In order to MANAGE your finances you first need to MEASURE them.

What are the measures? There are two:

• NET WORTH measures your wealth
• CASH FLOW measures your financial independence

The 80/20 Worksheet™ captures both net worth and cash flow in a single, easy-to-use document.

Once you've measured your net worth and cash flow, you can set goals to_

• Increase your net worth, and
• Move your monthly cash flow from negative to positive

Some important principles_

• "80/20 Rule"
  

  In general, 80% of your overall financial situation is determined by only 20% of financial items. For example, 80% of your Net Worth is determined by 20% of your Assets and Liabilities. You have many smaller Assets (appliances, dishes, furniture, etc.) and smaller Liabilities or expenses (energy bills, transportation costs, etc.); these are important and we will address them, but they don't have nearly the same impact on your overall Net Worth as do a small number of high-impact Assets and Liabilities like a house or a 401(k) retirement account. So that's what you should focus on first, and that's what we will include in your 80/20 Worksheet™.
  

• Some assets are better than others
  

  Assets that grow in value, or appreciate, are better than those that depreciate. For example, homes generally appreciate but cars depreciate or lose value.
  

• Some liabilities are better than others:
  
  • As a general rule, you should reduce your liabilities because doing so increases your net worth.But a loan to acquire an appreciating asset can help you increase net worth in the long run.
  • Loans to acquire a depreciating asset are not as beneficial. In some cases such liabilities are a necessary evil (for example, to buy a car) but you should try to minimize the damage! For example, don't buy an unnecessarily expensive car.

Some Assets generate cash flow, others don't.

A car or a boat, on the other hand, generally doesn't generate monthly income. And each depreciates in value over time as well.

What about a rental property? That's an asset that not only appreciates in value but also generates cash flow (from monthly rental income).*

So adding Cash Flow into the mix allows us to create - and rank in importance - three types of Assets:

1. Assets that BOTH appreciate AND generate cash flow (Best)
2. Assets that EITHER appreciate OR generate cash flow but not both (2nd Best)
3. Assets that NEITHER appreciate NOR generate cash flow (Worst)

Here are some examples of the three types of Assets.

* These examples are only generalizations intended to illustrate the concept of different asset types. Not all real estate or stock appreciates, and not all stocks pay regular dividends. Nor do the examples take into account different levels of risk.

"Should I buy the biggest house I can afford?"
No. A house is an asset that appreciates, but it also generates a negative cash flow (2nd Best asset type). The bigger your mortgage the less available cash you'll have to pay off other debts or to acquire other investment assets that generate positive cash flow (Best asset type)