Investment Gains Shouldn’t Cancel Out Your Cash Flow Problems

I’m in a temporary cash crunch, and it doesn’t feel good. After buying my house in 2023 and living paycheck to paycheck for six months, I promised myself I would never return to this state. Yet here I am. Part of it is just bad luck, but part of it comes down to poor planning on my end. I never expected a $20,000 capital call to land right in the middle of the winter holidays. WTH.

During my latest bout of financial hopelessnes, that unwelcome feeling where no matter how hard you try, you just can’t seem to get ahead, I had a realization. Even though my investment portfolio is up with the S&P 500 this year, I still feel defeated by a string of surprise expenses, especially with my car repairs piling up and no clear end in sight.

Theoretically, I should feel fine. If the stock market hands you big wins, those gains should outweigh a few thousand dollars in unexpected bills. But that’s not how the psychology of money works. That's not how building extraordinary wealth works either.

Cash flow and investment gains are two completely different financial animals with different uses and different emotional effects.

Let me explain, especially if you want to FIRE.

Cash Flow Is For The Present, Investment Gains Are For The Future

Imagine you’ve got a $1 million portfolio that’s up 15%, or $150,000. Great year. Pay up for a slice of cheddar cheese with your next burger and celebrate. You barely lifted a finger and your net worth meaningfully increased.

Now let’s say your car coughs up a $2,000 repair, and your house throws in a $8,000 plumbing problem for good measure. In theory, you could sell $13,000 of stock to cover the $10,000 in after-tax expenses. Easy.

But emotionally? It feels terrible.

• You’re robbing your future self of compounding. And we all know stealing is bad.
• You’re triggering capital gains taxes you didn’t need to pay if you had enough cash flow.
• You’re violating the purpose of those investments – long-term financial security.

Cash flow is meant to handle the chaos of everyday life. Investment gains are meant to build freedom over decades, not put out today’s fires.

This is why you can be up six figures on paper and still feel financially stressed from a few thousand dollars of unexpected bills. This is one of the big negatives of early retirement nobody talks about.

Where We Get Into Financial Trouble: Co-Mingling Funds

Some people struggle to build more wealth because they use investment accounts as giant catch-all slush funds. There’s no separation of purpose.

If your retirement money becomes your emergency fund, college fund, car repair fund, and vacation fund, you guarantee long-term underperformance. Once you start “borrowing from your future,” it becomes a habit.

This is why a mortgage is so effective. It forces you to save even though you can't resist eating after 8 p.m. You pay it or you lose the house. No mental wiggle room.

The idea of “saving and investing the difference,” over decades as a renter is comically hard. There is always something to spend money on, other than your investments. As a result, housing insecurity sometimes follows.

To protect yourself, build virtual barriers between accounts.

Creating Barriers Between Present Money and Future Money

The more you can compartmentalize your money, the better.

1. Have a dedicated cash-flow bank. This is where your paycheck lands, rent comes in, and bills get paid. Its purpose is liquidity, not return. Sure, your banker would love you to open an investment account and multiple other financial products. But try to keep it simple with your cash-flow bank.

2. Keep investments at a different institution. The more steps it takes to transfer money, the less you’ll raid your future. Personally, I keep all but one of my investment portfolios with Fidelity, which is separate from my cash-flow bank, Citibank. I've got my rollover IRA with Citibank, but I can't withdraw the money without penalty, so it doesn't matter.

3. Use illiquid investments strategically. Private funds, venture capital, and private real estate deals lock your money up for 7-10 years. You can’t panic-sell or dip into them emotionally. The forced illiquidity is a feature, not a bug. The capital calls make you to dollar-cost average over a 3-5-year period, and invest for up to a decade. The longer you can stay invested, usually, the better.

Every dollar meant for the future should stay as far away from your cash-flow account as possible. This way, the money can compound without interruption for longer.

A Middle Ground: Earmarking a Slice of Gains

If you must link the two worlds due to cash flow problems, do it intentionally.

You could allocate 5–10% of annual investment gains for life’s inevitable surprises.

Example:

Portfolio: $1,000,000

Gain: $150,000 for the year

Allocation for surprise expenses: $7,500 – $15,000 (5% – 10% of gains)

You still retain $135,000 – $142,500 in long-term gains and you avoid beating yourself up over every broken appliance or medical bill.

