Cash flow observation

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TMCD75
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Cash flow observation

Post by TMCD75 »

An observation I've made from reading this board for the last few years is that net worth is valued more than cash flow. I think cash flow, particularly in retirement, is considerably more important than net worth.

My dad is a fine example of lower net worth but nice cash flow. Dad retired from the automotive industry after 37 years. He was pretty opposite the BH approach. He made good money but lived a free wheeling lifestyle. He went on 3k dollar hunting trips, liked to drink, and liked to gamble a bit. He also bought a new car every 5 years.

Dad's cash flow was 6k a month to the positive, his net worth was around 350k. Dad's brother has a net worth between 3-5 million, yet my dad did everything his brother did. When you get down to it, cash flow is probably several times more important than net worth.

Being worth a million dollars has always been very pleasing psychologically in our society.
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whodidntante
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Re: Cash flow observation

Post by whodidntante »

A pension has a NPV that can be added to net worth for comparison purposes.
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SmileyFace
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Re: Cash flow observation

Post by SmileyFace »

I disagree with your first statement - it seems there are far more discussions about cash flow and topics related to it than net worth here.
aristotelian
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Re: Cash flow observation

Post by aristotelian »

whodidntante wrote:A pension has a NPV that can be added to net worth for comparison purposes.
Not sure what NPV means but many people consider pension and Social Security as well as a form of bond or annuity. If those constitute the bulk of your income and take care of your needs, then you do not need investment wealth.
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22twain
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Re: Cash flow observation

Post by 22twain »

Let me guess: TMCD75's dad had a pension, and his brother didn't. Most people nowadays don't get pensions except for Social Security, and have to make their own instead, which requires a largish lump sum to start with.
Last edited by 22twain on Wed May 24, 2017 9:00 pm, edited 1 time in total.
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delamer
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Re: Cash flow observation

Post by delamer »

Your dad undoubtedly had a significant pension. Those are much less common than they used to be. So most people now need net worth to generate cash flow -- either by purchasing an annuity or spending down their assets -- in retirement.
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Nate79
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Re: Cash flow observation

Post by Nate79 »

Recent locked thread on net worth. Do we need another?

viewtopic.php?f=2&t=219448
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TMCD75
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Re: Cash flow observation

Post by TMCD75 »

It's an important discussion because the paths to a high networth aren't necessarily the exact same paths to a nice cash flow. As my dad's example clearly points out, his path was never the BH path, yet he ended up in a very strong financial position.

Now days, someone who wants a nice cash flow without living an extremely frugal existence, probably needs to think about buying a few rental props.
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whodidntante
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Re: Cash flow observation

Post by whodidntante »

aristotelian wrote:
whodidntante wrote:A pension has a NPV that can be added to net worth for comparison purposes.
Not sure what NPV means but many people consider pension and Social Security as well as a form of bond or annuity. If those constitute the bulk of your income and take care of your needs, then you do not need investment wealth.
Net present value.
avalpert
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Re: Cash flow observation

Post by avalpert »

TMCD75 wrote:It's an important discussion because the paths to a high networth aren't necessarily the exact same paths to a nice cash flow. As my dad's example clearly points out, his path was never the BH path, yet he ended up in a very strong financial position.

Now days, someone who wants a nice cash flow without living an extremely frugal existence, probably needs to think about buying a few rental props.
You do realize that the value of rental properties are part of your net worth, right?

Personally, while some people will do great with rentals, for most people I doubt it is the best way to generating enough income for retirement spending - for most the best bet will be maximizing human capital income and investing as much of it as they can in a diversified set of productive business, then when the time comes they can use both the cash flow and the capital to support their spending needs...
bigred77
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Re: Cash flow observation

Post by bigred77 »

TMCD75 wrote:It's an important discussion because the paths to a high networth aren't necessarily the exact same paths to a nice cash flow. As my dad's example clearly points out, his path was never the BH path, yet he ended up in a very strong financial position.

Now days, someone who wants a nice cash flow without living an extremely frugal existence, probably needs to think about buying a few rental props.
If someone works for 37 years and retires around age 60 with a pension that's pays 6k a month that's great.

