Cash flow versus capital gains investment strategies

There are two motives or reasons why people invest. It is either for the purposes of generating cash flow or making capital gains. Simply put, cash flow investing is the art of purchasing an asset and holding onto it in expectation of getting a constant return on a monthly, quarterly, or even annual basis. Regardless of the interval, the keyword here is a “constant return on your investment.”

Capital Gains is about buying something, hoping it goes up, and selling it for a higher value. For example, stocks. You buy a stock, pray it goes up in value, and then sell it for a gain. Similarly, you can buy real estate, gold, silver, etc.At its heart, capital gains investing is the art of buying and selling an asset for a profit.

The question at this juncture is which one of these two investment paths is better? Should we jettison one for the other? Most finance experts maintain that every investor should make use of both, though one more than the other. One’s choice is dependent on one’s investment strategy, values, current financial position and level of financial education.

However I personally advocate that if you are yet to create wealth and financial freedom then you should invest mostly for cash flow rather than for capital gains. Those still trying to build wealth need cash flowing into their accounts on a regular and consistent basis to pay their bills and invest in their future wealth. Liquidity should be the major focus and attraction when you are at this stage.

Capital gains investing is fraught with high levels of risk for those trying to build wealth especially when the markets become volatile. You will need income in the short term first and foremost to meet your obligations, a portion of which will be invested to generate wealth in the medium to long term. Cash flow is what makes this possible as cash is the lifeblood of any enterprise. You will even need cash to purchase any investment for the purpose of capital gains, which is why cash is extremely key.

According to Robert Kiyosaki on his blog, www.richdad.com, Cash flow is better than capital gains for three reasons:

1.    It is resilient from market swings and market chaos.

2.    It brings money into your pocket on a regular basis (not imaginary “paper wealth” such as net worth)

3.    It is generally taxed at a lower rate.

One more advantage of focusing on cash flow is that it eliminates the fear of running out of money. One fear I hear from people who have retired is, “I don’t know if the money I have set aside for retirement will be enough to last through my retirement.” By accumulating assets that provide a monthly cash flow, money comes in every month until you decide to sell the asset(s).

The best thing about cash flow is that it’s money flowing into your pocket on a continual basis whether you’re working or not. It is your money working for you. And generally, cash-flow investing is based on fundamentals that aren’t as susceptible to market swings like capital-gains investments, which means that even in bad times, money still flows into your pockets.

According to Kim Kiyosaki when it comes to investing, the primary focus in building infinite wealth is on cash flow. This is based on four reasons:

1. You can’t save your way to retirement

It’s not easy—in fact, I would say it’s almost impossible—to save the amount of money you will need to retire. Unfortunately, too many hardworking people who were planning on retiring in the next few years are finding out that they cannot afford to do so. Too many people will be forced to work until the day they die.

2. It’s good to be in control

I don’t like to invest in things where I have no control, especially when it comes to my money. I am not a stock trader or a flipper (one who constantly buys and sells property). I am not good at timing the highs and lows of the stock market or the real estate market. I’m just not that smart.

One of the great things about having financial intelligence gained through financial education is that you have the knowledge and confidence needed to invest in assets over which you have control. You know the right questions to ask and the right things to look for. In short, you’re comfortable being in control.

3. You can truly retire

Most people still have to do some sort of side work when they retire. They either don’t have enough saved in their retirement accounts, or they are losing money because of market fluctuations. That’s the problem with relying on capital gains for retirement income.

By focusing on cash flow, however, you can achieve your goal of building up your income to equal or exceed your living expenses, each and every month. Cash flow frees you up to get on with your life and to do what you really want to do. You’re not dictated by the constraints of money.

4. Cash flow breeds cash flow

My first cash-flow investment was a small two-bedroom, one-bath house in Portland, Oregon, in 1989. My monthly cash flow averaged a massive $25 per month. Not a lot, but it gave me my start. And that first step was, by far, the toughest. I wasn’t sure if I could actually go through with it. I had enormous amounts of fear.

But that $25 was much more than a few dollars in my pocket. It was the first building block towards the cash flow I enjoy today. There comes a point in your investing life where the cash flow from your investments supports not only your living expenses but also your next investment. Your cash flow breeds new assets that, in turn, breed more cash flow. It’s a lovely cycle.

The time has come to deploy investing for cash flow purposes as your major investment strategy.