If you don’t end up using the entire “surprise” fund? Reinvest it, of course.

Tough To Go From A Saver To A Spender

For over 25 years, I’ve kept cash flow and investments separate. It has worked wonders for building wealth. So having to even think about selling risk assets to pay for annoying repairs feels like breaking a sacred rule.

Selling Treasuries before maturity to pay bills and buy stocks was already difficult enough. Selling stocks that might 3-5x in five years to pay surprise expenses feels awful.

Imagine selling $25,000 of a future winner just to pay off a car loan that’s already annoying you. Then imagine realizing you missed out on another $100,000 in gains because of it. This is a real possibility when investing in private AI companies today.

Then again, these tech stocks could just as easily nosedive. And if they do, you might actually feel relieved that you took some profits off the table to cover life’s necessary expenses while you had the chance. But given stocks go up ~70% of the time in any given year, your opportunity cost of not staying invested will likely continue to grow.

FIRE Is Tough On Cash Flow

If you’re FIRE, you no longer have the comfort of a steady paycheck. Sure, you might have a couple of side hustles, but consistent active income is gone. If you've given the gift of FIRE to your spouse or partner, then you really don't have anybody to depend on.

After buying a new house a couple years ago, my cash flow took a big hit. This was a self-inflicted wound due to desire, which is the cause of all suffering. I’ve been grinding my way back with solid progress. However, I’m still about a year out, assuming the stock and real estate markets cooperate.

If you want to feel like a poor millionaire, try living with razor-thin or even negative monthly cash flow. It doesn’t matter what your net worth is. Tight cash flow makes everything feel stressful.

If you want to feel like a rich millionaire, you need two things:

1. After-tax cash flow that comfortably covers at least 120% of your monthly expenses, and
2. A minimum of 12 months of living expenses that you can tap without breaking a sweat.

That’s the difference between living wealthy and simply having a high net worth on paper.

Give Yourself Some Grace After 20 Years Of Discipline

If you’re still in the first 20 years of your financial independence journey, keep your cash flow and investment gains strictly separate. Let your winners compound untouched.

But if you’ve been disciplined for decades, it’s OK to occasionally tap a small, predefined slice of your investment gains to smooth out life’s bumps. After all, the whole point of saving and investing for so long is to not worry about money, rather than feel financially hopeless when something goes wrong.

For most people, the optimal wealth-building strategy is simple: Use cash flow for the present. Use investment gains for the future. And don’t let one ruin the vibe of the other.

Over the past year, I’ve had to accept that my cash flow simply isn’t what it used to be. As expenses rise with inflation and income tapers off, the only realistic way to handle surprise costs and still take care of my family is to tap more and more into investment gains. And frankly, that’s exactly how it’s supposed to work once you’ve retired from a day job.

It’s just tough to rewire the mindset after a lifetime of relentlessly saving and investing for the future. But I'm trying my best to change.

Readers, do you separate how you use cash flow versus investment gains? Do you worry that tapping investment gains for too many different expenses could weaken your financial discipline over time? If you're planning to FIRE, are you prepared for the uncomfortable reality of feeling cash-flow-crunched more often than you'd like? And when the time comes, do you think you'll actually be able to sell risk assets to fund your lifestyle in retirement?

Stay On Top Of Your Finances Like A Hawk

One tool I’ve leaned on since leaving my day job in 2012 is Empower’s free financial dashboard. It remains a core part of my routine for tracking net worth, investment performance, and cash flow.

My favorite feature is the portfolio fee analyzer. Years ago it exposed that I was paying about $1,200 a year in hidden investment fees – money that’s now compounding for my future instead of someone else’s.

If you haven’t reviewed your investments in the last 6–12 months, now’s the perfect time. You can run a DIY checkup or get a complimentary financial review through Empower. Either way, you’ll likely uncover useful insights about your allocation, risk exposure, and investing habits that can lead to stronger long-term results.

Stay proactive. A little optimization today can create far greater financial freedom tomorrow.

This statement is provided to you by Financial Samurai (“Promoter”), who has entered into a written referral agreement with Empower Advisory Group, LLC (“EAG”). Click here to learn more.