Post by
Goldbuggy1 on Apr 02, 2016 10:25pm
Cash Flow?
So what is Cash Flow? To simplify things first consider that Cash Flow is your Wages and what someone pays you to go to work. This first obvious thing you will notice is that the higher your wages are the better it is for you. But does earning a decent wage make you automatically a financial success? Not on Your Life! It depends in what you do with your money and if you invest it and save it, or blow it. For example lets take 2 different individuals called Mr. PZA and MR. LIQ who both earn gross incomes of $100,000 / year. Mr. PZA is prudent with is money. He saves to buy a modest home but still has to borrow $47,000 on a Mortgage. But in 2 years time when he renews his mortgage he gets a lower interest rate that saves himself $640 a year. Mr. PZA buys an older car which he pays cash for. He doesn't believe in using Credit Cards so he pays cash for everything he needs. With his extra income Mr. PZA invests in a Retirement Plan to lower his Tax Payment. He invests the rest in a Safe Dividend Paying Stock the pays him 6%/year. In 5 years MR. PZA discovers that he has increased his Net Worth by 70%. He still owes a mortgage but with property appreciation it is also worth a lot more now to. Now on to Mr. LIQ. He believes that life is too short to not enjoy every minute of it. He doesn't believe in buying anything but instead prefers to rent (or Lease). Leases is cheaper than buying so that now just gives him more of his money back to enjoy life now. He likes that fancy new sports car, so no problem. He just borrows the money from the bank and gets it. Loves his vacation time and takes 2 vacation a year. One in Summer and one in Winter. But no problem as the bank will lend him more money. So off he goes. Mr. LIQ doesn't believe in paying cash for anything, except of course his Income Taxes. So he borrows money at every given moment and charges his Credit Cards up to there limit. He even borrows money for his investments and finally finds himself in $196,000 in debt. But no problem as he will easily make this back through his investments. He doesn't target an investment that pays a Safe Dividend of 6%. That is too slow for this High Roller. Instead he invests where he thinks he is going to get a 20% Return on Capital so he uses the borrowed money to buy a company named "Goodwill". But instead of getting his 20% Return this "Goodwill" drops in value by 33%. But no problems as he doesn't have to pay for this loss again and with his good wages (Cash Flow) he can probably borrow more money from the bank. Or use one Credit Card to pay the other's interest payments, or delay paying his taxes. We all know people like that. So in 5 years Mr. LIQ takes stock of his Net Worth and discovers that his Net Worth is 51% less now than it was 5 years ago. His investments in "Goodwill" have plummeted and he is only earning 4.5% in Dividend Payments now. So as you can see it is not your Wages (Cash Flow) which is the most important here. It is what you do with that which is. LIQ did very badly with that over these past 5 years giving Shareholders a 51% loss.