What are the Pros and Cons of Investing for Cash Flow

It’s one of the more hotly contested debates there is in investing. Income, or cash flow, vs. total return investing.

Each camp has its proponents and detractors. But the facts are that the way most investors approach investing for cash flow leaves some things to be desired.

Pros and Cons of Investing for Cash Flow

Arrow

The basic idea behind income investing is that you only spend the income from your investments. Seems like a great idea, right?

What Is Income Investing?

It’s easy to know when you have enough to retire—when the income from your investments replaces the income from your job. Plus, you know you’ll never run out of money if you’re only spending the income.

1. It’s easy to know when you’ve reached financial independence: This is really straightforward. If you spend $100,000 a year and your investments produce $100,000 a year, you know you’re there.

The Pros of the Income Approach on FI

2. You tend to leave more to your heirs: Since you never spend principal, you are likely to leave more money behind to your favorite heirs and charities. 

3. You can reach financial independence faster: Many of those who endorse the income approach to financial independence are big fans of leverage, real estate, and entrepreneurship. 

1. You might oversave: You don’t want to spend so much that you run out before you die, but if you don’t spend any at all, it just means you oversaved. It’s the flip side of leaving more to heirs.

The Cons of the Income Approach on FI

2. It’s tax-inefficient: From a tax perspective, you don’t want to ever have more taxable income than you actually need to spend. It’s tax-inefficient. On the eve of retirement, you are generating twice the income you actually need.

3. You can make funny investment choices: If you’re not careful, focusing too much on income can result in a portfolio full of lousy investments. The higher the ratio of income/return, the more attractive an investment becomes to an income-focused investor.

SWIPE UP NOW TO READ MORE

Is It Better to Invest for Cash Flow or Appreciation?

MORE STORIES

Creating Active and Passive Income Streams After a Late Start