If you’ve ever read Dave Ramsey’s book The Total Money Makeover, you’ll quickly recognize his argument that cash is king. Cash can definitely provide many benefits for those who hold it. However, there is definitely something that’s even better than cash, and that would be cash flow.
What Can Cash Do?
Ramsey is right that cash is king. Sometimes, it’s possible to save money on purchases when paying with cash. For example, when visiting the doctor, if you ask for the cash price when going to pay, you might save some money. If you’re looking to make a major purchase, paying cash can definitely save money.
For example, for every $10,000 that you borrow on a car or house, a 5 percent note would cost nearly $500 in interest the first year. These interest costs only compound over time. A quick look at Bankrate’s amortization calculator shows that a $100,000, 30-year mortgage at 5 percent would cost more than $93,000 over the cost of the loan.
Paying cash would definitely avoid the interest costs, and prepaying the mortgage could save much of the interest expense. Is this the best way to handle a mortgage? Quite possibly not. There is also an opportunity cost of using all available savings to pay off a mortgage. What could the money used to pay off the mortgage do? The answer is quite simple, it could buy cash flow.
What Is Cash Flow?
Cash flow is simply the amount of cash that comes into your possession during a month. If you get more cash into your account than you have expenses taking it out, you have a positive cash flow. On the other hand, when expenses are higher than the amount of cash coming in, you’d have a negative cash flow.
Most people will see the majority of their cash flow come from a job. Their employer will pay them a wage or salary, and the employees will then use the income to pay off bills. Having only one source of income is problematic, as the loss of employment in this instance will severely hurt cash flow. There is the possibility of unemployment insurance taking away some of the sting temporarily, but it’s unlikely to replace all of the lost cash flow.
Why Is Cash Flow Better Than Cash?
If you can build up a positive cash flow over time, you can avoid much of the worry that comes from having your job as your only source of income. Every time there’s a recession, millions of people lose their jobs. A sizable percentage of them will have serious problems meeting their financial obligations. How is it possible to build up multiple streams of cash flow to avoid this problem, you might ask.
There are a couple of opportunities that most people will have to build up solid streams of cash flow that can build up into a nice river of money coming at them every single month (or quarter).
- Get a side hustle
Side hustles can come in many forms. There are many options for freelance work available both online and offline. There are also second jobs that you can work outside of normal business hours if you have the traditional 9-5. Any money that you earn in excess of your expenses should then go toward the second method of improving your cash flow.
- Invest any additional money
It doesn’t take much money to get started toward bringing passive income your way. In fact, investing even a dollar a day can really add up over a period of years or decades. Starting early is the key so that compounding can really get to work. Bond interest and dividends or distributions from stocks can provide some of the cash flow that you need to pay for life.
How Dividends Help Cash Flow
If you can invest any excess money that you earn in a stock like AT & T (T) that pays a dividend yield of approximately 5 percent, you’d earn about $50 for every $1,000 you have invested. That would increase to $5,000 for every $100,000 invested. It’s not a good idea to invest all of your money in one company, but a reasonably diversified portfolio could also pay a similar yield over time.
How would $5,000 of additional cash flow each year help your financial standing? That $400+ each month could pay your car payment or for most of your grocery bill. If you could get to a portfolio of $500,000 that paid off $20,000 or $25,000 each year whether you went to work or not, would it help you sleep better at night? I’m not there, but I’m working toward it. A nice flow of cash from multiple sources brings freedom, and if you can compound these multiple sources of income into even more cash flow, the freedom will only grow exponentially. While cash is king, cash flow is definitely better.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publishing this post.