Cashflow committed vs Networth committed – Which one are you?

POSTED BY Jagoinvestor ON October 21, 2022 COMMENTS (22)

I have seen two kinds of people in my last 12 yrs of experience in the personal finance domain.

One is the Cashflow committed and another is Networth committed!

Do you know which one are you!?

cashflow vs networth mindset

What is a Cashflow vs Networth committed mindset?

Let’s talk about these two kinds of mindsets.

Cashflow committed Mindset

When you buy things and repay them back, you depend too much on your future cash flow, you are a cashflow-committed person. If you have to buy a car, a vacation, a training course, an expensive mobile, or anything for that matter, you say to yourself – “Let’s take a loan and I commit my future earnings (cashflow) for this purchase”.

You basically trust and rely on the future to consume TODAY.

You don’t think twice if you can afford something or not, because everything looks within your reach because everything is sorted IN FUTURE. The future is unlimited, the future is always amazing where you will EARN with no difficulty.

cashflow committed

If this mindset has become 2nd nature of yours or at I shall say you are almost addicted to buying things on loans, then you are a cashflow-committed person.

Networth committed Mindset

On the other hand, there is another mindset at work!

If you want to buy anything, you are committed to first building the networth required for it and prefer to pay out of your networth. Your nature is to consume when you have the money, or else you don’t want to consume things or defer them in the future.

You are a bit uncomfortable to commit for your future cash flow to the purchase, your internal design is to first acquire wealth, and then out of that wealth you want to pay for things. Even if you get a chance to take the loan easily, you deny it because, in your world, you want to be fully in control of your future cash flow.

networth committed

What if there is no income in the future? What if you don’t earn enough? Why have the headache of keeping track of how much loan is remaining? These are your conversations when you want to make any kind of purchase.

Which mindset is better than the other?

If you look closely, you will realize that the cashflow-committed lifestyle is becoming famous for the last 2 decades in India. Before 90s, the culture of buying things on loan and paying in the future was almost non-existent in the common man’s life. You first saved for things, built your wealth, and only if you could pay for it, you bought it. So everyone was forced to be a net-worth committed investor.

However, in the last 25-30 yrs, the culture of buying first and paying later has gained popularity and we are nudged to become a cashflow committed investor from all directions. Easy availability of loans on anything and everything and the peer pressure to match the lifestyle of friends circle along with rising aspirations and low control over one desire is the reason that most youngsters today are becoming cashflow committed investors.

When a person does not create their wealth creation on time and when their desires are more than what they can afford, it’s natural that one will turn out to become a cashflow-committed person.

Cashflow Mindset may lead to Debt Trap

However, you will also see that most of the cashflow-committed investors fall into a debt trap and then cashflow commitment is not just a choice but it becomes their internal nature or way of life.

On the other hand, I have observed that most of the people who create good wealth and are on the path to financial freedom are those who are of “networth committed mindset” as they keep their desires in check and are successful in postponing their wants to the point which makes sense and also balanced out things.

This is a vast topic and I want to limit myself to speak on this. I think you got my point and now you have to answer yourself on what is your internal design as an investor and do you think that design is helping you in life. What are the pros and cons of your design? Can you share in the comments section?

22 replies on this article “Cashflow committed vs Networth committed – Which one are you?”

  1. Waryam Singh says:

    Great Article! It really helps to understand the internal design of investors’ psychology.

    I am mix of both.

    I first accumulate that much money as a back up then exploit the loan. This means if I give interest on a loan 12% and earning on investment 15%. Then it creates an additional 3% cash flow.

    What do you think about it? Is it a right way?

    1. Jagoinvestor says:

      If you can do it successfully then why not 🙂

      1. Kamal Garg says:

        “Successfully” and “sustainably” also.
        Often, on the surface or face of it, it looks that your “cost” of debt is less than the “return” you would generate over the same time frame – but often, it is a myth. Because while “cost” or “interest” is being charged for every day (as we say in common parlance that “interest works for 24 hours”) whereas the “return” may be working for a few days only.
        But any how, every individual has to look at his capability to earn and manage “returns” successfully and sustainably and take decision accordingly.

        1. Jagoinvestor says:

          Very true .. good point !