But if I work 37 years and retire with a 3M - 5M portfolio and no pension I can annuitize less than $1.5M of my assets and buy myself a pension that pays me 6k a month until I die. Plus I still have an extra 1.5M - 3.5M to do with as I please. I can afford to buy myself a 12k a month pension if I'm so inclined.
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TheTimeLord
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Re: Cash flow observation

Post by TheTimeLord »

Just curious but wouldn't true cash flow be net of bills and obligations?
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NiceUnparticularMan
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Re: Cash flow observation

Post by NiceUnparticularMan »

DaftInvestor wrote:I disagree with your first statement - it seems there are far more discussions about cash flow and topics related to it than net worth here.
Yep. And even to the extent people talk about investment portfolio value (which is not the same thing as net worth, of course), it is largely because we are all immediately applying some percentage to that to guesstimate income in retirement.
NiceUnparticularMan
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Re: Cash flow observation

Post by NiceUnparticularMan »

TMCD75 wrote:Now days, someone who wants a nice cash flow without living an extremely frugal existence, probably needs to think about buying a few rental props.
Interestingly, I'd say this is actually just a variation on a broader theme, which is you can increase your lifetime consumption if you get more return out of your own labor. Rental properties are work, and if you properly account for them and compare them to notable alternatives like REITs, to the extent there is any extra expected return at all, it is largely from saving on management costs and doing that work for yourself.

Similarly, assuming your pre-65 income is fixed, you could live it up more before retirement and make up for the resulting reduction in savings just by planning to keep working after 65 too. That will also improve your cash flow after 65, for similar reasons.
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simplesimon
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Re: Cash flow observation

Post by simplesimon »

TMCD75 wrote:Dad's cash flow was 6k a month to the positive, his net worth was around 350k. Dad's brother has a net worth between 3-5 million, yet my dad did everything his brother did. When you get down to it, cash flow is probably several times more important than net worth.
Let's look at your dad's brother's cash flow...assuming the net worth is in a BH portfolio, he could take about $10-16k/month. If we're making this a contest, I think the brother (and his heirs) win.
dbr
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Re: Cash flow observation

Post by dbr »

simplesimon wrote:
TMCD75 wrote:Dad's cash flow was 6k a month to the positive, his net worth was around 350k. Dad's brother has a net worth between 3-5 million, yet my dad did everything his brother did. When you get down to it, cash flow is probably several times more important than net worth.
Let's look at your dad's brother's cash flow...assuming the net worth is in a BH portfolio, he could take about $10-16k/month. If we're making this a contest, I think the brother (and his heirs) win.
Exactly, choosing not to spend one's wealth is not a financial discussion.

Also, I agree questions and discussions about cash flow probably exceed discussions about wealth by about ten to one. Far and away the largest volume is probably about asset allocation, but that in itself is not a tell to wealth rather than cash flow in the end.
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Re: Cash flow observation

Post by CppCoder »

TMCD75 wrote: Now days, someone who wants a nice cash flow without living an extremely frugal existence, probably needs to think about buying a few rental props.
Aside from rental properties working because you are investing your labor (vs. passive investing), a lot of people think rentals work better than they do mathematically because of leverage. If you can buy a $200k rental property for 20% down and then start generating monthly cash flows from rent, the return looks artificially high because it's easy to delude yourself into comparing the cash flow to the $40k invested (ignoring the amount that will be repaid to the bank over 15-30 years, with interest, and any risk holding a leveraged asset that could lose capital value and leave you upside down). How do rental incomes look if you think about buying all the properties in cash? If you had $2 million dollars, would you buy 10 rental properties to convert the capital to cash flow or would you invest in stocks and bonds and live off the liquid portfolio?
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simplesimon
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Re: Cash flow observation

Post by simplesimon »

CppCoder wrote:
TMCD75 wrote: Now days, someone who wants a nice cash flow without living an extremely frugal existence, probably needs to think about buying a few rental props.
Aside from rental properties working because you are investing your labor (vs. passive investing), a lot of people think rentals work better than they do mathematically because of leverage. If you can buy a $200k rental property for 20% down and then start generating monthly cash flows from rent, the return looks artificially high because it's easy to delude yourself into comparing the cash flow to the $40k invested (ignoring the amount that will be repaid to the bank over 15-30 years, with interest, and any risk holding a leveraged asset that could lose capital value and leave you upside down). How do rental incomes look if you think about buying all the properties in cash? If you had $2 million dollars, would you buy 10 rental properties to convert the capital to cash flow or would you invest in stocks and bonds and live off the liquid portfolio?
How do you define "artificially" high? If the $200k property generates $5k/yr after PITI and maintenance, then the $40k invested is providing a 12.5% dividend instead of a 2.5% dividend if it was purchased with cash.

