Want Financial Freedom?
Cash Flow Your Life NOW
No one in all of history has ever wanted to be in financial bondage. Freedom calls to the human spirit in every way imaginable: we are adventurers, learnings, and crave things that add excitement to our lives.
Freedom easily falls in this category.
Sadly, financial freedom is possibly further away than at any time in all of history. Study after study shows that Americans are entirely unprepared for retirement: not having enough in savings to account for an unexpected $500-1000 bill (source), that 33% believe that their financial independence depends on an inheritance (source), and that 66% know that long term care costs would have a big financial impact (source).
Yet one study grimly sums up all the retirement information we need to know about workers in America today: the median amount of money saved in families with workers between 32 and 61 is just $5000. (source).
No one can retire on $5000. They're gonna need a few more zeroes in that account.
So when thinking of the looking problem of retirement and financial freedom, we need to ask the question of the most effective way to get there.
I want to argue that one way is quite a bit better than the others. It's called cash flow.
To understand why cash flow is king in finances, we must first understand a few concepts and definitions. I'll start with the basics, and these are my own definitions.
Invest: To place your money somewhere with the intention for it to grow and make more money (hopefully a lot more money).
Capital Gains: This is when you invest money in something and it is worth more in the future. If your house is worth $100,000 this year and $110,000 next year, that is a capital gain. Synonym: Appreciation.
Cash Flow: To receive money, often in place of, capital gains. Cash flow is the dollars going in and out of your bank account every month. If you rent out a room in your house on Airbnb and get $100, that is cash flow. Synonym: Dividend.
The following definitions are taken from bestselling - and life changing - book Rich Dad Poor Dad:
Asset: Anything that puts money in your pocket.
Liability: Anything that takes money out of your pocket.
With those pesky definitions out of the way, let's get rolling...
Capital Gains Are Valued By Emotion
WARNING: The first subtle difference between capital gains and cash flow may make you want to go and sell all your stocks that don't give dividends - just like I did.
Every time I tell people this little market secret, they immediately go silent, eyes enlarge, mouth slightly open.
I may as well have grown wings and a tail.
Any time that you have a capital gain or appreciation, your item is only more valuable because other people say it is.
Had a stock go up $100, price of gold is rising, house is worth more this year than it is the next...
It's all the same, sad story.
You are letting other people determine your financial well-
They don't have much planned for you.
Every time an item appreciates, it is because the other seven billion people in the world are saying that it should. This is dangerous territory, because it means that whenever they say it is worth less, then it is worth less and there is not much you can do about it.
In essence, the heart of your investment is rooted in the human ability to reason and feel to make decisions about the world around them. That ability, I should say, isn't very good.
Some people may argue that the value of something, such as a stock, is based on the amount that it earns. These arguments are correct to an extent.
While stocks are in theory priced based upon what they earn, this is not always the case. Market crashes or corrections are largely driven by fear (an emotion) and since emotion rules more than reason in these situations, your appreciation can quickly become depreciation simply because of how others feel.
In the same way, massive bull market runs (when stocks increase in value extremely rapidly) are often based off of emotional highs. There are millions of horror stories about people buying at the top of these markets.
The argument that earnings = appreciation is entirely false for some items. Precious metals and real estate (see 2008-2011) present some interesting counterexamples.
Cash Flow Is Valued By The Money It Pushes
Into Your Bank Account
The value of cash flow is exactly the amount of money that goes into your pocket. Just so I don't sound like a miming parrot, I will keep this to one example.
If you own a cash flow asset that gives you $1000 per month, the value of that cash flow is $1000 per month.
Do know that the value of cash flow is not the value of the asset. This means that if your asset is bringing in $1000 per month, you can probably sell it for more than $1000.
While capital gains are valued based on how others feel, cash flow assets are almost always valued at how much they bring in your bank account.
Businesses serve as an excellent example of this.
My father has started and sold multiple franchise businesses, and each was sold based on the cash flow of the business and a multiple based on market conditions.
For example, his accounting firm sold for about 1.5x what it made in one year. His insurance business, about 2.5x. If you're looking to start your own business and possibly sell it for up to 18x what it makes in a year, you can learn how in the world's best entrepreneur books.
In this situation, value is directly correlated to cash flow.
This is great.
