Which investing path is best, cashflow or capital appreciation? This is already a good question because it specifies two very different paths. If it were growth or capital appreciation investing, then we’d be on a completely different path. A harder path in my view. A winner takes all, no room for error path. And also one that never ends.
Cashflow investing, however, is an amble in the park and the scenery gets better with every mile you go. Life gets a little better every time you invest because you have a predetermined expectation of the result of your investment. You know you are going to increase your monthly cashflow by $100 and that makes your life $100 easier.
A good way to play this out is if we examine what happens when you invest for capital appreciation. Well, in the short run your life won’t look any different that’s for sure. But you keep going and invest more and more and you get lucky and hit a big windfall and suddenly have enough to live for 5 years on the proceeds of your big win. If the capital appreciation investor has this much cash, what are they going to do with it? They are likely to spend it the way they earned it. The only way they know to extract their winnings is to get rid of their winnings. In short order, they’ll be back where they started.
Now, that’s probably unfair. Maybe they’ll take their winnings and buy an investment that pays them without depleting their capital and they’ll live forever. In this case, they’ve taken their capital appreciation winnings and created cashflow with it. In order to realise their freedom forever they had to invest for cashflow. It is unavoidable.
Now let’s look at the cashflow investor who starts cashflowing out of the gate.
That first extra dollar in cashflow, independent of net worth, is a dollar less that you need your job for. If they stopped now, they’ll always have that extra dollar. That’s a lifetime improvement. Odds are their life won’t look any different on the outside. They’ll be reinvesting their extra cashflow to increase it. But they’ll feel better. Pretty soon, that extra dollar in cashflow has increased and is now enough to cover the car payment. It probably isn’t covering the car payment because it’s being invested forward, but it could. That’s the point. If things went to hell, you’d be covered some of the way through your monthly expenses, indefinitely.
Fast forward and the cashflow investor has gotten their windfall. They have cashflow enough to stop working and pay their expenses indefinitely. Their freedom doesn’t have a time limit and they haven’t been living in anxiety the whole time trying to reach a certain amount of wealth. Rather, their life has been improving steadily through the entire process.