It sounds like a simple question but many of us aren’t always certain what the relationship is between cash flow, assets, liabilities and net worth.

Cash flow is a product of your income and expenses and the timing of the ins and outs! If you spend more than you earn, you have negative cash flow and you will have to use credit or an advance on your earnings to cover the difference. This is a liability. Unless you reverse the trend, eventually the debt grows to an unmanageable amount – you will have to repay it at some point.

Sometimes the timing of the money coming in versus when you spend can lead to difficulty. A buffer is the key to handling this situation.

If you spend less than you earn and put aside some for savings then you are building assets. If you are able to acquire real estate or a car, these can be high value assets.

Definitions:

Asset – Something of future economic value that has been obtained as a result of a previous transaction. Examples include real estate, investments and vehicles.

Debt or Liability – Is a financial obligation or responsibility that results from a transaction. Examples include loans, lines of credit, mortgages and credit card debt.

Net Worth – The difference between assets and liabilities (owned/owed by an individual or company).