A Guide to Cashflow Investing: How to Generate Passive Income and Achieve Financial Freedom
Cashflow investing is what lets me sleep at night. More specifically, cashflow investing is a powerful investment strategy that allows investors to generate passive income streams and achieve financial independence. Unlike other investment approaches that focus on capital appreciation, cashflow investing is all about generating steady streams of income by investing in assets that produce regular cash flows, such as rental properties, dividend-paying stocks and bonds. In this short guide, we’ll explore what you need to know about cashflow investing, including the benefits of cashflow investing, how to get started and tips for building a diversified cashflow portfolio.
Cashflow investing has gone out of style in recent decades – growth style investing has been certainly ruling the roost. Ask any modern growth investor and you will get a long list of compelling reasons as to why their way is the best (including a dizzying array of spreadsheets and theoretical graphs measuring paper profits to prove the point)
However, when we peel back all the noise, what we all need is income – steady, reliable, regular, passive, well diversified cash flow.
Coins in our pocket every single day.
Cashflow investing done well, should produce steady, reliable & passive income streams irrespective of market and political gyrations.
This is, essentially, what My Passive Income Journal is all about.
What is Cashflow Investing?
Cashflow investing is a long-term investment strategy that prioritizes generating steady streams of income over capital gains. The goal of cashflow investing is to create passive income streams that can cover your living expenses and provide financial freedom. Cashflow investments are typically assets that produce regular cash flows, such as rental properties, dividend-paying stocks, thematic ETFs, CEFs and bonds. Unlike other investment strategies that rely on market fluctuations and capital appreciation, cashflow investing is focused on generating reliable, consistent income.
Benefits of Cashflow Investing
There are a wide variety of benefits of cashflow investing that make it an attractive investment strategy for investors looking to build wealth and achieve financial independence. Here are some of the key advantages of cashflow investing:
- Passive Income: One of the primary benefits of cashflow investing is the ability to generate passive income streams. Passive income is money that you earn without actively working for it, and cashflow investments allow you to create streams of passive income that can cover your living expenses and provide financial freedom.
- Stability: Cashflow investments are typically more stable than other types of investments because they generate steady, predictable income streams. This stability can provide peace of mind for investors who are looking for a more reliable source of income.
- Diversification: Cashflow investing allows investors to build a diversified portfolio of assets that produce regular income streams. This diversification can help to reduce investment risk and protect against market fluctuations.
- Inflation Protection: Many cashflow investments, such as rental properties, are able to provide a hedge against inflation. As inflation rates rise, the value of these investments typically increases, providing a hedge against the erosion of purchasing power.
- Tax Benefits: Cashflow investments can provide significant tax benefits, such as depreciation deductions for rental properties and tax-advantaged accounts for dividend-paying stocks.
How to Get Started with Cashflow Investing
We have discussed this before here. However here are some more thoughts. Getting started with cashflow investing is relatively straightforward, but it does require some upfront work and planning. Here are the key steps (that most people just gloss over BTW) that you need to take to get started with cashflow investing:
- Define Your Goals: The first step in any investment strategy is to define your goals. What do you want to achieve with your investments? Are you looking for passive income to cover your living expenses, or are you focused on building long-term wealth? Defining your goals will help you to determine which cashflow investments are right for you. Here’s an example – To build a private income of $90K by the age of 45 from passive income investments.
- Evaluate Your Risk Tolerance: Cashflow investments are typically lower risk than other types of investments, but they still carry some degree of risk. Evaluate your risk tolerance to determine how much risk you are comfortable taking on.
- Choose Your Investments: Once you’ve defined your goals and evaluated your risk tolerance, it’s time to choose your investments. There are many different types of cashflow investments, including rental properties, dividend-paying stocks, bonds, and more. Choose investments that align with your goals and risk tolerance.
- Build Your Portfolio: Once you’ve chosen your investments, it’s time to build your portfolio. Diversification is key to building a successful cashflow portfolio, so be sure to invest in a variety of assets that produce regular income streams.
- Monitor Your Investments: Once you’ve built your cashflow portfolio, it’s important to monitor your investments regularly. Keep an eye on your income streams and evaluate your portfolio’s performance. Make adjustments as needed to ensure that your portfolio is aligned with your goals and risk tolerance.
How to Get Started with Cashflow Investing
Getting started with cashflow investing is relatively straightforward, but it does require some upfront work and planning (worthwhile and often missed).
Here are the key steps you need to take to get started with cashflow investing:
- Write down Your Goals: The first step in any investment strategy is to write down your goals. What do you want to achieve with your investments? Are you looking for passive income to cover your living expenses, or are you focused on building long-term cashflow income to live off in retirement? Defining your goals will help you to determine which cashflow investments are right for you. I personally love the chapter in Mike Kemp’s recent book about creating a farm – check it out.
