I have been enjoying teaching a 4-week real estate investment course at our local college. It’s a fun way to give back and help others in our community become more financially independent.
On the first day, I start by asking the class what an investment is, and how they would define a “good investment”. There is of course no right answer here, but most often students mention returns, and the value of their investment and portfolio increasing over time.
I often hear a common misconception that investing means to invest income and savings into something that has the potential to increase in value.
You invest, then forget about it and wait, and hopefully it will be worth more down the road. It’s what most think of when you mention investing. For example, many people invest their retirement accounts into mutual funds and don’t really know where their money is going or who is managing it, they simply hope the value will grow over time.
Although investing for future growth is a common investment strategy, this is not the best practice!
In addition to investing for growth, earning consistent positive cash flow along the way is not often considered as a key investment goal, and it should be at the top of the list!
Michael Dell:
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
Have you thought about what makes banks successful?
Banks are so profitable because they focus on cash flow. They understand the importance of cash flow and they focus on it daily.
Banks take our deposits and pay us back a very small return as an interest payment. They also incentivize us to keep our money with them for the long term. They do this by providing a higher rate of return in a savings account or CD and they often penalize you if you want to cash out your CD early.
Then they turn around and loan our money to others who pay a much higher rate of return to the bank than we are earning.
The difference between the interest paid to us and what the bank earns is their positive cash flow and it’s how banks grow and become very rich, they are investing for cash flow!
If you like the idea of earning passive income and having multiple streams of income, you should be investing in cash flow producing opportunities.
There are many benefits of investing with a focus on cash flow and earning passive income, including:
- Cash flow benefits you now to supplement income vs speculative future growth
- Predictability of returns and avoiding stressful stock market volatility
- Continue to receive regular income even while retired
- Cash flowing real estate provides favorable tax advantages often resulting in paying less taxes
- The ability to reinvest your distributions and maximize returns through compounding interest, which we will discuss further in the coming weeks!
Having your cash continue working for you is central to continued growth. Warren Buffett mentions this:
“When people talk about cash being king, it’s not king if it just sits there and never does anything”
In addition, if you are focusing on cash flow investment opportunities you will not be as worried about market fluctuations affecting your investment, and will be less likely to sell at the “wrong” time.
Another famous Warren Buffett quote:
“Our favorite holding period is forever”
By focusing on cash flow, building multiple streams of income, and having your money work for you, you will be much less vulnerable to economic fluctuations.
If this sounds intriguing, you may want to investigate cash flow investing in more detail and begin to reap the benefits!