Monday, July 23, 2012

Cash Flow Importance

I seem to read a lot lately about how people should be debt free going into retirement. Also, people think that you should not take on debts when retired. I do not agree. I do not think that you need to be debt free at any time. I think what you need is to manage your money so that you have enough cash flow to pay for your lifestyle.

I also read that you should have x amount of money to retire. I disagree on this also. What you need to know is what income you are or will generate from your money.

Why do I think this way? It is because I work with is cash flow. I need enough cash flow to pay for my basic needs and other things, or in other words my lifestyle. Because I work on cash flow, I would have no trouble considering buying a condo and getting a mortgage now, when I have basically retired. I would, of course, only go for a mortgage I can pay for with my current cash flow.

It does not matter how you get your cash flow. I get the majority of mine cash flow from dividends. I also get some small pension amounts. About 5% of my portfolio is in cash or MMFs.

What I have found in investing that for dividends and stocks, my dividend income has steadily increased but my capital (value of my shares) has wandered all over the place. Over the long term, my capital has increased.

What I have found in investing for interest with bonds, GICs, MMFs that my interest income has wandered all over the place, but my capital has stayed the same. Bond prices can wander all over the place too, but if you hold them until maturity, you get your money back.

Problem with interest income is that at the moment you are not earnings much. For my MMFs I am projecting earnings of 0.30% per year over the next 5 years. I do not expect that the 1.5% interest I am earning on my ING Account will change much either. This is probably conservative, but if you are planning on living off interest you are not going to be getting much in cash flow unless you are willing to take a lot of risk.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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