“Cash is King.” – Anonymous
The fourth Principle of Prosperity is FLOW. We teach our clients to focus on cash flow, not simply (or even primarily) net worth.
In a “typical” financial planning environment, the goal is to build net worth vs. cash flow. Net worth is built through various means until hopefully, one day, there is enough net worth to live off the interest or investment proceeds in a phase of life commonly referred to as “retirement.” First, accumulation, then, disbursement.
In our philosophy of Prosperity Economics™, the focus is on building a sustainable personal economy that will provide the financial abundance you need to live the life you want. This goal is reached sooner, not later, and a little at a time, not all at once on some distant future date.
Net worth will also be built with this model, but it is not the guiding factor. Instead, decisions are made according to cash flow. Here are some do’s and don’ts to focus on cash flow:
1. DON’T send your money down a one-way street.
401k’s, 403b’s, IRA’s, and 529 funds all share one undesirable characteristic: They are built for accumulation, not cash flow. Money flows in, but unless you want to pay stiff penalties and (often) taxes, it’s not easy or cheap to get the money back out.
2. DO choose investments where cash can flow in both directions.
- Bridge Loans.
Investing in bridge loans brings favorable interest rates to the investor who doesn’t want their money tied up for years (or decades) at a time. The money is typically loaned for 6 months or less, and brings low double-digit (annualized) returns. Additionally, the bridge loan is secured against freshly appraised real estate.
We explored bridge loans in a bit more detail in our popular post on “Investing Outside of the Box: Alternative Investments,” and we’ll be covering them in more depth in future posts.
- Rental Real Estate.
Cash-flowing rental real estate has been a mainstay of successful investors for centuries. According to Stanley and Danko in The Millionaire Next Door, about 2/3 of millionaires and multi-millionaires own investment real estate (even if it is not their primary source of income or wealth).
Real estate is also a key component of a healthy, truly diversified portfolio, according to “Rich Dad” financial guru Robert Kiyosaki. And for good reason: you can buy real estate using mostly your lender’s and your tenants’ money! You can also refinance and borrow against the property, typically with no income or capital gains taxes. Thus, rental properties can provide for cash flow in additional ways than just rents.
- Whole Life Insurance.
As discussed in this article, there are many ways that a life insurance policy can be used for cash flow or cash injections when needed. Not exactly an “investment” in the traditional sense, a whole life policy is a great place to store cash where it can grow (typically tax-free) and give you a lot of flexibility in your financial options.
3. DON’T reinvest your dividends.
If you receive dividends from investments, mutual funds, or savings vehicles such as CD’s or money market funds, don’t simply dump the earnings back into the investment. Put your dividends to use doing something else, such as paying an insurance premium, a bill, or purchasing something for you.
We recommend this for two reasons: First, it makes financial sense, particularly when the investments and dividends grow to sizeable amounts. Over time, reinvesting dividends will have unfavorable tax consequences. And secondly, we want our clients to focus on cash flow because it helps them think from a prosperous mindset. Using the cash flow from dividends is a simple way to receive cash flow, even for investors just starting out.
4. DO consider a side business or additional streams of income.
Increasing your income is an obvious but often overlooked way to increase your cash flow. Even if you have a good steady income, you shouldn’t overlook the possibilities of “supplementing” what you already have. And if you find yourself temporarily unemployed or under-employed, increasing your income could really help fill the gaps!
- Get paid to enjoy your hobby.
Perhaps it’s time to turn playing music or tinkering with off-road vehicles into a side-business. See where you can monetize what you’re already doing.
- Get paid for what you know.
Are you knowledgeable about something that others want to know about? Whether you’re a software expert or you’ve opened a chain of successful restaurants, you can offer yourself as a consultant to others.
- Get paid to refer services or products.
Network marketing (or direct selling) is a way that millions of people have added small (and sometimes large) extra streams of income to their households. Find a product or service you believe in and start sharing!
5. DO save consistently.
Cash flow typically begins with the “out” flow. Money flows “out” of our purses and wallets into investment vehicles, real estate, insurance, and savings. It is this out-flow that allows for more cash to flow “in” later. Just as giving is the flip side of the coin from receiving, so saving is an essential counterpart to cash flow.
But DON’T wait for age 65, 70 or a gold watch to allow cash to flow back in! You can build cash flow now by making wise financial decisions and practicing the 7 Principles of Prosperity™.
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