Financial Goals

Updated: March 28, 2024

What Are Your Financial Goals?

Planning for financial goals is an important aspect of personal finance. Whether you are looking to save for retirement, buy a home, or start a business, having a plan in place can help you achieve your goals. One of the key considerations when planning for financial goals is deciding whether to focus on stable cash flow or overall returns.

Stable Cash Flow

Stable cash flow refers to an investment strategy that prioritizes consistent income over long-term growth. This approach is often favored by investors who are looking for a reliable source of income, such as retirees or those who are nearing retirement age. The goal is to generate enough income to cover living expenses without having to dip into savings or sell assets.

One way to achieve stable cash flow is to invest in income-producing assets, such as dividend-paying stocks, bonds, or rental properties. Dividend-paying stocks are shares in companies that pay a portion of their profits to shareholders in the form of dividends. Bonds are debt securities issued by companies or governments that pay regular interest payments to bondholders. Real estate, such as rental properties, generates income through monthly rent payments.

While stable cash flow can provide a sense of security and peace of mind, it may not be the best approach for everyone. One downside is that investments that prioritize income over growth may mean your overall returns may be lower over time when compared to a growth-focused investment.

Overall Returns

Overall returns refer to an investment strategy that prioritizes long-term growth over short-term income. This approach is often favored by younger investors who have more time to ride out market volatility and can tolerate higher levels of risk. The goal is to build wealth over time through capital appreciation, which is the increase in the value of an asset over time.

The overall returns for a real estate investment can vary significantly depending on several factors, including the type of property, location, market conditions, financing terms, maintenance costs, and the duration of the investment. However, there are some common metrics used to evaluate the returns on real estate investments:

Cash Flow: This is the net income generated by the property after accounting for operating expenses and mortgage payments. Positive cash flow indicates that the property is generating more income than it costs to maintain.

Appreciation: Real estate properties can appreciate over time, leading to an increase in their value. The rate of appreciation depends on factors such as the local market, economic conditions, and property demand.

Tax Benefits: Real estate investors can benefit from various tax deductions, such as mortgage interest, property taxes, and depreciation, which can reduce the overall tax liability and increase the after-tax returns.

Leverage: Financing a real estate investment with a mortgage can amplify the potential returns. With leverage, investors can use a relatively small amount of their own money to control a more expensive asset. However, it also increases the risk, as the investor is responsible for repaying the loan regardless of the property's performance.

Equity Build-Up: As the mortgage is paid down over time, the investor's equity in the property increases. This equity build-up can provide additional returns when the property is eventually sold.

Diversification: Real estate can serve as a diversification tool in an investment portfolio, helping to spread risk across different asset classes.

Risks and Expenses: Real estate investments come with risks and expenses such as maintenance costs, property management fees, insurance, and potential vacancies. These costs can impact the overall returns on the investment.

It's important to conduct thorough research and due diligence before investing in real estate to understand the specific market conditions, potential risks, and expected returns. Working with experienced professionals such as real estate agents, property managers, and financial advisors can help investors make informed decisions and maximize their returns.

Conclusion

Deciding whether to prioritize stable cash flow or overall returns is an important consideration when planning for financial goals. While stable cash flow can provide a reliable source of income, it may not keep pace with inflation over the long term. On the other hand, overall returns can provide the potential for higher long-term growth, but they come with higher levels of risk. The key is to find a balance that aligns with your financial goals, investment timeline, and risk tolerance. A financial advisor can help you evaluate your options and develop a plan that is tailored to your unique needs and circumstances.