1. Savings: Interest from savings is a form of cash flow. Today, the interest rates on short-term bonds are less than zero. If you are lucky a bank may pay you 3 percent interest on your savings.
There are two problems with cash flow from savings. One is that the 3 percent interest is taxed as ordinary income--the highest tax possible, which means your 3 percent interest is rally 2 percent net taxes. Second, the Federal Reserve is printing trillions of dollars to bail out the big banks. In the late 1970s, the bailouts were only in the millions. By the 1980s, bailouts were measured in billions. In 2009, the bailouts are in the trillions.
This will result in inflation, and possibly hyperinflation. If inflation is higher than 2 percent per year, you actually lose money by collecting interest from banks in the form of savings account interest. Understanding the relationship between bailout money and inflation is one example of the importance of knowing history: By knowing a little history, you can understand how fast your savings can lose value. You get paid 3 percent (2 percent after taxes) on your savings as the central banks print trillions of dollars.
2. Stocks: Some stocks pay dividends, which are a form of cash flow. Millions of retirees live on dividends from their stocks. The problem with dividends is that during this crisis many firms cut dividends. During the first week of April 2009, Standard and Poor's announced that 367 firms cut dividends by $77 billion in the first quarter of 2009. That was the worst payout since the S&P started tracking dividend payments in 1955. This meant the recession was spreading right where it hurt, to retirees who were once well off in the pocketbook.
3. Pensions: Pensions are a form of cash flow. The problem is that the federal Pension Benefit Guaranty Corporation (PBGC) shifted most of its $64 billion in assets from bonds to stocks and real estate, just in time for the crash. This means the geniuses behind the PBGC shifted out of cash flow from bonds, presumably because the income from bonds was perceived as too low, and into stocks and real estate, hoping for larger profits from capital gains. This means many pension plans are now in deep financial trouble.
Additionally, the concept of the pension is ancient history for most people. Most companies do not provide a pension anymore, or have drastically reduced the range of their pension program. Now it is mostly government and labor union employees who can count on a pension. Most people have to figure out some other way to generate cash flow for their retirement.
4. Annuities: Annuities are also a form of cash flow. Let's say you turn over $1 million to an insurance company. In exchange, it agrees to pay you a percentage of interest on that money for the rest of your life.
The problem is that annuities are often backed by commercial real estate that you have no control over--commercial real estate and other financial instruments that were bought by large institutional-type investors, many of which are public companies, for capital gains and not for cash flow. The problem with public companies investing for capital gains is that by standard accounting rules, they must mark down their assets to market and raise more capital to cover those losses. This hurts the insurance companies and your annuity returns--all you have to do is look at AIG.
Why Doesn't Everyone Invest for Cash Flow?
There are a number of reasons why most people invest for capital gains, and not cash flow. Some of the reasons are:
1. Most people do not know the difference.
2. When the economy was growing, it was easy to play the capital gains game. People automatically assumed their house and stock portfolio would go up with inflation.
3. Cash-flow investing requires more financial sophistication. Anyone can buy something and hope the price will increase. Finding cash-flow deals takes knowledge of both potential income and expenses, and how to project the performance of the investment based on those variables.
4. People are lazy. They live for today and ignore tomorrow.
5. People expect the government to take care of them. This was my poor dad's attitude, and he died a poor man. For my poor dad, it was easier to expect someone else to take care of him. Today, there are over 60 million Americans, my fellow baby boomers, who are about to follow in my poor dad's footsteps.
Read more about how you can generate new avenues of income and how you can strengthen your cash flow potential in his best seller:
Rich Dad's Conspiracy Of The Rich:
The 8 New Rules Of Money
by Robert T. Kiyosaki.