Always Work On Improving Cash Flow For Financial Independence

Cash Flow For Financial Independence
Cash Flow by Jo Z-Sunny

The other day I asked a very wealthy entrepreneur about his main financial concern. He's probably worth anywhere between $50 million to $75 million dollars. Given he has so much money, I thought his answer would be more philosophical, like “making sure my kids appreciate the value of money,” or “how to create a lasting legacy.”

Instead, the entrepreneur responded, “My biggest concern is making sure I have enough cash flow to maintain my lifestyle.”

I initially thought the answer was odd because why bother measuring cash flow given he can simply draw down principal to fund his lifestyle forever. $500,000 here, $1 million here, who cares? He's still left with tens of millions of dollars left over! But maintaining a lifestyle that is meaningful to you is what having money is all about.

Many people with tremendously high net worth figures don't have nearly as much LIQUID net worth as one would assume. People mistakenly think that just because someone has a $10 million net worth, that they can withdraw 10 million $1 dollar bills and make it rain. Instead, high net worth individuals likely have much of their net worth tied up in equity stakes that could disappear if a downturn like 2008-2009 ever happened again.

Just look at the guy who founded CNET, the technology online review site. He was worth $2 billion dollars, but after a divorce and leveraging up in 2007, he filed for bankruptcy. Every super wealthy person I know is well aware of how ephemeral wealth is. This is why buying real assets, like property or fine art is so attractive to many equity millionaires.

The Importance Of Cash Flow

Whenever the stock market takes a dump, I lose a lot of money due to my absolute dollar value exposure. But I really don't pay attention so much after I establish a proper asset allocation based on my risk tolerance. The stock market's daily movements are out of my control and I don't recommend anybody wasting their time trying to trade the market if they have more interesting things they want to do.

The only thing I pay close attention to on a weekly basis is where the 10-year bond yield is moving so I can jump on refinancing my mortgage debt. When I see the S&P 500 drop 1.5%, I don't care so much unless the S&P 500 continues to drop for consecutive weeks. But when I see the 10-year bond yield collapse, I am exciting as all get out!

There's two years left on one of my 2.625% 5/1 ARM mortgages. If I'm able to refinance the mortgage to 2.25%, I'm able to save $3,750 a year in interest on a $1 million loan ($1,000,000 X 0.00375). The $312.50 in monthly savings excites me even though I'm probably losing five figures in the stock market that day alone when rates are collapsing! Weird, isn't it?

It's not so weird because taking action with your finances feels good. If I refinance a $1 million mortgage at 2.25% at a cost of $2,000, I will break even in 6.4 months and save $312.50 in interest expense for 43.6 months left = $13,625. As for the stock market? I can't be sure what tomorrow will bring.

For anybody who has a mortgage, inquire about the latest mortgage interest rates. Take a look at the mortgage rate chart below.

I spoke to two bankers, and they said there is a tremendous amount of volatility in the bond market now with Russia, Europe in general, and the oil market. I've specifically told them that if they can get 2.25% for a 5/1 ARM jumbo, I'll do business with them. This way, I don't have to keep on checking. Two people are already incentivized to save me money so they can make money.

My only problem with refinancing a mortgage is that banks require two years of 1099 wages (independent contractor) and I've only got one, so my entire 2014 contractor income does not count. Furthermore, I've decided to earn a much lower W2 income amount than what I made in finance in order to reduce my tax liability. A 25% Federal tax rate feels fair. A 39.6% Federal tax rate feels like highway robbery.

The “good” thing is that refinancing a mortgage can often take 60 days. And within those 60 days, I can up my business salary to a point where my debt to income ratio passes by bank underwriting standards.

30 Year Fixed Mortgage Historical Rate
The trend is your friend for mortgage borrowers

Control What We Can, Make Peace With The Rest

The Serenity Prayer says, “God, grant me the serenity to accept the things I cannot change, The courage to change the things I can, And the wisdom to know the difference.

I love this prayer because it reminds us that action can be taken to improve a situation, and we should let go of things outside of our control.

I view the following things as what we can control:

* Our attitude. Are we coming in with a positive, cheerful, hopeful mindset? Or are we bringing a bitter, angry, pessimistic, and jealous mindset?

* Our work ethic. Given we all have the same amount of time during the day, are we trying our best to utilize our time to learn more, focus more, and try harder? Do we wake up before dawn or stay up way past when we kiss our loved ones goodnight to work on our dreams?

* Our generosity. Do we think how our actions will affect other people? Is there a way of enriching ourselves while enriching others as well? Are we thankful for what has been given to us, and mindful of the suffering around us?

