Whether you’re semi-retired, fully retired, or still working, it’s crucial to understand that cash flow is more important than net worth, especially during economic downturns. Net worth can often be misleading, making you feel wealthier in good times, but it can also be a blow to your ego when times are tough. If you don’t invest in assets that generate cash flow during a downturn, your portfolio will likely underperform, especially if your investments have weak balance sheets.
In a bear market, the performance difference between growth stocks and dividend stocks is stark. So, if you’re a growth investor, it’s wise to take some profits during good times. Otherwise, you won’t be able to capitalize on your investments since they don’t yield dividends.
Remember, the value of an investment is based on its present and future cash flow. An investment needs to generate income for its owners, otherwise, it’s just based on speculation. Your cash flow is what allows you to live the life you want. It’s real, while net worth can be subjective.
There are many factors to consider when calculating net worth. Should you include the value of your primary residence? Should you calculate your net worth pre-tax or post-tax? What should the value of your private business be in your net worth? These considerations make net worth subjective, which is why it’s unfair to tax unrealized capital gains. Your investments might be worth a certain amount one day and significantly less a few months later.
If your net worth doesn’t generate income, it likely consists of more volatile assets. The exceptions are precious metals, fine art, and collectibles. Some people with a large net worth that produces no income choose to draw down principal to fund their lifestyle. However, this approach is riskier and less reliable.
I personally love real estate and blogging because they generate strong cash flow. Real estate is a favorite because rental income is steady. Everyone needs a place to live, regardless of the economic climate. Plus, you can remodel your rental property to generate more cash flow. Blogging is a high-margin business with low running costs. As long as you keep writing, you’ll keep generating cash flow.
Other attractive cash flow investments include large-cap, dividend-yielding stocks with strong balance sheets. You can easily buy a dividend aristocrat ETF to capture their dividend income. The downside is that you can’t take positive action, you’re at the mercy of company management and external variables, and there’s more volatility and lower yields than real estate.
I’m also a fan of investing in private real estate funds that generate higher yields in a passive manner. It’s less stressful because there aren’t daily market value updates. With private real estate, you’re investing over a longer time horizon.
Net worth can be a useful measure of momentum. The greater your net worth, the greater your passive income. Or at least, with a greater net worth, you have a greater ability to generate more passive income depending on how your net worth is structured.
The larger your net worth, the more confident you’ll feel about your finances. But it’s dangerous to be overly confident about your estimated net worth figure. The biggest benefit of a large net worth is having more options to create more passive income if you want.
Here are some ways to boost cash flow: allocate more capital toward higher-yielding investments, increase work output and efficiency, job hop for a pay raise, increase rents, expand a property to generate more rental income, invest in multi-family properties, start a side hustle, consult or give private lessons based on your expertise, or become a hard money lender.
During uncertain times, your cash flow will enable you to maintain your lifestyle. Cash flow is what’s going to feed your family. Net worth has no utility. As long as you have a proper net worth allocation that matches your risk tolerance, you’ll be fine in the long run. Cash flow is what will keep your lifestyle steady in the short run.
Net worth is secondary to cash flow. It’s fun to track during good times and can make you feel better about your progress. But during bad times, you’ll realize that net worth is really of secondary importance.
Finally, consider investing in real estate for greater cash flow. Real estate rides the inflation wave through capital appreciation and rent growth. Also, consider investing in private growth companies, particularly those in sectors like artificial intelligence, modern data infrastructure, development operations, financial technology, and real estate & property technology.
