Cash Flow Is King

When somebody says “Cash Is King” they’re generally referring to the fact that no asset has value if it can’t be converted to cash.  Or perhaps they’re referring to the ability of cash-rich investors to take advantage of those rare golden opportunities the market so rarely delivers.  But I say, Cash is not King.  Rather, cash is the prince to the real king, Cash Flow.  Which is better, having cash or having the ability to reliably generate an endless stream of cash on a regular basis?

That’s why net worth is such a misleading number.   In the net worth paradigm, a million dollars in the bank yielding 1% (for $10,000 in annual income) is more valuable than $500,000 in a diversified portfolio yielding 5% (for $25,000 in annual income).  But is it really?  That measly 1% payout won’t even keep pace with inflation, whereas the 5% will.  What’s more, that extra $25,000 in annual income brings with it far more options than the $10,000 payout.  You could very well choose to use $5,000 of that money to supplement your income and still save twice the amount of money you could afford to save with the 1% payout.  Even better, the higher-yielding portfolio won’t take long to overtake the larger bank account.  You could also choose to save it all, or none.  The point is, you have options.

You Can’t Spend Net Worth

Unfortunately, you can’t spend net worth.  Or rather, you can but unless you’re extremely wealthy you will eventually have to worry about running out of money.  But cash flow has an interesting property:  so long as you spend it conservatively, perhaps reinvesting a bit of it just to be safe, it will never run out.  Cash flow gives you the freedom to live your life how you want to live it, not having to slave away at a job you hate just to pay the bills.  And that’s worth far more than adding a digit to your net worth, at least to me (not that I’d turn down a million dollars if you offered).