What is Cash Flow and Why So Important?

Cash flow literally means ‘the flow of cash’. Behind this barbaric term lurks an extremely simple principle: it is simply a sum of money that will return to your pocket at regular intervals. For example if you buy a stock that costs $100 and pays $5 of dividends, your cash flow is $5. If you buy 100 shares, this gives you a cash flow of $500, which return to your pocket without touching your initial capital, and this at regular intervals.

It’s a way to increase your revenue from day 1 of your investment, and it doesn’t matter what kind of investment vehicles used as long as it pays you regularly (shares via dividends, bonds via coupons, real estate via rents). The higher the payment frequency is, the better.

Why do we need to focus on this way of investing?

Because the Cash Flow that goes right back into your pocket can be reused immediately to create a snowball effect.

For example: You buy a property that gives you a positive cash flow of $200 per month. You can use $200 to buy 2 shares at $100 each month which will bring you $5 each. In one year you buy 24 shares, a portfolio of $2400 will pay you itself 24 x 5 = $120 in the first year, that can be used to buy new shares and will bring you interest again. You will understand it allows you to reach interest on interests, which greatly accelerates your enrichment speed.

Another advantage: Having cash flow will allow you to keep the flexibility of your investment while still paying the bills if you ever face a difficult period such as medical expenses, unexpected expenses, etc…

Attention, NOT all investments will create cash flow for you!

For example, precious metals or investments in raw materials do not pay dividends. That’s why Warren Buffet, among others, always avoided gold as an investment. On the other hand, a property pays you every month. Some funds and shares also pay you monthly (or quarterly).

Another advantage: the psychological factor

An investment method based on cash flow is more “easy” to hold psychologically. If today I ask you to put $10,000 in bank and not to touch them for 10 years and eventually recover $15,000 in the end, this will be harder than if you put $10,000 in bank to receive this month $100 , next month still $100 on 50 monthly payments.

The investment does not weigh heavily psychologically on your shoulders and allows you to increase your comfort of life immediately. You are a winner in both cases in relation to a recovery at maturity.

Conclusion

I hope that you will understand here the interest of investing in assets that pay you regularly from the point of view of accelerating wealth creation and the snowball effect that it allows you to create. A hint to be brought here is that it’s important to master taxation with fixtures adapted to your financial objectives, because you will be taxed (potentially heavily, depending on your tax bracket) on your rents or on the dividends collected.