THIS IS PART 3 OF A 3-PART SERIES
In the last 2 posts we talked about:
- How to “Cashflow” Your Way out of Bad Debt in 5 Simple Steps…
- The Cash Flow Index is the Fastest Way to Wipe out Your Debt… PERIOD.
By checking out the strategies we talked about in the last posts you will have liquid cash reserves, extra cash flow, and a compass as to which debts to pay off first.
Now it’s time to see if we speed up our investment returns.
To do this, we turn to another simple formula called the Investment Cash Flow Index.
Today we’ll see how it can potentially turn lazy, unproductive investments into new cash flow to amp up your business or your life.
There are so many accumulation-based financial planners that have driven this idea of never touching our money into our minds that we just accept it to be the truth.
“You’re in it for the long haul” they preach.
As a result, many people have tens of thousands, even hundreds of thousands of dollars locked up in “lazy assets” that could actually be helping them create real, sustainable, and predictable cash flow indefinitely.
And as I’m sure you’ve realized by now cashflow is king when it comes to economic freedom.
Why is this relevant to me?
As we’ve discussed in previous posts, a cash flow focus always wins over an accumulation-based financial strategy.
What accumulation-based financial planners often don’t tell you is that as long as your money is invested in their company’s funds, they continue to get paid on Assets Under Management (AUM). This is why I’m not into Mutual Funds. But that is another topic for another day.
But when we rise above the smog of “accumulation” bias, we see a much clearer method to the madness.
And the fact is, sometimes it is financially smart to cash out an inefficient investment and use it to pay off an inefficient loan. The net gain to you is more cash flow. I’ve had a hard time doing this in my journey but it has proved true.
Is it something you should always do? No, not necessarily. Always weigh all the options and opportunity costs associated with doing so.
However, the first step in gaining clarity is to see which investments are efficient and which ones are duds. That at least gives you a great head start to making prudent financial decisions.
In this post, we’ll take a look at a simple indexing system called the Investment Cash Flow Index. It easily shows you which investments are cash-flow inefficient.
Let’s look at the formula itself, and then walk through a few examples to see exactly how this can help you increase your wealth much more quickly.
How Does It Work?
To determine the Investment Cash Flow Index of your individual investments, run your entire portfolio through this simple formula:
Unlike in the Cash Flow Index we looked into in the previous post, the closer to zero your Investment Cash Flow Index is, the more efficient things are.
So in this case, a low number is good.
A high number means the investment is highly inefficient as far as cash flow is concerned. Remember, we focus on cash flow because it’s predictable and measurable.
If an investment doesn’t create cash flow, it is speculation. That doesn’t mean it’s bad, necessarily. I love to speculate with a percentage of my net worth. But for some this is their ONLY strategy which is not healthy.
It’s what the ultra-wealthy use to win the money game, so it’s what we like to use too. Plus it adds safety and reduces risk.
give me some examples!
Asset Value: $52,500
Monthly Cash Flow: $0
Investment Cash Flow Index: ∞ INFINITY ($50,000 ÷ $0)
Invested: $35,000 (1000 shares paying $0.24 per share quarterly)
Asset Value: $34,000
Monthly Cash Flow: $80
Investment Cash Flow Index: 437.5 ($35,000 ÷ $80)
Single Family Rental Property:
Invested: $50,000 (down payment, financed the remainder)
Asset Value: $200,000
Monthly Cash Flow: $1000
Investment Cash Flow Index: 50 ($50,000 ÷ $1000)
Asset Value: $1,250,000
Monthly Cash Flow: $50,000
Investment Cash Flow Index: 20 ($1,000,000 ÷ $50,000)
And as usual the business has the lowest number. This isn’t always the case, but in most cases it is. Which is why I would always suggest that investing in your own business is your best investment.
The rental property is also fairly efficient at 50 — so even if you are not a business owner, you can still find efficient, cash flow investments outside the stock market.
The dividend stock is not very efficient, but at least it cash flows (and to be fair, it can become much more efficient over time, especially if you reinvest dividends at first).
But the mutual fund with no cash flow is ultimately a dead asset. You are speculating that it will make some capital gains. Maybe it will. Maybe it won’t. The problem is you have no certainty and no way to plan ahead.
So what can you do?
Creating Cash Flow Out of a Dead Asset
In most cases, it may make sense to cash out highly inefficient investments (with a high index) and use the funds to pay off or pay down inefficient loans (those with a low index).
Most people cringe at this idea. They like the “security” of seeing a big positive number in that investment account. I have this issue lol.
But a cash flow focus tells us that overall, it’s an inefficient use of our money.
Let’s go back to the example above.
Let’s say you cash out the $50K in a mutual fund that hasn’t been earning any cash flow.
Instead, you could then use it to immediately pay off inefficient loans.
Imagine you had an inefficient credit card debt that is costing you a perpetual $500 a month just to keep treading water.
By paying that off immediately with a dead asset, the $500 monthly amount you had been paying is now freed up as new cash flow.
You can use that extra cash flow to pay down the other loans more quickly. Or, if your remaining loans are already efficient, you could instead use that $500 per month to buy new cash flow investments. Or reinvest it in your business (or whatever current investment has your lowest Investment Cash Flow Index).
This is just a small example, but these kinds of efficiencies have a multiplying effect on your wealth over time.
Fortunately, the math is so simple that you can run these numbers yourself just to get an idea of how efficient your existing loans and investments are beforehand and then make an informed decision with someone who has their act together.
What To Do Next
Determining which investments are efficient and inefficient is the first step in building a rock-solid investment portfolio that automatically propels you forward to reach economic independence as fast as possible.
With that in mind, here are your action steps to consider today:
- Run the Investment Cash Flow Index formula on all of your investments.
- Rank each investment in order, from most efficient (lowest number) to least efficient (highest number).
- Consider cashing in any dead assets (ICFI of infinity) or investments with a high index.
- Use the proceeds to pay down inefficient loans or make new cash flow investments.
Until Next Time…