River Rider Going with the Flow

Build Your Cash Flow, Ignore Net Worth

One of the fairly ironic aspects of “early retirement” (read, “aspires to lazy?”) is the hard work, dedication, and sacrifice required to reach the goal. Of all the workers your company would rather NOT lose, you, the guy who’s peaking at his personal financial spreadsheet between conference calls, is the one planning to jump ship well before his 60th (or 50th, or maybe even 40th) birthday.

Generating sufficient cash flow before and after you retire early is extremely important.

Following the early retirement community, you might get the sense that Net Worth is the only key indicator. Some even publicize their net worth as a means to keep feeding their audiences some sort of magic marker for success. Don’t get me wrong, Net Worth is a helpful indicator of how well positioned you are from an asset vs. liability perspective. However, you’d find it difficult to live off of assets that don’t produce income streams (automobiles, homesteads, jewelry, 401Ks, 529s, etc.) in retirement.

Cash Flow, on the other hand, is what pays the bills.

If you wanted to share something interesting with your early retirement community friends and audience, share this. Personally, I’m holding back on sharing all the details of our balance sheet. My view is that it’s less relevant than the tools and themes essential for jumping ship. Let’s just say that if you are able to retire early, you’ve probably had success at saving a large chunk of your income since your 20s. You’ve avoided unnecessary luxuries (giant homes, boats, two golden retrievers in the yard, private schooling, and annual trips to Paris.)

My main effort to build cash flow has centered on real estate rental properties. We have four single family homes in operation that each yield about $500 per month in operating income. At tax time, the depreciation on each rental is treated as a deduction, along with upkeep costs.

The rentals we own are fairly close to us. We’re willing to learn and apply our own elbow grease, so we’ve been able to avoid property management costs. In a future post I’ll share how we manage our rentals in highly passive manner.

Cubert dreams of cash flow at Zion
Cubert dreams of cash flow at Zion

Cash flow can also be extracted from investments.

Part of our plan is to sock away about a 18 months of income into taxable index funds towards the end of my corporate career. We would then withdraw those dollars slowly over the next 13 years until age 60, when the 401K can be tapped. This cash flow is our “bridge funding” that allows some amount of flex in our budget. Unlike Mr. Money Mustache and other extremely frugal early retirees, we expect to need close to $40K annually to cover our expenses and allow for certain luxuries along the way.

There’s also side gigs. Yes, this is technically considered “work”, but even retirees are known to hold down part time jobs to supplement their retirement income. Mrs. Cubert will likely continue to teach a few classes each week at the gym. She’ll also work part time as a sole-proprietor health care professional. I intend to find a part time job that fits my interests: real estate, property management, and “building.”

On the other side of the cash flow equation is cost reduction.

Examine your personal budget and what do you see? Most of the line items fall on the “expense” side. You’ll be hard pressed to whittle that list down too far. There are discretionary categories that can be eliminated or reduced.

Even the basic needs deserve a healthy amount of scrutiny. It can be easy to fall into a lull when it comes to monthly recurring expenses. After many months of simply paying the internet and cell phone bills without a second thought, I finally took the time to call CenturyLink to get a reduced rate. We switched our cell service to Ting. That $50 a month in savings comes in handy when your cash flow is dramatically reduced at retirement. Stay vigilant!

I plan to employ four cash-flow building tools: a business (rentals, blogs, etc.), part-time job, investment income, and cost avoidance. Some interesting decisions could come your way if you choose to focus on cash flow over net worth. For instance, is it more important to pay off the high interest loan first? Or, the one with the highest impact to your cash flow? Consider this when the competing rates are within a few percentage points, and you know you need the cash.

ignore Net Worth, and focus on Cash Flow

Comments 18

  1. That’s an interesting point. I’m slightly early retired with a sizable net worth but fortunate to be in a position to earn 100% of my family’s expenses through two days a week of side hacking at four side gigs I enjoy. For that reason I’ve not had to solve the riddle of turning the net worth assets into an income stream and may not have to for quite a few years. However like anyone else retired or close to retirement it is a topic I’m trying to learn more about. Thanks for contributing to this area of information!

  2. This is the best explanation for the benefits of rental properties – over stashing a ton of more liquid capital – that I’ve seen. Don’t get me wrong, I’m sticking with my liquid capital “net worth” focused plan for the foreseeable future. But, you’ve made a good argument that I’ll be thinking about for a while. (Glad to see your back at writing, btw)

    1. Thanks, Ryan! Glad I could offer up some food for thought. I didn’t mention it in the post, but it makes a huge difference *when* you purchase the property: mortgage rates, market pricing, rent v. Own trends etc etc etc

  3. I’ve always thought this was a better way to make sure you’re set, especially if you consider that most people’s net worth is likely largely composed of assets that won’t create cash flow such as your primary residence.

    To me, cash flow is the more important thing that I’d be focused on. And over time, it’ll help my net worth grow, too. Win-win.

    1. I caught onto this premise of cash flow is king a few years ago from a book called “Killing Sacred Cows”. Had the premise that 401Ks were to be avoided but I don’t advise that at all. Thanks for stopping by, Dave!

      1. Definitely don’t agree that they should be ignored, but I’m intrigued. And of course – can’t pass up reading what another MN blogger has to say! (and my brother’s a land-lord, so I was curious to read a bit more about how you built cash flow).

  4. Great article! I’m interested in getting started with RE investing, but I wonder if the market is too overvalued right now. I would want to use a PM company because my wife and I plan on moving out of state in a few years, so I’m especially sensitive to maximizing cash flow from the properties. Do you have any advice for getting into RE right now? Jump in or wait?

    1. Thanks, Dylan! I’ll have to check out trailtofi.com this weekend. I’d argue that the market is too overvalued today. My daily search from MLS often comes back empty – when in normal times these five or more active listings. I would wait until you do your homework- start with Craigslist postings to see what rents are and then check out open houses. I shoot for 15% cash on cash returns. And I’d highly recommend Investfourmore.com to learn what you need about single family home rental investment. Let me know if I can help with any questions!

  5. Completely agree, Cubert. I’m a firm believer that people can retire comfortably on much less than what’s normally recommended if they get a couple sources of alternative cash flow going. It doesn’t even need to be that much. $1,000/month in some kind of residual cash flow could take the place of having to pile up hundreds of thousands of extra retirement savings.

    And I love your plans for “bridge funding”. It pairs nicely with Keep Thrifty’s “retirement freedom” concept. Where your retirement savings can grow enough on its own without new contributions. Great plan! Great article!

      1. Yes. Definitely check him out. He’s a spreadsheet wizard over there. He’s doing some cool things. And he just started a “mini-retirement” that I think will be fun to follow.

        You seem to be making up for lost time. That extra hour has served you well. It’s great to see all the new content you’ve been pumping out!

  6. I will always back this strategy because being just as stated, “cash flow pays the bills” – your home
    Equity or vehicle will not. Of course there is always Airbnb and Turos of the world to rent out these illiquid assets, but overall, zero cash flow for these line items in your NW.

    Great post that brings home the point.

  7. Great post, really enjoyed that! As you know I recently wrote about all the benefits simple living has brought me – which include greater financial stability. I’m pushing to get a second rental property later this year and fully agree about the cash flow point. My net worth isn’t very high but ill have some nice additional income quite soon hopefully! Then, ill pile into the retirement pot 😉

    1. Thanks, James! Best of luck in finding your second rental. Sometimes that search can be a long and frustrating process. Keep focusing on income and cash flow and you can leave the net worth nonsense behind.

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