The Importance of Cash Flow

A fellow blogger touched this topic in his blog and I thought, I should discuss about cash flow in the context of investments.

I hope by now you are already aware that investing is important. Even though it is important, there is also something that you need to consider. As the title suggests, what I’m talking about is cash flow. When you put your money in an investment, the first thing you’re going to get are capital gains. Second thing is income stream (be it through dividends, rent, and etc.).

Now, when you buy shares for example. It’s great if you get 100% of capital gains per year. However, this gain is not realised until you actually sold your shares. If the company does not give out any dividends at all, effectively, your income from that investment is zero. That means zero cash flow.

It is fine if you only have a small portfolio of investments but how about when you have taken up a number loans to fund your investments? Let’s say, you took up loans to invest in ASB, in properties, and shares. Let’s assume for the ASB, you’re reinvesting the dividends. For properties, rental income is being used to pay the mortgage. Same goes with shares.

Generally, these assets will grow, thus increasing your net worth. But in the example, you’ll be getting little or no income whatsoever from these sources. This is what we call as being ASSET RICH, BUT CASH POOR. Your asset base is huge but you’re not getting any income out of it. That could be a real problem for some people.

Remember that automatically directing all your cash into new investments is good but we still need some cash to stay afloat (i.e. to go about our daily lives, to have some money to go on a shopping spree, etc).

So, when planning your investments, take into account the cash flow situation as well on whether or not you’ll be able to live without any extra cash flow. An alternative could be diversifying by investing in a few places that gives you high positive cash flow (i.e. the income that you get outweighs the costs).

INCOME – EXPENSES = NEGATIVE FIGURE = NEGATIVE CASHFLOW


INCOME – EXPENSES = ZERO = ZERO CASHFLOW


INCOME – EXPENSES = POSITIVE FIGURE = POSITIVE CASHFLOW

Remember that if it’s a negative cashflow investment, it doesn’t mean that it’s a bad investment. It just means more money out of your pocket, that’s all. There are investment strategies that implement negative gearing (a.k.a. negative cashflow). We’ll discuss this on another day.

All in all, consider the cash flow elements while planning for your investing efforts. Determine what is suitable for you.

About nadlique

This blog is about the journey of a 28-year-old Malaysian towards financial freedom. This blog was started back when the blogger was 21 years old. However, his journey towards financial freedom had begun way before that. Materials such as investing, business, entrepreneurship, equities, and real estate are presented. The author also posts his thoughts and observations on life in general.

Comments

  1. Good, lets tell everyone!

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  1. […] – Risk Tolerance Level – Risk Tolerance Level: Part 2 – Back to Basics: Recovering from Negative Returns – Fund’s Strong Performance – CFD Trading : An Introduction – The Importance of Cash Flow […]

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