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I have previously touched upon the importance of cash flow in my post, “Become A Capitalist, Not A Laborer (Building Your Financial Dam).”
Cash flow is the lifeblood of a household’s finances.
Having negative cash flow, where money going out exceeds that which is coming in, will cause your household finances to wither and die, similar to an animal exsanguinating out.
Having a positive cash flow will allow your household to flourish and thrive (unfortunately the analogy to a living, breathing entity breaks down in this scenario as I am sure there would be some volume overload situation play out that would end up killing the animal).
I therefore pay very close attention to my household cash flow on a monthly basis to see if there are any positive trends that I can continue to promote or negative trends that I can nip in the bud before they get out of hand.
Where is the money coming from?
On top of just dealing with the absolute number of dollars that are coming in versus going out, I find it very beneficial to categorize where the incoming dollars are coming from.
The biggest, and most important, division I make is if the money is coming in from a retirement account or not.
Using this information can then shed some light on how I would fare in early retirement.
If I want to retire early, I need to be able to meet my living expenses from the non-retirement cash flow side only.
I know that there are ways the IRS allows you to tap into retirement accounts without paying a penalty but I plan to only tap into that retirement cash flow when I hit the standard qualifying age.
I also do not include my current W2 income in this calculation because I am mainly doing this as a “retirement readiness” exercise and in retirement I would no longer be receiving it.
If my non-retirement cash flow does not meet the annual draw I need for a specific retirement lifestyle I want, then I know I am not ready to retire just yet.
Divide and conquer.
The next step I do is divide my non-retirement cash flow producing assets into the following categories:
- Real estate syndication distributions/rent collected
For my retirement accounts I just add the value of all the dividends received for that particular month.
The following is an excel spreadsheet I created where I track my monthly cash flow.
Note: The numbers used are not my actual returns (however the actual return ratio between each asset class is correct as I simply took my true returns and then divided each by the same amount).
This excel spreadsheet is interactive so you can change any number and it will update the totals, etc.
You can also download this spreadsheet for your own personal use by clicking the download button (located in the bottom row of the table).
From this information I have a running year to date (YTD) total of money from non-retirement assets alone and also retirement and non-retirement assets combined.
Another useful tidbit of information is the pattern of monthly cashflow that occurs.
The vast majority of my real estate syndications pay distributions on a quarterly basis.
There is variance even within these quarterly distributions.
While the majority of syndications distribute at the end of March, June, September, and December, one syndicator typically has a 1 month delayed offset from the more standard time frame.
The bulk of dividends paid also follows the standard end of each quarter timing.
Thus March, June, September, and December tend to be incredibly high positive cash flow banner months.
All is not lost on the other months as one real estate syndicator happens to pay distributions on a monthly basis in addition to the monthly check I receive from my guest house rental.
Why Cash(flow) is king.
You may have noticed that all my calculations revolve only around what I receive in distributions from my investments regardless of type.
I wanted to be able to meet my anticipated retirement draw purely from cash flow without having to liquidate capital.
This is a very different ideology from the typical Trinity 4% SWR which anticipates you selling your stocks/bonds along the way during a retirement drawdown.
The Trinity method requires an individual to make up the difference between the 4% withdrawal rate and the dividend yield (for a 60/40 portfolio it is currently around 1.7%) by selling capital.
If I could meet my retirement needs purely from cash flow from dividends, interest, and real estate distributions then I can leave the capital untouched and let the system run on as a continual perpetual money making machine.
With this line of thinking I have created a massive safety net in retirement in case all hell breaks loose.
If an unforeseen black swan event comes into play and exceeds my retirement cash flow I still have the ability to switch to the Trinity method and slowly consume capital to make up the balance.
I would love to hold off on selling capital as long as possible because once it is initiated it is hard to break the negative feedback loop:
When cash flow is not enough that you have to sell capital, there will be less future capital in play which then results in less future cash flow. Rinse and repeat.
The downside of my cash flow retirement ideology.
I believe the positives outweigh the negatives in my system (hence the reason I went with it) but I cannot simply dismiss the negatives that are present with my line thinking.
The first major negative is that my system is VERY capital intensive.
Removing capital consumption from the Trinity system forces me to have a much larger initial outlay for capital in order to generate the passive income needed to live off of solely.
It does takes awhile for your Capital Snowball to gain steam and traction.
Even with a high income as a specialist, I doubt I would have gotten to this point so quickly if not for my quite fortuitous investment (which I almost lost).
The proceeds from that investment seeded a lot of subsequent investments which now create money of their own.
The second negative is that I have definitely worked longer than I needed to if I had just gone with the “accumulate 25x your living expenses” guideline.
Would it be nice to be already retired now, having just turned 50?
Of course it would.
But I am very conservative by nature and did not want to risk running out of money later on in life when there is no possibility for me to go out and earn more.
I already had a taste of what abundance and scarcity in retirement can look like and believe me when I say I prefer abundance any time of the day.
I choose to continue to work since my daughter still is in high school and I would be tied down to her school schedule until at least 2023.
Another potential downfall occurs by assuming distributions/dividends will always continue on the same trajectory.
Companies can and have cut dividends.
Real estate distributions are not 100% reliable.
The 2020 COVID black swan event I experienced gave a small glimpse of what happens when this assumption is wrong when it looked like all of my carefully constructed asset baskets were breaking at the same time.
Surprisingly, when 2020 was all said and done, I had generated the largest amount of annual cash flow ever across all assets (and 2021 looks to be outpacing 2020 so far).
Again the additional safety mechanism built in my system (the ability to switch to the Trinity system) gives me a bit of comfort that I can weather potential upcoming storms.
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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