How to Increase Your Cash Flow (Part 2)

This is the second episode in a 2-part series about how to increase your cash flow. In part one, we discussed the importance of eliminating or reducing negative cash flow. I gave you 5 tips for cutting one of the biggest expenses that typically drains cash flow: housing.

In this episode we’ll look at the other side of the coin. I’ll give you ideas about how to increase your positive cash flow by owning assets and investments that actually create income..

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How to Increase Your Cash Flow

To achieve financial success, you need regular monthly income, or cash flow. But most people don’t understand all the ways you can get more of it. For instance, the average person is stuck in a linear view of money that goes something like this: get up, go to work, earn a wage, deposit paycheck in the bank, and spend paycheck on bills.

Don’t get me wrong. It’s wonderful to have a secure 9 to 5 job, especially if you love the work. But it’s also important to remember that you don’t have to depend on an employer for 100% of your cash flow. It can also come from owning different kinds of assets.

Problem is, if you spend your entire paycheck on bills and never have any left over to invest in assets that create additional income, you’re missing a huge financial opportunity. This is why you should always invest at least 15% of your income.

See also: How Much Money Do You Need to Retire?

Which Assets Create Cash Flow?

But what should you invest in to get the most cash flow? I strongly recommend buying assets inside tax-advantaged retirement accounts. You might qualify for one at work, like a 401(k) or 403(b). If not, just about everyone is eligible to contribute to an Individual Retirement Arrangement (IRA). There are even more types of retirement accounts designed just for business owners or those who are self-employed.

See also: 6 Retirement Accounts You Should Know About

Retirement accounts are great because they reduce your taxes and give you an easy way to invest small amounts of money. For instance, you might invest $100 from every paycheck in a mix of stocks, bonds, mutual funds, exchange-traded funds, or real estate investment trusts (REITs).

However, don’t contribute money to a retirement account that you might need to spend before retirement. You generally aren’t allowed to make any withdrawals from a workplace plan, unless you have a documented financial hardship. You have more flexibility for taking withdrawals from an IRA.

But no matter the reason for tapping a retirement account, you generally have to pay a steep 10% early withdrawal penalty. So, if you’re not sure whether you’ll need access to money before the official retirement age of 59½, invest using a taxable brokerage account instead.

A huge benefit you might get from participating in a workplace retirement plan is employer matching funds. This is when your company contributes this money to your retirement account on your behalf. That’s free cash flow! So be sure to participate and contribute enough to take advantage of an employer’s maximum match on any workplace retirement account that you’re offered.

See also: 10 Things You Should Know About 401(k) Plans

How Stocks Create Cash Flow

The next step is to consider what to buy inside of your retirement account or brokerage account that can give you cash flow. One option is dividend stocks. They have the advantage of potentially growing in value plus generating cash flow in the form of dividends. You could earn 2%, 3%, or more from stock dividend payments, compared to getting less than one percent from a savings account or CD.

However, stocks are considered a risky investment because prices can fluctuate wildly over just a few minutes of trading. But the idea is to own stocks that will appreciate in value over the long term, so you aren’t concerned about their minute-to-minute value on the stock market.

With any type of investment account you should have access to a broker or company representative who can help you understand how safe or risky an investment should be and what’s best for your situation.

How Real Estate Creates Cash Flow

Another way to generate cash flow is to own rental real estate, like a house, multi-family building, or commercial property. I’ve been a real estate investor in all of these property types for a long time. Though some years are better than others, owning property that’s completely paid for by the tenant is a great investment. The goal is to have some monthly cash flow after all expenses are paid and to see the property’s value rise over the long term.

But real estate is more difficult to buy than stocks or mutual funds because you need a big chunk of savings to put down. You typically need anywhere from 5% to 20% of the purchase price for a primary residence, and at least 20% for an investment property. So a great way to start investing in real estate is to own your own home. Then you can buy a second home and turn your first property into a rental, instead of selling it.

If you can charge rent that’s high enough to cover your mortgage payment, property taxes, insurance, maintenance, and perhaps a monthly fee to a professional property manager, you’ll be in business.

Here’s a quick and dirty tip: Find a real estate agent or two who specialize in investment property and use them as resources to make the best decision. Also, talk to local property managers about typical rents and expenses to expect in a given neighborhood. These professionals will be more than happy to share their expertise and perhaps gain a new client.

See also: Should You Buy Rental Property?

How You Create Cash Flow

Besides buying investments like securities and real estate, don’t forget that your most important asset is you! Think about what you can do outside of your day job to create more income. If you have a passion for something like photography, blogging, graphic design, or becoming a virtual assistant, you could develop a cash-flow producing side hustle right now.

Turning your talents into a business gives you a second or third source of income and reduces the risk of relying solely on an employer. Wouldn’t that be a nice financial cushion to fall back on if you lose your job or decide to make a career transition?

I mentioned in part one that you need to be creative to find ways to reduce negative cash flow. Well, the same is true for increasing positive cash flow. Always be looking for opportunities to expand the types of income you can create.

Winning the cash flow game isn’t about immediate gratification or making a quick buck—it’s about creating wealth, peace of mind, and financial security for the future

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More Articles and Resources You Might Like:

7 Days to Healthier Personal Finances

How to Find a Second Source of Income

How to Make Decisions About Personal Finances?

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This article was written by Laura Adams and Keith Whelan, who is the founder of CashFlowNavigator.com, a free website offering advice and tools to help maximize your cash flow. It won the prestigious Excellence in Financial Literacy Education (EIFLE) Award for 2012.

Money Flow image from Shutterstock