Luck Comes And Goes

Eventually, our luck will fade. Hopefully, we'll have done enough good things during our time of good fortune where we'll be able to maintain a steady state of happiness once the bad times return – savings, asset diversification, etc.

The super wealthy contain the very same survival mode instincts as the rest of us, despite accumulating more wealth than they could ever imagine. The super wealthy know their riches could disappear in an instant. They just need enough risk-free assets to keep the income flowing.

Other Cash Control Ideas

* Call your credit card company to lower your interest rate.

* Transfer your credit card debt into a 0% intro card. Haven't done this since I was 25, but it's effective.

* Find out what the latest HELOC rate is and consider conducting some debt arbitrage.

* Call your mobile carrier and ask about the latest data deals.

* Analyze the latest rental market and raise the rent.

* Research the latest high dividend yielding stocks.

* Invest in REITs

* Invest in real estate crowdfunding platforms through debt or equity

* Get rid of things you don't use and take advantage of the sharing economy.


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They've even got this amazing Monte Carlo simulation based Retirement Planning Calculator to see your financial future you've got to try for yourself. I started using them in 2012 and have seen my net worth skyrocket thanks to optimizing my investments for this bull market. Everything is free, so you must take advantage!

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How is your retirement outlook doing? PC's Retirement Planning Calculator shows you.

Updated for 2019 and beyond.

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41 thoughts on “Always Work On Improving Cash Flow For Financial Independence”

  1. Pingback: How To Get The Lowest Mortgage Interest Rate Possible | Financial Samurai

  2. Reminds me of John Steinbeck–“Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.”

    No matter what one’s income, it’s just a matter of time till that lottery ticket hits… :-)

  3. Right now I’m sitting on some cash because I have a lot of expenses coming up in the next couple months. Prior to Nov/Dec of last year, I did a much better job putting my cash to work. I do like to have at least a couple thousand in cash sitting in my savings at any given time just so that I can quickly cover anything that comes up without having to liquidate any investments. Several years ago I was sitting on way too much cash for 6-12 months at a time, without any real need to have that much super liquid. That wasn’t terrible but wasn’t good either, so I’m trying to avoid doing that again.

  4. Interesting answer from your friend. I wouldn’t even know what I’d do with myself if I had half that money, so it’s hard for me to see how he could be worried about keeping up his lifestyle. I’m not sure if your friend has succumbed to lifestyle inflation, but not every rich guy can be like Zuckerberg and walk around in a t-shirt and jeans all day. I try to avoid this by taking any raises and applying them to my student loan debt.

  5. I have stock that originated as the company ESOP match to my 401k; I have long since left the company, subsequent to which I eventually migrated the stock to my cash account using Net Unrealized Appreciation rules. Stock pays dividend, but only about 3% which is still a decent check due to the quantity I own. Now it has appreciated a lot and I’m realizing that just another 10% which it’s capable of would put me in the sweet spot of being able to use it to kill my mortgage after paying all long term cap gains taxes on the sale and still have a few bucks left over. So I’m contemplating doing that and I would really like somebody to tell me why I shouldn’t do it.

    Disclosure: Mortgage is 4.5% fixed, last refi done in 2009 but I can’t refinance because I don’t have enough income on the books. I do have a variable rate HELOC for which I’ve been charged only 2.3% for years so I’ve used this account as a place to do leveraging for stocks paying dividends. I suppose another option is to cut mortgage debt in half and refinance remainder at lower interest rate, hoping lower LTV percentage works in my favor.

  6. Sam, I think you should write an article about investment regret. My husband thinks we have achieved a lot, but I can’t help but think that if I had been smarter over the years, we would have a lot more money. For instance, if I hadn’t sold all of stock “x” in 2006, we would have xxx more dollars. Or if I hadn’t signed us on with that investment advisor in 2010 we would have a lot more money. Etc, etc. I tend to beat myself up over this stuff since I am the one that makes most of these decisions (Because he doesn’t care that much.) You probably don’t have many regrets since you are a professional finance person, but I would be interested to hear your thoughts.

    1. Mina, I find myself of that mindset often too! I think the MAIN thing to remember is that our intentions are GOOD and we won’t always make the “winning” decision financially, but if we are trying our best with best intentions, that’s all we can hope for. We are human after all :) You could read “Your Money and Your Brain” It is helping me understand SO much about all of our emotional reactions with $ issues. The fear of losing money is in the same area of the brain as the fear of dying! That explains a lot :)

  7. Quote from Patrick Ewing – “Sure we make a lot of money, but we spend a lot too”. The wealthy entrepreneur and Ewing should hang out together. I assume samurai is less well off. Hence, I bet you adhere to the principles advocated in Kevin Hart’s hanging with athlete skit. It’s a good advice for rest of us as well.