I agree with your points about risk.
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Re: Cash flow observation

Post by CppCoder »

simplesimon wrote: How do you define "artificially" high? If the $200k property generates $5k/yr after PITI and maintenance, then the $40k invested is providing a 12.5% dividend instead of a 2.5% dividend if it was purchased with cash.

I agree with your points about risk.
I agree with you. If someone carefully accounts for all costs, the (leveraged) return is what it is. I've seen a lot of people, however, forget, or conveniently neglect, to amortize maintenance costs or the costs of unoccupied months. My property returns $X a month. Sure, I had to buy a new roof last year, but that's a one off cost.

Also, you comment about the risk, but it's not fair to compare your hypothetical 12.5% return above to a 2.5% dividend. Your $40k in real estate is leveraged. How much would your stock return be if you used the equivalent amount of leverage to buy stock on margin?
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simplesimon
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Re: Cash flow observation

Post by simplesimon »

CppCoder wrote:
simplesimon wrote: How do you define "artificially" high? If the $200k property generates $5k/yr after PITI and maintenance, then the $40k invested is providing a 12.5% dividend instead of a 2.5% dividend if it was purchased with cash.

I agree with your points about risk.
I agree with you. If someone carefully accounts for all costs, the (leveraged) return is what it is. I've seen a lot of people, however, forget, or conveniently neglect, to amortize maintenance costs or the costs of unoccupied months. My property returns $X a month. Sure, I had to buy a new roof last year, but that's a one off cost.

Also, you comment about the risk, but it's not fair to compare your hypothetical 12.5% return above to a 2.5% dividend. Your $40k in real estate is leveraged. How much would your stock return be if you used the equivalent amount of leverage to buy stock on margin?
Agreed. Having even one month of vacancy can wipe out most of the return. Housing just seems to be safer and easier to understand. Just ask anybody who's read Rich Dad Poor Dad!
NiceUnparticularMan
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Re: Cash flow observation

Post by NiceUnparticularMan »

This is one of my reasons for preferring equity REITs. In addition to diversification, they also have to comply with accepted accounting standards.
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Re: Cash flow observation

Post by Valuethinker »

TMCD75 wrote:An observation I've made from reading this board for the last few years is that net worth is valued more than cash flow. I think cash flow, particularly in retirement, is considerably more important than net worth.

My dad is a fine example of lower net worth but nice cash flow. Dad retired from the automotive industry after 37 years. He was pretty opposite the BH approach. He made good money but lived a free wheeling lifestyle. He went on 3k dollar hunting trips, liked to drink, and liked to gamble a bit. He also bought a new car every 5 years.

Dad's cash flow was 6k a month to the positive, his net worth was around 350k. Dad's brother has a net worth between 3-5 million, yet my dad did everything his brother did. When you get down to it, cash flow is probably several times more important than net worth.

Being worth a million dollars has always been very pleasing psychologically in our society.
If his employer had gone broke and the pension fund fell into the hands of the PBGC there would have been a significant reduction in benefits?

Ditto if he had been made redundant after say 25 years? I know lots of people in "stable" industries, equivalent of Fortune 500 companies, that that has happened to.

Friend of mine at IBM right now, in fact, after 27 years.

Your Dad would have had very few savings, a much reduced pension, and probably would have struggled to get another job (if he had been at the same employer for 25 years).

I had a friend who took redundancy from GM North America before the bankruptcy. He said that he saw it with colleagues. They had new cheap cars every 3 years, cellphones, DB pension scheme, healthcare, the works. They really had no idea how to live outside of the corporate mothership-- had in fact worked for GM straight from undergrad, so had never worked anywhere else. This was once the largest car company in the world by sales.

20 years in, you lose that job, it's going to be hard to make up the lost ground.

Those corporate jobs were often traps. They are now in banks. Banks are slashing middle managers over 50- huge waves of cuts. Goodbye the easy life.

If you worked for the civil service or State or Local government AND the pension is in good shape (most of them aren't, in the US) then great. I am all for DB pension schemes when they work.

But if not, well, you are going to be like a beached whale if you can't manage your 30-35 years at the company.
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