Cash flow is the payment frequency of income from an investment. This income is paid regularly (e.g. monthly, quarterly, biannually or annually) but can be inconsistent, particularly for longer term investments. Cash flow differs from the total income return, in that it examines how often and when income is paid, rather than the actual level of income received from the investment over a set period.
Two main reasons cash flow is important to understand
1. It is fundamental for having an effective personal financial budget
While you may be receiving income from an investment, if the income doesn’t arrive regularly enough to meet living expenses, you may need to access cash from other sources to bridge the gap.
2. Having uneven cash flow makes accelerated debt repayment a difficult goal to achieve
Due to the high initial costs involved, many people go into debt to purchase items such as cars. However, this debt comes at a price. While you are carrying that debt you cannot use these funds to invest elsewhere. Therefore it makes financial sense to reduce lifestyle debt as quickly as possible so that these funds can be used to invest in financial assets that are likely to appreciate in value to create wealth.
Considering cash flow diversification
Diversification is not limited to your choice of investment asset type. It is wise to consider it from a cash flow perspective as well. By having a sufficient mix of underlying assets within your portfolio you can help ensure you receive a relatively even income throughout the year. While some investments may look similar at first glance, a prime differentiator between them may be the frequency of dividend or distribution payments and the terms on which they are paid.
It is best to speak with a licensed adviser for further guidance on how to manage your investment cash flow to meet your personal requirements.
Trilogy Funds’ investment offerings usually pay a monthly income, but occasionally have different structures. Our monthly income trust currently pays a monthly distribution as do our property trusts. Please bear in mind past performance is not a reliable indicator of future performance.
Please note that Trilogy Funds provides general information only and does not take into account any of your personal circumstances or seek to provide a personal recommendation to you. You are encouraged to seek expert advice before acting on any information contained in our resources.