  2. D Singh says:

    Great Article Sir…. Now a days ,large percentage of persons are falling in cash flow category . They are following the path of instant gratification without caring for the future . The competitive environment around them further aggravates the situation and compel them to maintain better lifestyle than the neighbour ……..and this never ending race starts . Sir ,as you have well written that taking loan per se is not bad until someone uses the tool for the growth of the business or investing in instruments giving higher returns than interest of debt ……However the choice of choosing the path of cash flow or net worth mindset depends as per financial goals and planning of the individual.

    1. Jagoinvestor says:

      Thanks for your appreciation Mr. D Singh 🙂 and sharing your key points

  3. Tejas says:

    One psychological point I see here, is difference of lifestyle inflation.
    Let say C is cashflow mindset person and N is networth mindset person. C would be more affected by the lifestyle inflation than N after a long period of time (10/15 years) because C is consuming the things which mostly stretches the lifestyle sometimes. Once the lifestyle is stretched, it’s rarely goes back it’s older state. Gradually C adopts that as part of nature and then it will become its mindset to consume more.
    That will impact the FI number exponentially. Most probably C will ignore lifestyle inflation mindset while calculating FI number. N is controlling the mind and needs/wants. Delayed gratification will be part of the nature for N.
    C might take much more time to become FI compared to N.

    1. Jagoinvestor says:

      Very good observation Tejas:)

  4. TAMAL BISWAS says:

    Excellent article. But most people I see around are cash-flow committed and driven by uncontrolled desires & peer pressure ,specially in India and the US.

    1. Jagoinvestor says:

      yea .. thats one big issue these days .. wealth creation is not easy

  5. Unfortunately,marketing by manufacturers will push one to be cashflow comitted mindset.
    Wealth committed mindset will generate wealth if one’s investments in company grows.
    Investments in company will grow when earns profits by increased revenues.
    To increase revenue some one has to be cash flow comitted mindset by more & more purchases.
    Both are complimentary if a balance is achieved.
    Budget,plan,save,invest,raise corpus to spend,spend,increase revenues of company ,increase investment value,budget,plan,save,invest.

    Only if such a virtuous cycle be created,there is WIN WIN situation.

    1. Jagoinvestor says:

      True .. not everyone can be networth committed! .. Only a small portion of people will be 🙂

  6. Sanjay Prabhu says:

    Agreed , Net Worth committed lifestyle will eventually win as there is no debt trap due to losing job or business going bust

    1. Jagoinvestor says:

      Yup .. thanks for answering !

  7. Abhijit says:

    I think it is best to draw a line at what is good for the individual. Having cashflow mindset is dangerous as it may lead to debt trap but having complete networth mindset sometimes becomes integral p part of one’s nature that makes you keep of increasing the capacity to buy but never allows you to spend it. Again when you want to buy house you must think with cashflow mindset but when you buy daily groceries or do regular online purchase it is best to have networth mindset just to a oid recurring credit bills later.

    1. Jagoinvestor says:

      Yea.. agree to great extent .. however even with networth mindset one can spend well , just that its little delayed in future !

  8. Vignesh E says:

    Good topic Manish. However, isn’t the “cash flow” minded people keep the economy thriving?

    1. Jagoinvestor says:

      Yup .. Its keeping economy thriving and making the other side create wealth at the same time. The article mainly wants to say that keep a balance between two and dont be on extreme ends!

  9. Aseem Das says:

    One needs a balance of both. If it is an asset that appreciates it makes sense to have a cashflow mindset if one cannot afford it, eg. A house. Taking a loan is fine as one gets tax benefits too. The cashflow mindset if unchecked makes little sense for a vacation or buying a car and could lead to debt trap. The networth committed mindset is more of an advantage to create wealth.

    1. Jagoinvestor says:

      Taking loan for loan is totally fine .. I was pointing when it becomes default for each and everything in life.

  10. Pulkit says:

    There is another mindset . they are in between networth and cashflow. Those people take loan and still be in benefit. For example, my friend had 5L to pay for a car, but still took loan and invested those 5L in some instrument. At the end of 5yr loan, he was still in surplus in comparison to 5L loan + Interest paid.

    1. Jagoinvestor says:

      Yeea thats more of a skill 🙂 .. Its a different thing . If one is able to make use of the situation, its a different thing

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