- Know Your Risk Tolerance: Cashflow investments are typically lower risk than other types of investments, but they still carry some degree of risk. Evaluate your risk tolerance to determine how much risk you are comfortable taking on. Sometimes adjusting the environment will change our risk response (e.g. tracking the monthly dividends paid not the daily stock price)
- Select Your Investments: Once you’ve defined your goals and evaluated your risk tolerance, it’s time to choose your investments. There are many different types of cashflow investments, including REITs, covered call ETFs, CEFs, Debt funds, dividend-paying stocks, high yield ETFs, corporate bonds, website ownership and more. Choose investments that align with your goals and risk tolerance.
- Build Your Portfolio: Once you’ve chosen your investments, it’s time to build your portfolio. Diversification is key to building a successful cashflow portfolio, so be sure to invest in a variety of assets that produce regular income streams. Diversify against various known market conditions, geographic factors, industry factors and income sources.
- Monitor Your Investments: Once you’ve built your cashflow portfolio, it’s important to monitor your investments regularly. Keep an eye on your income streams and evaluate your portfolio’s performance. Make adjustments as needed to ensure that your portfolio is aligned with your goals and risk tolerance. Don’t check the stock market every day – this triggers suboptimal investor behaviours.
Tips for Building a Diversified Cashflow Portfolio
Building a diversified cashflow portfolio is essential for reducing investment risk and ensuring long-term success. Here are some tips for building a diversified cashflow portfolio:
- Invest in Different Asset Classes: To build a diversified portfolio, it’s important to invest in different asset classes, such as real estate, stocks, and bonds. This diversification helps to spread your investment risk across different types of assets.
- Choose Different Types of Investments: Within each asset class, there are different types of investments to choose from. For example, in the real estate asset class, you could choose to invest in single-family homes, multi-family properties, or commercial properties. Diversifying within each asset class helps to further reduce investment risk. REITs make this easy.
- Consider Geographical Diversity: Consider investing in different geographical locations to further diversify your portfolio. Investing in different regions or even countries can help to protect against localized economic downturns.
- Evaluate Your Income Streams: Evaluate your income streams regularly to ensure that your portfolio is producing a steady stream of income. If one income stream is underperforming, seek to understand why before making adjustments to your portfolio to increase its reliability. Often waiting is the best cure.
- Rebalance Your Portfolio: Rebalance your portfolio regularly to ensure that it remains diversified and aligned with your goals and risk tolerance. Over time, some investments may perform better than others, which can throw off your portfolio’s balance. Rebalancing helps to maintain the proper asset allocation and reduce investment risk. During accumulation it is easy to rebalance by adding funds to each part of the portfolio strategically. Once you are drawing down (e.g. retired) using the natural income of portfolio, you may wish to use some of the natural income to top up parts of the portfolio.
Cashflow Investing Strategies
There are several cashflow investing strategies that investors can use to generate passive income streams and achieve financial freedom. Here are some of the most popular cashflow investing strategies:
- Collecting Rent: Real estate investing is one of the most popular cashflow investing strategies. Rental properties can produce regular income streams in the form of rent payments, and real estate values tend to appreciate over time, providing long-term wealth-building opportunities. REITs make this type of investing very simple.
- Collecting Dividends: Dividend-paying stocks are stocks that pay regular dividends to shareholders. These dividends can provide a steady stream of passive income and are often tax-advantaged. Dividend growth stocks are very superior in this regard.
- Collecting Bond Coupons: Bonds are debt securities that pay regular interest payments to investors. Bond investing can provide a reliable source of income, and bonds tend to be less volatile than other types of investments. Corporate bonds pay a good level of return if approached wisely.
- Receiving Peer-to-Peer P&I Payments: Peer-to-peer lending is a relatively new cashflow investing strategy that allows investors to lend money directly to borrowers through online platforms. These loans typically have higher interest rates than traditional bank loans, providing a higher yield for investors. Normally you get paid principal and interest payments (P&I) monthly – this is your cashflow from these investments.
- Business Returns: Investing in businesses can provide a steady stream of income in the form of profits or dividends. This type of investment can be riskier than other types of cashflow investments, but it can also provide higher returns.
- Distributions from Themed ETFs: ETF like covered call ETFs or corporate bond ETFs or even high dividend yield ETFs are all excellent ways to create steady reliable income payments every month.
Cashflow Investing – In Summary
Cashflow investing is a powerful investment strategy that can help investors to generate passive income streams and achieve financial independence. By investing in assets that produce regular cash flows, such as REITs, covered call ETFs, CEFs, Debt funds, dividend-paying stocks, high yield ETFs, corporate bonds, website ownership etc, investors can create streams of passive income that can cover their living expenses and provide long-term wealth-building opportunities.
To get started with cashflow investing, it’s important to define your goals, evaluate your risk tolerance, choose your investments, and build a diversified portfolio. By following these tips and strategies, investors can build a successful cashflow portfolio that provides reliable income streams and financial freedom.
Cashflow investing has completely changed my life – that’s why I love sharing what I know freely in all the My Passive Income Journal articles.
Cheers
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