better habits

The Most Important Personal Finance Concept?

There are many important factors to consider in personal finance. Opportunity cost, rate of return, interest on loans or investments. But if you asked me to select the single most important factor in making decisions, what would my answer be?

My answer would be cash flow.

This is really what all of our efforts boil down to. Generating the largest amount of free cash flow so that we can retire when we want to. Now there are really three ways to increase your cash flow, assuming you have debt. One is to decrease reoccurring expenses, another way is to invest, and lastly, pay off your debts.  So let’s go over some of these areas and talk about the advantages and disadvantages of these things when trying to increase the spread of cash flow.

Decrease Reoccurring Expenses

You may wonder why financial articles always seem to poke fun at weekly lattes and a monthly cable subscription.  It is not that the single expenses are expensive in and of themselves, but cumulatively they are very expensive.  Take the weekly Starbucks, or whatever brand you may prefer.  Say you spend $4.00 a week that is just $208 a year.  Not too bad!  But let’s consider what it costs to maintain that habit.

Assuming a 4% yield after inflation on your investments, you need an extra $5,200 ($208 divided by .04) saved to maintain this habit.  And really most dividends and the S&P 500 index are not yielding near this amount currently.  So let’s look at Vanguard’s S&P 500 index fund, the yield is currently showing 1.95%.  So let’s say 2% for simplicity, you would need $10,400 dollars in the S&P 500 index to fund your weekly coffee without worries.

And this gets worse with more expensive habits like cable or satellite television.  Say you have some combo deal for $100 combining TV and internet and the internet will cost $35 without the combo pack.  So you are looking at $65 a month, or $780 a year.  Using the base of 4% yield you need $19,500 to keep your TV indefinitely.

It is important to note that these numbers above do not take into account the costs of taxes for your income, so it is possible that you may need even more to maintain these in retirement.  This is why when I find ideas to decrease expenses I like to try them out and if it worked for me I feel no shame in sharing.  Such as switching to a prepaid phone, making my own laundry soap, and cutting my own hair.  I read articles about people using Amazon prime, or how their membership works for them at Costco.  I cannot emphasize enough that this is one of the more important areas and why so many articles focus on it.  When you make changes in this area not only are you decreasing your future cash needs but you immediately increasing your cash flow allows you to save more now as well.

Increasing Cash Flow Passively

Investing in Dividend Stocks

This is probably my personal favourite way to increase cash flow presently.  My favourite example of how this strategy works is the blog Dividend Mantra.  Jason has built a six-figure portfolio on a middle-class income in a small amount of time.  This is now generating a decent cash flow that will in time meet all of his financial needs.  There are many who argue that index investing is superior, and I would say that the overall returns are more than likely to be superior, but when you look at this form of investing from a cash flow perspective dividend investing is king.  You have a more stable stream of income and as a result, a change in the stock prices will more than likely not result in a change in your lifestyle.

Land-lording or Real Estate Investment Trusts

I am nowhere near an expert in this area, but I must admit it is intriguing.  There are a lot of blogs and resources that focus solely on this area of building income, one of which is No Nonsense Landlord.  This is an area that someday I may want to try out, but really I am not sure if it is for me or not.  Some of the risks include damage done by tenants and vacancy and I don’t desire to jump into this realm while having to rely on steady cash flow.  I think it is something you can either start early to get a feel for how things are running in your personal rental, or start later when the cash flow would be a bonus.  Personally, I would like to try it out later when I don’t need the cash flow to live off of.

That said, you can still invest in real estate without directly owning a rental unit.  With Real Estate Investment Trusts, or REITs.  This can be a way to invest in a diversified market and remove yourself from the issues of repairing a unit and dealing with a vacancy.


Interest returns are not that great in the current environment, but that does not mean that will last forever.  Besides earning a respectable interest on your checking account, you can invest in bonds.  Bonds have different classifications for their risk level, with ratings done in letters (the highest rank depends upon the agency).  Usually the higher the interest rate, the riskier the bond.

Now the odd thing about bonds is, in a rising interest rate environment, the value of present bonds decreases.  That is because in order to make themselves competitive with the current market rate, if you are to sell a bond then you must less it for less.  On the other hand, when the interest rates are decreasing the value of your bond increases to adjust to the current market interest rate.  If you buy individual bonds are hold to maturity you will receive the face value back regardless.  When interest rates begin to increase I may consider investing in some bonds to diversify in this area.

Paying Down Debt

The last area to improve your cash flow is to pay down debt if you have any.  The thing about paying off debt is you will probably get the higher return on your cash flow in doing so because part of your monthly payments include principal.  This does not mean it is the best investment, but it is more than likely the fastest way to increase your spread in cash flow.  That is why the method of snowballing is so effective for people paying off debt.  It is not that they will be paying the least amount of interest in this method.  But it is that they see perhaps the fastest result in decreasing their monthly obligations.

I am not advocating for everyone to pay off low-interest debt instead of investing, but what I am saying is that it can be the right thing for someone to do who is struggling on a monthly basis to get some air.


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