Build Your Cash Flow, Ignore Net Worth

One of the fairly ironic aspects of “early retirement” (read, “aspires to lazy?”) is the hard work, dedication, and sacrifice required to reach the goal. Of all the workers your company would rather NOT lose, you, the guy who’s peaking at his personal financial spreadsheet between conference calls, is the one planning to jump ship well before his 60th (or 50th, or maybe even 40th) birthday.

Generating sufficient cash flow before and after you retire early is extremely important.

Following the early retirement community, you might get the sense that Net Worth is the only key indicator. Some even publicize their net worth as a means to keep feeding their audiences some sort of magic marker for success. Don’t get me wrong, Net Worth is a helpful indicator of how well positioned you are from an asset vs. liability perspective. However, you’d find it difficult to live off of assets that don’t produce income streams (automobiles, homesteads, jewelry, 401Ks, 529s, etc.) in retirement.

Cash Flow, on the other hand, is what pays the bills.

If you wanted to share something interesting with your early retirement community friends and audience, share this. Personally, I’m holding back on sharing all the details of our balance sheet. My view is that it’s less relevant than the tools and themes essential for jumping ship. Let’s just say that if you are able to retire early, you’ve probably had success at saving a large chunk of your income since your 20s. You’ve avoided unnecessary luxuries (giant homes, boats, two golden retrievers in the yard, private schooling, and annual trips to Paris.)

My main effort to build cash flow has centered on real estate rental properties. We have four single family homes in operation that each yield about $500 per month in operating income. At tax time, the depreciation on each rental is treated as a deduction, along with upkeep costs.

The rentals we own are fairly close to us. We’re willing to learn and apply our own elbow grease, so we’ve been able to avoid property management costs.

Cash flow can also be extracted from investments.

Part of our plan is to sock away about a 18 months of income into taxable index funds towards the end of my corporate career. We would then withdraw those dollars slowly over the next 13 years until age 60, when the 401K can be tapped. This cash flow is our “bridge funding” that allows some amount of flex in our budget. Unlike Mr. Money Mustache and other extremely frugal early retirees, we expect to need close to $40K annually to cover our expenses and allow for certain luxuries along the way.

There’s also side gigs. Yes, this is technically considered “work”, but even retirees are known to hold down part time jobs to supplement their retirement income. Mrs. Cubert will likely continue to teach a few classes each week at the gym. She’ll also work part time as a sole-proprietor health care professional. I intend to find a part time job that fits my interests: real estate, property management, and “building.”

On the other side of the cash flow equation is cost reduction.

Examine your personal budget and what do you see? Most of the line items fall on the “expense” side. You’ll be hard pressed to whittle that list down too far. There are discretionary categories that can be eliminated or reduced.

Even the basic needs deserve a healthy amount of scrutiny. It can be easy to fall into a lull when it comes to monthly recurring expenses. After many months of simply paying the internet and cell phone bills without a second thought, I finally took the time to call CenturyLink to get a reduced rate. We switched our cell service to Ting. That $50 a month in savings comes in handy when your cash flow is dramatically reduced at retirement. Stay vigilant!

I plan to employ four cash-flow building tools: a business (rentals, blogs, etc.), part-time job, investment income, and cost avoidance. Some interesting decisions could come your way if you choose to focus on cash flow over net worth. For instance, is it more important to pay off the high interest loan first? Or, the one with the highest impact to your cash flow? Consider this when the competing rates are within a few percentage points, and you know you need the cash.