You might have noticed that we devote much of our time and attention to the topic of cash flow. It’s the lead subject of our e-booklet, a key component of our measurement tool, and is regularly featured in our blog articles. We do this in large part because cash flow tends to be neglected in most personal finance plans and resources. Instead, the focus is usually on wealth building…increasing your net worth.
To be fair, building wealth is critically important; in fact it’s the first step in the two-step process of becoming financially independent. But there are many paths to building wealth. Some involve taking on substantial debt, others don’t. Sometimes debt is used in a positive way to leverage an investment (such as an investment property or business), other times the debt
-- Many personal finance resources do address the
wealth/cash flow connection near the time of
your retirement. But why wait until then? That
approach carries with it a 40+ year opportunity cost.--
carries with it a heavy burden in the form of negative cash flow. It’s that cash flow connection to your wealth – specifically, to your assets and liabilities – that will largely determine how and when you achieve financial independence. That’s the missing piece, or rather the missing connection – the connection between wealth and cash flow – that deserves greater attention.
It’s true that many personal finance resources do address the wealth/cash flow connection near the time of your retirement. At that time a plan is typically developed to convert a portion of your wealth (certain assets) into regular income streams. For example, placing some funds into CDs that pay quarterly interest and stocks that pay quarterly dividends, or perhaps putting some funds into an annuity.
That’s fine, but why wait until then? That approach carries with it a 40+ year opportunity cost. Instead, why not start earlier? The earlier you start, the sooner you can make financial choices that build wealth while also optimizing cash flow. That’s a path that can take you more quickly through all of the stages of the financial life cycle.
So we hereby set the record straight: Wealth creation is a very important part of a sound financial strategy. But it’s just one part. To complete the picture, generate wealth in a way that builds sufficient, sustainable cash flow.
Keith Whelan is founder of www.cashflownavigator.com and author of the “Wealth is Good, Cash Flow is Better” e-booklet. He is a graduate of Columbia University Business School, teaches at Rutgers University, and has over 30 years experience in the banking and financial services industry. Keith, his wife and their two sons live in New Jersey.