Most of us are familiar with investing in the stock market. The goal here is to buy a stock or mutual fund at a lower price and sell it at a profit. This is called capital gains, which is defined as “a profit from the sale of property or an investment.” Cryptocurrencies are becoming quite popular as well, with many looking to find the next big thing. Will it be Dogecoin, Ethereum or something else?
Examples of Capital Gains
The average investor focuses on capital gains. Social media is full of capital gains investors who made tremendous profits from their investments. Examples of capital gains can include the following:
- Fine art
House flippers are popular examples of investors who seek capital gains. The goal is to buy a house, give it extensive renovations, and sell for a great profit. Another example is stocks and investing. There are countless stories of individuals buying stock for a few dollars and selling at a tremendous profit.
An example of capital gains for the stocks is Amazon (AMZN):
On Aug 29, 1997, Amazon traded at $2.34 per share. On December 29, 2020, the stock closed at $3,322.00. This is the type of capital gain that people dream of.
Capital gains is also the primary goal for retirement savings: invest in the stock market to build your nest egg, and live off those savings when you retire.
What is Cash Flow?
Another type of investment that we all should be aware of is cash flow. Cash flow is defined as “The amount of net cash generated by an investment or a business during a specific period.”
Examples of cash flow include the following:
- Stock dividends
- Rental property
An excellent example of cash flow is rental property. Every month, a person can have money deposited into their account from rents collected. Another example of cash flow is a monetized website. Each time someone visits the website, money is earned from advertising revenue.
Royalties from book sales, money from vending machines and franchises are also examples of cash flow.
In many instances, cash flow can be passive income, meaning a person receives that money even if they aren’t actually involved in the day-to-day business operations. The more assets a person has, the more cash flow they can generate. Accumulating assets is the key.
Which is Better?
Both forms of investing have their benefits, but which is better?
When it comes to capital gains, there are three things to keep in mind:
- There’s no guarantee the capital gains will be as high as anticipated or desired;
- There’s no guarantee a person will have enough money for retirement;
- Capital gains may be taxed higher than cash flow (contact a tax adviser for more information).
Cash flow is ideal for retirees because you decrease the risk of running out of money. Another benefit is you could have the option of retiring early, or not needing to use your retirement money at all.
With cash flow, important points to remember include the following:
- It can take time to accumulate the assets needed generate a respectable amount of cash flow;
- Cash flow isn’t as exciting as or get the same media attention as capital gains
Using Both In Your Portfolio
A great option is to utilize both investment strategies. For example, the capital gains from investments can be used to purchase assets that produce cash flow. The money received from stocks could be used to purchase rental property or a business, such as a laundromat or popular fast food franchise.
Monies received from book sales could be used to purchase gold or silver. Even though these are not revenue generating assets, they can retain their value and are often used as a hedge against inflation. Many savvy investors will accumulate gold and silver, then sell a portion during times of inflation to purchase other revenue-generating assets.
Another option is to take some of the monies received from cash flow and invest in stocks or cryptocurrencies. In each instance, you could be getting the best of both worlds.
Bonus Tip: How Rich People Buy Their “Toys”
Social media is a great place for people to show off their expensive “toys:” fancy cars, expensive watches, fabulous trips, etc. The average person will see this and assume rich people buy items the same way they do. That may not be the case. Many investment strategies aren’t readily discussed, and this is one of them:
- Wealthy person sees nice car they want
- Instead of buying car outright, they use that $$$ to create a new business
- Business starts to generate revenue ( 3 months, 6 months, year later?)
- Money from new business is used to buy car
- Person now owns car AND a business
The average person only sees the car purchase. They don’t realize the car was purchased with money from a passive income stream. In this scenario, instead of buying the car, they used those monies to create a new revenue stream FIRST.
The average person simply buys a car, which is a depreciating asset, and that’s all they have. The wealthy person not only has a car, but they now own an asset that will allow them to buy more cars or other items in the future.
Or, they can simply create another business if they want to buy more “toys.”
Ask yourself: if you make millions with cryptocurrency, what will you do with the money? An option is to take some of those proceeds and buy/create a new revenue generating asset, such as rental property. Then simply buy your expensive new car, watch, or dream home with the proceeds from the rental property.
This type of strategy requires patience and turning off feelings of instant gratification. Over the long term, this could be a great way to not only preserve wealth, but gain more as well.
The key to financial success is to make your money work for you in a variety of ways. In other words, instead of spending your money on items that lose value immediately when purchased, invest in items that produce cash flow, and use those proceeds to buy the material item you desire.
Putting It All Together
Capital gains investing gets most of the attention, but cash flow is another great strategy to be aware of. By using more than one way to increase your wealth, you could increase your chance of reaching your financial goals. Unfortunately, this type of information is not taught in school, so it’s important that you stay open minded and continue to seek knowledge.
Get more investment strategies in my book Invest For Success: Millionaire Wealth Strategies Not Taught in School, available on Amazon. Also, register for my online course Tired of the 9-5? How To Retire Early With Passive Income. Available on Udemy.