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1 question to transform your finances

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Pitcher of beer? Doesn't produce cash flowsTalking to Bankrate’s senior financial analyst Greg McBride about investing in gold one day, I asked him why he thought gold was, in general, not a great place for normal people to put their money. His reply was something like, “It’s metal. It doesn’t produce cash flows.”

Later I thought, why not apply that to everything?

See, stocks and other good investments produce cash flows: money you get just for owning that investment. For stocks, that comes in the form of your share of all the profits that company makes, paid out either as dividend checks, or as appreciation of your stock as the price increases. For bonds, it comes in the form of coupon payments that a company makes to you in exchange for lending them money for their business.

Sneaker collection? Doesn't produce cash flows
But any way they come, cash flows are awesome. At its best, a good portfolio of stocks and bonds is like a magical box that fills up with money every few months. That you just get to have. Without doing any work at all.

Eventually, if you build a box that’s big enough, you can cover all your living expenses, and never have to have to worry about getting laid off, or even working again if you don’t feel like it. If someone offered to sell you one of those, you’d probably buy it, right? But instead, most people spend their money on things that don’t produce cash flows — new iPhones, clothes, sneakers, restaurant food, etc.

To me, the most valuable thing I can have is freedom to spend my time as I choose, and financial independence definitely makes that easier. So, as far as my own personal finances go, I’m trying out a new test for whether I should buy something: Does it produce cash flows?

Oracle Corporation? Does produce cash flows

That’s especially true for things you usually have to borrow money to buy, such as a college degree. For most people, their main source of cash flows is a paycheck from their employer, so spending money on education or a professional certification that will get them a better job does produce cash flows. Similarly, if having the ability to travel a little farther to work could mean a higher-paying job, buying a basic car can help you produce cash flows, which may make taking out a small car loan worth it. Or, if you’re the creative or entrepreneurial type, borrowing money to create a business or intellectual property that generates royalties can also pass the test.

Obviously, in the real world, you’re always going to have to spend some money to maintain a standard of living that doesn’t make you miserable. For instance, taking my wife out to dinner for our anniversary is unavoidable; if I want to have a good marriage, and I do, then it’s money I have to spend. But when considering the universe of possible things to buy that I don’t necessarily need, I’m going to try and stick with things that produce cash flows from now on.

What do you think? Is there a specific litmus test you use before buying something?

(photos, from top to bottom: Flickr users skipjack 2000, nikochan and Håkan Dahlström)

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18 Responses to “1 question to transform your finances”

  1. Interesting litmus test. I do think that is a good one, but I just go with the tried and true “Do I need this?” or “Can I afford this?”. They seem to work well for me, but I might incorporate the “Does it produce cash flow?”.

  2. Claes says:

    Yeah I think those are great litmus tests as well and definitely think they should be go-tos when considering a purchase. For me personally, though, I can fall into the trap of rationalization that leads to some highly irrational purchases and wheel-spinning, which is where the cash-flow question helps.

  3. matt g says:

    i wait 1 week, if i still want it (often times i don’t) i will pull the trigger. interesting new spin “will this purchase generate cashflow…” i suspect my spending will decrease if implemented.

  4. Trogdor says:

    Do you know what else doesn’t produce cash flows?
    Single family homes that you live in.

  5. Chad says:

    Awesome article. I like the perspective! Taking your wife out to dinner for your anniversary may not produce cash flow, but it sure PRESERVES your cash flow…because you won’t lose half of it in a divorce! :)

    Chad

    • I’d like to some day soon do a complete analysis on the cost of divorce and break it down to annual. I think this can put some cheapskate tendencies into perspective if it would cost someone $30-$40K a year to get divorced…

  6. Claes says:

    Matt G: it’s definitely done that for me … Trogdor: exactly right; only cash flows I’ve ever seen from my house are negative ones to Home Depot! … Chad: Thanks! And yes, exactly … if wifey ain’t happy ain’t nobody happy

  7. Brandon says:

    Trogdor: easily the best name on the site.

    *I have nothing else to add to this post

  8. Topher says:

    I made a heap of money from gold, cash flow or no.

  9. Claes says:

    Topher, you and lots of people have, but my issue with it is over the long haul, gold rises no faster than the rate of inflation. So if someone is trying to save for retirement or something and putting money in gold, they’re not going to see much in the way of growth in real terms.

  10. MrCoffeeCup says:

    Great article: However, Cash flow, needs to provide security(a three legged stool) .

    When the ship hits the sand so to speak; this prepper says you need your security to provide survival tools.

    Cash, enough for 6 months in small denominations (provided it’s accepted).
    Grid supply back-up systems.
    Sustenance in the form of food, meds.
    Gold ! The ultimate value commodity exchange !

  11. adam carolla fan says:

    i’ve been using this “buy something, get two tacos for free” text message at jack in the box lately. probably used it 20x in the past month, easily. some good eating.

    does the food produce money for me? no.
    do i need it? no.
    is it healthy for me? no.

    but i love a good deal…..and it tastes dayum good!

  12. Claes says:

    MrCoffeeCup: Thanks! Agree cash and gold are good stores of value, and definitely think there’s an argument to be made that keeping some on hand is a good hedge. In terms of prepping, might add arable land, too.
    AC: I am also not immune to the promise of a good taco. Eating out is actually one area of spending where I’m trying to do better. Too bad they don’t have Jack in the Boxes in Florida.

  13. Meagan Bell says:

    love this! Should have used this test when buying stuff at Home Depot this morning. Mulch for my front yard, doesn’t produce cash flows.

  14. Fred says:

    True, gold doesn’t produce cash flow, but it does preserve wealth. If you have enough money to buy gold it is the same as buying insurance to preserve your purchasing power. I think the excuse that it doesn’t produce any cash flow is a narrow-sighted approach. See how much your paper is worth when this socialist paradigm obama has created, crashes.


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