Founder of the “Rich Dad” series of financial publications, Robert Kiyosaki believes in the power of cash flow investing to generate long-term wealth. What exactly is cash flow investing, though? What advantages does it offer, and is it appropriate for all types of investors?
What Is Cash Flow Investing?
There are two primary ways you can make money from investing: capital gains and income. A capital gain occurs when you sell something for more than you bought it. For example, if you buy a stock for $100 and sell it for $150, you’ve earned a $50 capital gain.
When you invest for income, while your investment may or may not appreciate in value, the point of the investment is to generate immediate cash flow. For example, if you buy a bond for $1,000 that pays a 6% interest rate, you’ll earn $60 per year in cash flow.
Another common example of investing for cash flow is buying rental properties. Regardless of whether housing prices are rising or falling, every month you’ll receive a check from your tenants. That income is also likely to increase over time, perhaps as often as every year.
Three Advantages of Cash Flow Investing
Some investors, such as Kiyosaki, much prefer receiving actual cash in their pockets from their investments rather than hoping, waiting and wishing for capital appreciation. Here are what Kiyosaki sees as the three primary advantages of cash flow investing.
Kiyosaki believes that cash flow investing is a better and faster way to achieve financial freedom. Rather than having to build up hundreds of thousands or even millions of dollars in assets, the objective of cash flow investing is to continue increasing the money coming into your pocket until it exceeds the amount of all your expenses. At that point, Kiyosaki says, you’ll have finally achieved true financial freedom, not having to work any more and having enough money to pay for everything you do in life.
One of the greatest fears of retirees is running out of money. Even if you have $1 million in the bank, there’s no guarantee that you won’t blow through that money, or that it won’t go down in value if it’s invested in capital assets like stocks. But if you invest for cash flow, you have a predictable amount of money coming in every month, quarter or year. In most cases, that cash flow will actually increase over time. Either way, the fact that you have enough income to satisfy all of your obligations means that you will never run out of money. That removes one of the primary worries in retirement.
As Kiyosaki explains it, cash flow investing offers you a level of control that you don’t often have with other types of investments. When you trade stocks, for example, you have no control over what the price will do. When you flip houses, any number of variables could sink your investment, from spending too much on renovations to paying too much in interest while you’re waiting to sell to not even finding a buyer at the price you need. When you invest for cash flow, on the other hand, you have a consistent string of revenue. If you buy rental properties, for example, you can set how much you’ll charge for rent and increase it in accordance with local laws. As long as you manage and maintain the property well, it will always remain a predictable source of income.
Is Cash Flow Investing for You?
Kiyosaki’s “Rich Dad” YouTube channel has 3.25 million subscribers, and he has written a number of bestselling books. Clearly, many investors believe in his strategy and seek financial freedom through cash flow investing.
However, this doesn’t mean that you should necessarily devote your entire portfolio to it. Just because Kiyosaki doesn’t believe in financial assets like stocks doesn’t mean you should avoid them. Many investors who choose capital appreciation over cash-flow generation still end up with seven-figure retirement accounts, at which point they have enough capital assets to convert to an income-based strategy.
Whether investing for capital appreciation, income, or a combination of the two is best for you will depend on your investment objectives and risk tolerance. If you feel like you need to continue the conversation further, enlist the aid of a financial advisor.
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