#17 - Net Worth > Cash
It is not uncommon for people to correlate their checking/savings balance with how they are doing financially. Cash is easy to understand, has minimal to zero volatility, and is typically what people see the most often.
One potential negative ramification of this is accumulating high cash levels (higher than needed for an emergency fund or short term needs). When this happens, your money is no longer working for you - at least not as well as other possible alternatives.
For example, if you take money from your checking account and pay down debt your money has started to work for you by saving you interest you otherwise would have paid.
I do believe you need to maintain some cash as an emergency fund and for short term goals. In addition, never forget that money is only a tool and not the goal. Maybe placing cash in a good investment gives you a higher expected long term rate of return but if it comes at the cost of increased financial worry/stress it is worth reviewing whether it should be pursued.
My encouragement is to look at net worth instead of cash levels when reviewing your financial position. At the moment cash is deployed to an investment or to pay down debt your net worth is actually the exact same. You have used cash but not “spent” it in the sense that your net assets or net worth is lower.
Interesting Article(s) or Video(s)
Behavior Gap - Outperform 99% of Your Neighbors
“Investment returns and investor returns are almost always different.”
John Maxwell - What Are You Reflecting On?
“We look back before we look ahead because reflection is the process that turns experience into insight.”
Thank you for reading! What are the ramifications of using cash as the metric for financial position?