  8. Sam, how come you never ventured into business of other sorts to increase cash flow? You seem restless enough to start one :-) Your experiences would make wonderful inspiring posts I am sure!

  9. Done by Forty

    Rental properties are our recent purchases to increase cash flow. It’s a lot of work on the front end but, with the help of our property manager, they’re not a lot of work on an a weekly or monthly basis once we get them rented.

    1. Yeah, once you handle all the stuff to get your rental right, it’s pretty smooth sailing if you pick the right tenants who are also self-sufficient e.g.DIY fix, sends you the bill.

  10. Inspiring post as always! I’ve been building up my P2P accounts, would love to eventually go over $100K

  11. Sam,

    I’m glad you finally agreed that cash flow is most important and gave up that silly net worth pursuit!



  12. Great post, Sam.

    1) As your first responder noted, an obvious way to improve FCF is to lower expenses.

    2) I harmonize with your comment about the 39.6% federal tax rate being highway robbery. Don’t get me wrong. I’m not complaining. We are very very fortunate. But after noting how much I busted my ass through last year, while also observing that every penny of my salary was taxed at 39.6% plus a very high California state income tax rate of 11.3% (my wife works and does well), I decided to opt out.

    3) Man, your average poster must be young. I’m seven years away from being able to withdraw (versus HAVING to). I just ate a greasy burger and two slices of fatty bacon. I’m highly confident I will still be here. The burger was grass fed and the bacon came straight from a farm in Pescadero, CA. But I digress.

      1. a) You’re right about the CA bracket.

        b) 53 in April. But….I cranked out 35 pull ups (no weight assistance) at the gym this morning.

        c) HOO-RAH!

    1. NoeValleyJim

      Every penny is not taxes at 39.6%, you must have deductions. Plus the first $1/4M is taxed at a lower rate. You have nothing to complain about.

  13. Similarly, I pay attention to the mortgage rates but after locking in a 15 year fixed at 3‰, I’m not expecting to get something lower any time soon. I could buy it down by purchasing points, but I’m not looking to squeeze every penny only to have to pay more points next year if the rates go lower.

    It’s nonsense, but given how high the rents have become in my area, it’s fun to check the rent rates in my area to see how much I’m saving over if I’d been renting…

      1. Have you ever seen the Khan Academy teacher on Youtube break down why he rents in Seattle instead of buying…because investments will outdo owning a home. He has the math to prove it. Also, there is a great “anti” real estate/anti owning very expensive home information on Patrick dot net. And then I read an opposite opinion in another book that said “Borrow as much money as you can (for a home) and get a 30 year loan” because inflation is coming…etc. What we need is a crystal ball! :)

        1. NoeValleyJim

          Let’s see, I bought a home in San Francisco with 10% down 12 years ago. Since then it has increased 150% in value. I paid a mortgage that was less than rent after tax breaks. My return on investment is 15X over 12 years, please show me an alternative investment that would have done better.

  14. I’m struggling with this very decision. Do I get an equity line of credit against I commercial property that I currently own debt-free in order to cover the equity piece of purchasing a home to live in (which would reduce my cash flow and feel like a step away from early retirement), or do I continue to rent and continue to put all my excess and savings into investments that actually provide cash flow? I’m not ready to commit to a super long-term housing situation, and while the place that I’m considering purchasing would easily and quickly rent, it wouldn’t provide as good of cash flow as an alternative property that I would purchase purely as an investment. I think about cash flow all the time since I view that as the only true way to achieve financial independence.

    1. I’m biased towards living in as nice a place as possible and then renting out my place when I’ve found something new, interesting, better, different.

      Remember, each year you live frugally is one less year you get to live it up. I’d just save more and build up new money downpayment instead of taking a HELOC.

  15. Wall Street Playboys


    Everyone says they want more cash but really they want more *free cash flow*

    The ebb and flow of investment income is going to occur, but at the end of the day you want to be able to pay for your expenses + entertainment.

    The money isn’t going to do you any good if you can’t spend it. That is also why 401K money should really be discounted by 50% or so. You can’t even touch it till you’re old and it’s only going to cover you healthcare expenses!

    1. I agree with that perspective on the 401K – I totally ignore it when I’m thinking about my investments, and treat is as a potentially nice ‘safety net’ when I’m older. I want to try to live off my other investments well before I hit that retirement age!

