can get by. And a lot of people do just that. We say they live pay cheque to pay cheque. The problem is, what happens when the person no longer works? The plant closes down. They get laid off. Or maybe they retire. If they don’t have a pension, what happens next? Now I don’t mean to downplay net worth. When the cash flow ceases, there is always the possibility that some of the assets that make up that net worth can be sold or used as collateral. If you are fortunate enough to own your own home, it can be sold or encumbered. But converting net worth to cash flow can be painful, gut-wrenching and not always practical. The solution is to own things that bridge the gap. And that brings us to revenue-producing items such as rental real estate. Going back to the island example. It’s real estate. But it’s not revenue-producing real estate. But I do happen to own a residential duplex. Valued at about the same. $500,000. The difference is that the duplex brings me in $3,325 a month in rent or $39,900 annually. That’s cash flow. Of course, there are expenses, like taxes and insurance. Water, sewer and maintenance, but generally speaking, about $30,000 in disposable income. And it follows, like the island example, if I owned 10 such duplexes, my net worth would be $5 million, but unlike the island, which generates me no cash flow, with the duplexes I would be enjoying in the neighbourhood of $300,000 a year income, without having to give up any of the items that make up my net worth. And that’s a lot of ham sandwiches.