Perhaps it’s the two MOST IMPORTANT words in Personal Finance! Ever since day one of my financial journey, I’ve kinda been obsessed with these two words! I definitely try my best to find new ways to increase Cash Flow every single day! Whether it’s by finding a new side hustle or even by cutting unnecessary fees in our lives — it is a form of increasing Cash Flow!
So what is it?
My fellow millennial Canadian blogger, GYM from Genymoney.ca (Btw, I’m a big fan of her blog! 😉) couldn’t have explained things better!
What does financial freedom or financial independence entail? To me, financial freedom means that the income that you have generated per month (without having to work your regular job) covers your monthly expenses. This will give you a work optional life. You don’t need to work to keep paying your monthly expenses because you have income producing assets.
How does this work? Well, people have different definitions of the term ‘asset’, but to me, an asset is something that can produce income (or currently produces income). A primary residence is not really an asset (though some may beg to differ) unless you are renting a portion of it out because it does not produce income. Cash flow is important, and income producing assets come into play here. Net worth means nothing if you don’t have cash flow.
CASH FLOW IS KING!
And to generate cash flow, you need to focus on income producing assets.
You can own a $2,000,000 house in cash but if you don’t have any money coming in, you won’t be able to pay for food, for electricity, for property taxes, or for your financial freedom.
So as you can see from her explanation above, cash flow plays a big role in being financial independent! Here are some more important key points to remember:
Nevertheless, with cash flow being a predominantly ‘good thing’, just be careful, as you might inadvertently stumble upon a NEGATIVE CASH FLOW (instead of Positive) in your pursuit of it.
Positive vs Negative Cash Flow
I think the easiest example I can give to illustrate ‘Positive’ vs ‘Negative’ cash flow is through a rental property scenario. Let’s say you bought a house to get some rental income…
- Positive flow is when your operational home expenses, including mortgage payment, are less than your rental income.
- Negative flow is when your operational home expenses exceed your rental income.
As shown above (illustrations by Rentthemortgage.com), even though you bought the real estate property in the hopes to increase your cash flow & your income, you don’t necessarily come out on top all the time! Sure enough, the Positive illustration is easy to understand and I’m sure we all hope to fall in this side all the time….but that isn’t always the case!
The Negative illustration shows that if you don’t charge enough rent, you end up with a negative cash flow scenario. And in order for you to turn that into a positive cash flowing property, you’re either going to have to put a bigger down payment (which is very hard to do) to reduce your monthly mortgage from the bank OR you simply charge more rent per month! But the latter isn’t as easy to do either, since you normally charge the rent amount based on the area where your property is located and on market conditions!
But, hang on…
Having a negative flow isn’t necessarily a bad thing! I mean think about it… it is still a form of ‘forced savings’ with the mortgage payments accumulating, PLUS the appreciation in the value of the rental property over time! So you might be negative now, but once you sell that property down the line, you just might reap the rewards and turn things into a POSITIVE RETURN overall at the end!
Once again, here is my hero Robert Kiyosaki — the author of Rich Dad Poor Dad — who briefly explains how SOMETIMES, negative cash flow just might make sense!
I personally have actually been on BOTH ends of the cash flow spectrum and YES, the theory works!
All in all, when it comes down to it, these TWO WORDS are found at the heart of personal finance — for better or worse!
By the way, did you know that the average millionaire has 7 streams of income? Now that’s some amazing CASH FLOW!!! 😉 We’ll talk about that in my next post!
