You will find an endless number of posts on FIRE that include discussions about the central roll of net income in your journey to financial independence and early retirement. But Networth, while not unimportant, pales in comparison to your Monthly Passive Income (MPI) if you truly want financial independence.
Why is passive income more important than net worth?
Passive income surpasses net worth in importance as you approach retirement because it pays the bills and supports your progress toward meaningful financial goals. Net worth provides a theoretical value to your possessions while passive income offers immediately usable money.
Back in the late 90s, Stanley and Danko released their landmark work, The Millionaire Next Door, cementing in the mind of just about everybody who read it the roll of net worth in becoming a millionaire. After all, they used net worth and not income to define a millionaire: someone whose net worth, excluding the value of their primary residence, reaches or exceeds $1M.
Your Net Worth Means Nothing at the Grocery Store
While net worth may serve you well when describing your general sense of wealth accumulation, it does nothing for you on a day-to-day basis. It will help you if you want to apply for a loan but not when checking out at the grocery store. For everyday purchases, you need income, whether passive or active.
The problem with net worth stems from the likelihood that it involves many non-liquid assets. Some of these assets might include property, some art and collectibles, retirement accounts, a business, jewelry, vehicles, boats, furniture, and even business equipment.
You can’t use non-liquid assets to pay your bills or make purchases. Stores don’t accept non-liquid assets as payment in most countries.
I have other reasons for not placing net worth on the…
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