Investing 101: Cash Flow vs. Capital Gain
When it comes to investing, there are a lot of different strategies you could implement.
To execute a successful strategy, you must consider your investing habits and behaviors. Always keep in mind, what are you going for at the end of the day?
Are you going for cash flow or capital gain?
Knowing where you are going and what you want makes a huge difference in your investing strategy. Let’s take a closer look at each stage.
Cash flow delivers a regular return of money from your investment instrument. It could be a monthly, quarterly or annual return. Personally, I prefer monthly returns.
Capital gain is the expectation that you will earn a huge return when you exit your instrument.
Cash flow and capital gains applies to any investment instruments, like property, REITs, stocks and dividends. Knowing what you want from your investment instruments will help you plan your cash flow, and help you to know which strategy will work best for you.
Here’s a personal example. Sometime back, I looked into buying property to rent out. I was very clear on my end goal: I wanted cash flow from this investment property.
Since I knew this goal, I was able to zoom in on the specific type of property that would give me the cash flow I wanted. I knew I had to hold onto this property for the foreseeable future and I was not interested in selling it. This is why I didn’t factor in capital gains at all.
In order to focus on your end goal and recover the capital gain of your financial instrument, you would want to eventually get into a position where you want to sell it.
If you don't intend to sell the financial instrument, then capital gains isn’t relevant unless you're putting the property up for collateral (that's another story altogether).
Let’s get back to the basics. Are you looking for cash flow or capital gains? You need to be crystal clear on your investing intention.
As you start or continue your investing journey, remember that managing money can be as simple or as complicated as you want it to be. Whenever you feel overwhelmed, just remember what you want and get back to the basics.
Everyone will have a different financial goal, intention and strategy. At the end of the day, you have to pick the investing strategy that works best for you.
You are the person who will care most about your money. Do you know your financial goals you want to achieve?
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