      I know cash flow is most important, but I plan to convert my stock portfolio to strong dividend paying stocks only once I hit my target. For now it’s more focused on higher growth stocks, but perhaps it’s worth weighting it a little more to dividends stocks now in case another market crash happens in the meantime…

  16. There’s a lot of unhappy rich people out there, isn’t there? Frightened they’ll lose it all. If, as you intimate, they’d focus on what positive change they could make to those less fortunate than themselves then the world would be a better place.

    1. The more you have, the more you have to lose. I feel this way, and believe this is common thought for people as they accumulate more. It’s just human nature.

      Desire is the cause of suffering!

  17. Cash flow was something that I never thought about until I read “Rich Dad, Poor Dad.” I think too many people confuse “financial independence” and “financial freedom” with being “debt free” which isn’t the case. It’s all about having your passive income cover your expenses. I’m very focused on this in 2015 and I hope to achieve true “financial independence” in the next 5-10 years by spending money on assets (not liabilities).

  18. FS,
    All good cash control ideas. I would comment on two:

    Regarding consolidating CC debt onto 0% APR cards–I’ve done this this year, begrudgingly, given a tight cash environment. The Chase Slate card, specifically, offers a industry-standard 0% 15-month APR, but (!) also waives the standard 3% transfer fee if you transfer a balance within the first 30 days.

    Second, regarding the mobile carrier option. If somebody is willing to have a phone that isn’t blacklisted (iPhone 6 or GS5), then there are literally over a hundred MVNOs where you can get a highly favorable plan for under $20/month. Just Google, “MVNO List Wiki” and there’s a great, up-to-date wiki list of them. My favorites are Ting, Ring+, and Republic Wireless–through some pretty exhaustive research those seem to be the cheapest with most plan flexibility.

    Thanks for the article.


  19. Seems like this shouldn’t be an issue. I always thought the very wealthy held more in cash equivalents than the average person (This article says around 20% –

    So I wonder why the entrepreneur wouldn’t keep a few million/a few years worth of expenses in liquid form and invest the rest. Maybe he prefers to squeeze every last cent of return out of his pile?

    1. This person is not a billionaire. “Only” worth $50,000,000 or so. I can understand a billionaire having lots of cash. The amount of money the person has may bulldoze over how much supply there is to be able to invest.

  20. Gen Y Finance Guy

    Great Post.

    This past year I made some huge changes in optimize cash-flow, while maintaining the same standard of living that my wife and I had grown accustomed too.

    The biggest move I made was moving out of the OC where the average starter house where we wanted to live was about 1,400 sqft with a condo sized patio for about $550K to $650K.

    So instead we moved inland and bought a 3,300 sqft house for $370K on a quarter acre. We went from paying $3,000/month in rent to a mortgage that is only $1,600/month ($2,200 with taxes & HOA). We also ditched the commuting we were doing as we now both work within 5 miles of home. So there is another $500/month. We paid off all of our debt with the exception of the mortgage on our primary residence and our investment condo, saving us another $650/month.

    Additionally, I started a side consulting business in the digital marketing and analytic’s space that brought in on average an extra $1,500/month last year. And lastly, by moving jobs I was able to increase my income by $600/month. This was surprising because I moved to a city with a much lower cost of living, but I will take it and run…to the bank.

    Lastly, we decided that since it was just me and the wife in the new house that we would rent out a room at $600/month. Our room mate has been with us for about 4-months now and has become a great friend and we actually consider him family now. Its actually the perfect set-up, he travels 50% of the time for work.

    All in all our cash-flow has improved by about $4,650/month.

    I worked my ass of this past year and I will find out what my reward is this week when I find out what kind of raise and bonus I am looking at.

    Excited for 2015 to see what we can do to continue building our net worth while optimizing our cash-flow at the same time. This year we start using some of that cash-flow pay off the mortgage in 7-years or less. I have a post detailing this now pain strategy coming out in February, I will come back and share it if your interested.


    1. Wow! Lots of good stuff you’ve done. Moving to a cheaper area with more space AND saving time on commute is a huge win. That’s rare for many people.

      Good luck on the raise/bonus! Let us know how it goes.

    2. One of the BEST articles I’ve read recently about the pros and cons of paying off a mortgage now or soon due to the lowest interest rates in history along with the tax/interest break is on a site by financial mentor dot com. It is broken down into pros/cons and sums up all that I have read in many places. I’m reading Money Guide 2015 now and it is so true what the author says “Finances aren’t brain surgery, they are much more complicated than that!” Best! Angela

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