Jaspreet Singh is a well-known financial personality responsible for the “Minority Mindset” YouTube channel, which has over 1.7 million subscribers. Singh is a strong believer in investing for cash flow in order to achieve financial freedom. In a Q&A with GOBankingRates, Singh discussed his investment philosophy and specifically addressed Americans and how they should approach retirement savings. He also referenced how cash flow investing can be used to fight off inflation.
Here’s an explanation of how cash flow investing works, how it can be used to combat inflation, and how Singh’s investment philosophy works.
How Does Cash Flow Investing Work?
In the investment world, you can try to generate capital gains, income or a combination of both. When you invest for capital gains, the idea is to build up your asset value until you have enough to live off when you retire. With cash flow investing, on the other hand, you’re not necessarily as interested in the net assets you have. Rather, you’re trying to increase your cash flow to the point that it can cover all of your expenses.
According to Singh’s investment philosophy, cash flow investing is key, because it gives you consistent, controllable income that goes directly into your pocket. Rather than chasing financial assets that you can’t even touch and have no control over how they will perform, Singh says that physical assets like rental property have concrete value and put real cash directly into your pocket.
What Are Common Examples of Cash Flow Investing?
Singh primarily uses rental real estate to generate his cash flow. As opposed to house flippers, who are in for capital appreciation over a short time period, Singh believes that rental income is a more secure, controllable investment. While he has no control over prices in the housing market, he can control who he rents to and how much income he wants to generate from a property. Over time, that income will increase, often as quickly as every year.
Another way to invest for cash flow is to buy dividend-paying stocks. As with rental real estate, dividend income tends to increase over time, and if you buy high-quality companies, this income is quite reliable. With this type of investing, you might also benefit from capital appreciation.
How Can Cash Flow Investing Fight Off Inflation?
Inflation eats away at the value of investments, particularly fixed-income investments, because the rise in prices defined by inflation means that $1 in the future will be worth less than $1 today. That’s why it’s so important to invest in assets that increase in value.
In the case of cash flow, to be successful, you’ll want to invest in assets that increase the income they pay over time. Rental real estate is a good option, because rents generally increase over time. Quality dividend-paying stocks are another source of rising income.
Imagine, for example, that you’re living in an environment in which inflation is rising at 4% annually, and you’ve got a combined portfolio of rental real estate and dividend-paying stocks. If you raise your rents by 5% per year and your stock dividends increase by 6% per year, your income will be growing at a rate that outpaces inflation. This means that your purchasing power will not be diminished but will actually increase over time.
How Does Singh Explain Financial Freedom?
For Singh, financial freedom means having all of your expenses covered with money left over.
If you have an asset-heavy portfolio, you’ll have to sell off some of it if you want to live off that money, or at the very least convert it to an income-generating option. If you invest for cash flow, on the other hand, you don’t have to take any additional steps.
As Singh puts it, “I know that I can generate 3%-10% in cash flow for every dollar that I invest. That means, if I want $50,000 a year in income, I will need somewhere between $500,000 — $50,000/10% — and $1.67 million — $50,000/3% — to live financially free.”
So, rather than investing for a specified asset sum, Singh simply invests to reach an income goal. Once that goal is reached, so, too, is financial freedom. And this freedom should remain for the rest of your life, as your rising income stream should stave off the effects of inflation.
More From GOBankingRates