Cash Flow - Part One

I’ve been learning a lot recently about cash flow, and just how important it is in life. Having positive cash flow, that you can invest into cash generating assets, is the key to building long-term sustainable wealth. Cash generating assets can take many forms and I’m sure there are a variety of cash generating assets that I may not be aware of yet, but I think the basics are as follows: real estate, stocks that pay dividends, bonds and businesses.

 Of those three, I believe they should be ordered as follows in terms of lowest level of involvement to highest level of involvement required. Bonds, stocks, real estate and finally, businesses. Bonds and stocks simply require you to choose the investment and then you make your purchase and walk away while you receive a steady stream of cash payments. The only thing that you have to monitor is the underlying health of the business which may take an hour a quarter at most.

Real estate also requires you to choose your investment and make your purchase, but unless you are going to give 10% net rents to a management company, you’re going to have to likely be more involved in this investment as you will be dealing with tenants and various repairs and maintenance issues that may come up. As a reward for this extra work, you may end up with a higher rate of return than bonds but the return may be similar if not less than a diversified portfolio of stocks. This can be discussed at a later time but that’s how I would view the returns.

Finally, businesses require the most time. If you are going to own a business that produces high levels of cash flow, you are likely going to have to be more involved than if you owned a bond or a stock or a rental property. However, you are likely to make the most money and have the largest growth potential by owning a business. It is important to run a business that requires the least amount of time and involvement by you as the owner. This will make your business more sustainable over the long-run and increase the sale value of the business.