When you rely on investments for income, cash flow is a crucial part of managing your portfolio. Let’s take a look at what you need to think about when structuring your investment cash flow.
What is cash flow?
When we say “cash flow,” we simply mean looking at the payment frequency of income from an investment.
Investment income is usually paid monthly, biannually, or annually, but it can sometimes be erratic. Longer-term investments such as private equity, are particularly guilty of this.
Cash flow is different from total income return because it examines how often and when income is paid. Whereas total income return is about the actual level of income received from the investment over a set period.
Why is cash flow important?
Understanding the cash flow components from your portfolio is important for two main reasons:
- It’s fundamental to an effective personal financial budget. If your investment income doesn’t arrive regularly enough to meet living expenses, you will be forced to get cash from other sources to cover the gap. You might get a cash advance from a credit card with high-interest rates (never a good option), or end up taking money from your monthly savings.
- Reducing your debt is difficult with irregular cash flow. Many of us take on debt when purchasing items with high upfront costs, such as vehicles. But there’s a price for this convenience. While you carry this debt, you can’t invest those funds elsewhere. It’s a better financial practice to reduce lifestyle debt quickly and invest the freed-up funds in financial assets that will appreciate in value, instead. This is how enduring wealth is created.
Cash flow diversification
When diversifying your portfolio, your choice of investment assets isn’t the only aspect that should be considered. Remember to consider the cash flow perspective as well. A good mix of underlying assets within your portfolio is imperative so that your income remains relatively even throughout the year.
Some investments may look similar at first. The frequency of dividend, distribution, or yield payments and the terms on which they are paid may help you to differentiate them.
As we all know, maintaining a realistic budget is key to achieving your financial goals. A good understanding of investment cash flow will help you maintain your budget and manage your wealth successfully.
Are you clear on your investment cash flow?
Book in for a Cash Flow Audit now and learn how to harness the true potential of the money you’re making.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.