crown with cash

What is Cash Flow? Cash Flow is Queen!

What is cash flow? The answer will relieve your stress about money and provide an ongoing stream of income

Do you ever worry about your financial future? Perhaps you’re even worrying about your financial present. According to a study by Lexington Law, 26% of Americans are worried about spending more than they earn this year. Another study shows that two-thirds of Americans would struggle to come up with $1,000 in case of emergency. And yet another survey shows that 25% of Americans are worried about running out of money during retirement.

What do all these statistics have in common? That the vast majority of Americans have no idea how to achieve financial independence. They work their butts off, live paycheck to paycheck, rack up credit card debt, and don’t have any savings to speak of. This is a scary position to be in — and Robert and I were in this position ourselves many years ago.

So how did we turn things around? Through the power of a magical concept called cash flow.

What is cash flow?

In the world of investing, there are primarily two things people invest for: capital gains and cash flow. What’s the difference?

  • Capital gains

    Capital gains is the one-time profit you make on the sale of an investment.

    For example, you buy 5 shares of a stock for a total of $100. Those shares go up in value to $150. You decide to sell your shares. The $50 profit you make from the sale of your shares is capital gains. The same applies to real estate. You buy a house for $100,000. You fix it up and sell it for $140,000. Your $40,000 profit when you sell the house is capital gains. Now, here’s the kicker: In order to realize capital gains, you must sell the asset. You can also have a capital loss if you lose money on the sale of the asset. A capital gains strategy assumes an appreciating, or up-trending, market. In order for you to make a profit the asset has to go up in value. Someone must pay you more than what you paid for it.
  • Cash flow

    Cash Flow is an ongoing stream of income you receive from an investment. You may receive this money on a monthly, quarterly or annual basis, depending on the investment. The strategy behind cash flow is to buy and hold, whereas the strategy behind capital gains is to buy and sell.

    So, let’s say you buy a stock that pays you a dividend every year. That dividend is cash flow. You loan money to a new start-up business. Each month the business pays you interest on your loan. That interest is cash flow.

Why is cash flow the way to go?

Cash flow investing is what most buy-and-hold real estate investors are after. For example, you buy a six-unit apartment building and you rent out each of the units. Every month you collect the rent, pay the operating expenses and the mortgage, and, if you’ve managed the property well, you end up with positive cash flow. Is it possible to have a negative cash flow? Absolutely. That’s why having a strong financial foundation is so important, so that the investments you make generate positive cash flow.

So why does cash flow investing get me so excited? Because it has numerous advantages, including creating:

  1. Financial freedom

    One of the beautiful things about the Rich Woman formula for financial independence is that you do not need to acquire hundreds of thousands, or even millions of dollars in savings — yet, this is what most people think of when they talk about being financially free and never having to work again. Instead, you simply need to build up your monthly cash flow to be greater than your living expenses. Once your life is no longer dictated by the constraints of money, your time is freed up to do whatever brings you joy.
  2. Carefree retirement

    One more advantage of focusing on cash flow is that it eliminates the fear of running out of money. One concern I hear from people who have retired is, “I’m worried I’m going to outlive my retirement account.” By accumulating assets that provide a monthly cash flow, money comes in every month until you decide to sell the asset(s).

  3. Control

    I don’t like to invest in things where I have no control, especially when it comes to my money. That’s why I’m not a stock trader or a house flipper — I’m not god at timing the highs and lows of the stock market or real estate market and don’t like the pressure. With cash-flow investing, my success is not dictated by the daily fluctuations of the market. I cannot control the markets, but I can control my rental properties/business.

How to start cash flowing

My first cash-flow investment was a small two-bedroom, one-bath house in Portland, Oregon, in 1989. My monthly cash flow averaged a whopping $50 per month. No, it wasn’t a lot, but it was a start. I looked at that $50 as much more than a few extra bucks in my pocket — to me, it was the first building block toward the cash flow I enjoy today. There comes a point in your investing life where cash flow from your investments supports not only your living expenses, but also your next investments. Essentially, cash flow breeds new assets, which, in turn, breed more cash flow. See how the cycle works?

My goal at the time was to acquire two rental units per year for 10 years. At the end of the decade, I’d have 20 units, all cash flowing. And guess what? It didn’t take me 10 years to reach that goal — it only took 18 months. Of course, that just led to me setting my next, more aggressive goal. And so on.

When Robert and I “retired” in 1994, we did not have millions stashed aside. What we had was $10,000 in cash flow coming in every month from our investments, primarily real estate. The beauty was that our living expenses were only $3,000 per month. At that point we were financially free. The cash flow from our investments was more than paying for all of our living expenses.

Today, we have roughly 14,000 real estate investment units and each one not only pays for the next, but keeps the cash flowing into our bank accounts. I’m free to spend my time golfing, traveling and doing other things that I love. Sure, I still “work,” but not in the traditional sense. I’m not tied to a desk. I don’t have a boss. My time is mine to schedule as I please.

So, what is cash flow for you?

What kind of life do you envision for yourself? And what about your future? If money is something that’s a constant source of stress for you and your family, then cash flow may bring the peace of mind that you're looking for.

Original publish date: July 02, 2009