You can't control how other people feel, but you can control the cash flow of your assets either by creating those assets and manipulating the variables or by specifically choosing cash flow assets to invest in and increasing the cash flow if desired.
For this reason alone, cash flow is often more safe than capital gains because it is less subject to feelings and more subject to concrete numbers.
Cash Flow Is Easier To Predict
In almost every situation that arises when investing, cash flow predictions are more likely to be accurate than capital gain predictions.
Capital gains are based on what others say.
Cash flow is based on what you receive.
Let's go through a simple example. You can purchase an stock that gives no cash flow (no dividends) but is predicted to grow 5% this year.
Or you can purchase a stock that for the past 15 years has had a dividend yield of 5% (we're just using easy numbers. Most stocks don't yield 5%).
If you buy the stock that does not produce cash flow, you are placing the growth of your money in the hope and dream that others will feel like this stock should grow 5% this year.
What if others feel like it should grow 10%?
What if they feel it should grow 1%?
When you try to predict capital gains, you are trying to predict how every single investor in the world is going to value your company.
When you try to predict cash flow, the process is much more simple.
Does the company have good reason to continue paying 5%?
Is the company capable of paying a continued 5%?
When you try to predict cash flow, all you have to do is predict one single thing: the profit of the business itself.
Obviously, any business is subject to gain and risk, but businesses that have continually increased cash flow (or dividends) at steady rates for years can generally be trusted to continue doing so. And because the company is continuing to perform well, there is a good chance that the company's value will increase also.
When you try to predict capital gains, you are trying to predict what the whole world is going to say about an investment a year from now. For this reason alone, cash flow has similar results with capital gains but with less risk than capital gains.
Capital Gains Set A Time Limit On Freedom
Traditional investment advice says that once you hit retirement age, you should sell approximately 4% of your assets per year.
Once you factor in inflation and gains on the remaining percentages, you will have 30 years worth of savings for retirement. If you have $1,000,000, this means that you will sell $40,000 per year and you can do this for 30 years.
This plan is great!
Unless there is a bad year for the market (such as 2000-2001, 2008-2011).
Unless you have less than $1,000,000 saved up in that fat bank account of yours.
Unless you live more than 30 years after retirement.
Then you're in big, big trouble. You effectively have no money. You run out.
Capital gains put a time limit on retirement - on freedom itself - because once you are out of savings, then you are out of savings.
Simple as that.
Cash Flow (usually) Lasts For The Lifetime Of The Investment
Due diligence can save you a whole lot of hurt here. Some investments provide cash flow for a limited time while others, supposedly, offer cash flow for life.
Most dividend stocks (KO, KHC, WMT, O, etc.) have paid dividends for a long time and are expected to continue doing so.
Investment real estate is usually expected to produce cash flow as long as a tenant lives within the building.
Here's why this is actually great:
It doesn't put a time limit on your freedom.
If thirty years go by and you've still got this thing, you are still receiving income from it.
If the market collapses and your stocks go down 40%, you're good. Cash is still flowing. There is little need to fear a full market collapse because companies such as the ones listed above have very long histories of paying their shareholders more and more each year.
Even if you have less than $1M in the bank, you may be forced to retire on less than $40,000 per year, but you can live a whole lot longer than 30 years.
And really, a relatively safe 4% yield isn't even that difficult to find. It just requires some searching and diligence.
Cash Flow Is Flexible
My favorite thing about cash flow can be summed up in a few neat statements:
I can do whatever I want with it.
I can reinvest it.
I can build a business with it.
I can watch a movie with it.
I can spend it.
With capital gains, the situation is pretty opposite. You can keep it in the investment (reinvest) or lose parts of or all of your investment (sell).
In some capital gains, you are required to lose all of the investment if you sell (such as selling your home).
I like cash flow because I can use it whenever, however, and on whatever I choose.
Thanks for reading!
Because of cash flow's low relative risk, its ability to turn time into an asset by which you gain more money, and its versatility, it is the king to financial freedom.
Whether it happens when you are 25 or 65, cash flow is the key to being free more quickly and more permanently than those who do not use it.
Tell us in the comments below: what are you investing in right now?
Stay awesome. Have a great day.
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Disclosure: I do not have positions in any of the mentioned stocks and have no intention of opening a position for 72 hours following this writing.