Having multiple cash flows - is this the ultimate goal?

M. asked me: Should having multiple cash flows be the ultimate goal? Some say that this defines the level of wealth.


Multiple cash flows are nice to have. If they are multiple, at least some of them should be passive or you will work yourself tired.
This goes along with not keeping all eggs in the same basket. But maybe instead of juggling multiple small baskets one can get a single really sturdy basket with a lid and with a low upkeep and have all the eggs in it?

How will that define the level of wealth? It depends on how much return those eggs will bring.

Articles about generating passive income are very popular right now. The suggestions focus mostly on something like creating an online course, writing an e-book or some other side hustle.
If you are a high income earner, you will not bother with anything like that. A super successful online course or an e-book are "zebras".

I prefer 'horses".  "Horses" in this case will be using your saved money to produce additional income. Some people buy timber land and get income from timber, some buy farms and rent them out, some buy rental property. This requires work and dealing with people.

I was looking for something like a business that produces income but has no customers to deal with. And I found it in investing.

I see my investments as a business which I bootstrapped with my savings. The trading fees and expense ratios are business expenses. The realized gains and dividends are income (which is taxed). The stocks and other investment vehicles are your "clients" and you can be very selective with which clients you work. The good thing, those clients never complain.

This business is brutally honest. Any mistake in investing is your own mistake due to lack of knowledge or experience. The more you know the better you get.  

The percentage value of your return is the profit margin. You can get down your business expenses by picking a broker with lower fees. There is not much tweaking on taxes. But you can select your clients and you can fire your clients too. You can follow up with the statistics and see how your business is doing.

You also an choose the degree of involvement into this business. You can put it onto the slow burner and just buy ETFs and dividend paying stocks long term. Or you can choose to be more active.

Like every business it will have seasons. And they are called "bear" and "bull".  They vary in length but those are just seasons, and after a bear there will always be a bull. And after a bull there will always be a bear. I know, the previous sentence sounds like I am unconcerned about the bear markets. I am actually concerned a bit, but I am not close to retirement and if one will happen tomorrow, there is still time to recover. Also the dividend paying stocks give you some protection during the bear markets. I am curious to see how I will deal with the next bear.

I would separate 4 levels of risk in this business:
Risk level 1: Very low risk - CDs, government bonds, money market accounts
Risk level 2: Medium risk - ETFs, dividend paying stocks with good track record
Risk level 3: High risk - Non-dividend paying stocks or stocks of troubled companies, junk bonds
Risk level 4: Very high risk - Penney stocks, options

Many might disagree with this classification and it will be just an opinion against another opinion. Only results will matter and show who is right.

Since I have a very big fear of loss, my risk level is level 2. I might move slower, but at least I will move forward.

A good thing about this type of business - investing doesn't take much time. Any other side hustle feels like a second job with very low pay compared to my main job.

By the way, this blog is not a side hustle. It only qualifies as a hobby. It costs $12 a year to maintain and has brought in $1.5 trough advertisements this year (there were 2 clicks on the ad banner sometime 2 months ago). That is it. 
I am writing just for fun and education. $12 per year is really not a big deal. I am not doing anything to promote it. Mainly because I want to stay anonymous but also because that requires to post comments on popular blogs so people can click on your name and see what blog do you come from, but I am too introvert for that. 

In elementary, middle and high school my school jobs were "class nurse" and "stengaseta" - Russian word for school wall poster/news paper. That is almost the same I do now. Physician and blogger, hahaha. But at home I had a different job. I was "the money keeper". My father was giving me the money from his side hustles to hide from my mother. I kept it well. Mostly I didn't give it back to him, because many times he forgot to ask back for it. I had a good stash. I still do the same thing today. Of course I don't keep my father's money, now I keep my own. I use this Warren Buffet's rule: Never loose your money. So I keep it.

If some strange star constellation will move me to write an e-book, writing it shouldn't feel like a second job. If that will be fun, like this blog, I might. I just don't know what about...  

Update on how much do I need to stop worrying

While I was working on organizing my non-probatable assets, I read few personal finance blogs.

All say about the same:
Trinity study is obviously the best or the most popular study to determine your withdrawal rate to make sure the money will last trough the retirement time. And that is 4% withdrawal rate on $3,000,000 saved.

Some people, especially in the comments section, were concerned about market downturns which no one can ever predict.

That made me think about the market downturns.
I went to the stock charts and checked how deep did the market go while recent market "crushes".

The drawdown was about 50% for indexes. It was more variable for stocks. 

Here are some of my thoughts on how to combat that:

Option 1: The downturns are temporary. I can sit them out.
Especially if I accumulated for many years and the average price will not be the top price. The 50% decrease will be  from the top price (and not from the average price) and that will not be as critical after years of accumulating. 
   
Option 2: I can increase my magic number from $3,000,000 to $5-6,000,000. That number appears to be difficult to reach, because I don't know if I even reach the $3,000,000. And I will have to call it the "super-magic number".

But if the downturn is about 50% only from the top price and it might be only about 30% from the average, I might need only approximately 30% increase in the magic number and that will be approximately $4,000,000. This is still very far out but looks more doable.

Option 3: I could create an additional source of income. Dividends would be one option. Dividends, in most cases, are paid during marked downturns and can help to bridge that time. I can't think of any other realistic options working full time.

Recalculation of "How much do I need to stop worrying" - now it looks much better and simpler.

I am not a political person but this week I attended a meeting with Congressman Phil Roe as a key note speaker. One of the things he talked about was the Social Security. 

In his opinion social security will persist but it will change. One of the things what may change is that the retirement age will be pushed further toward 70. The other is that people may be vetted in based on their available retirement resources.  
The last one, the vetting (or means testing), worries me because that will mean all the paid in money will be gone, because very likely I will not qualify if they start vetting in. 

As you see in my other post I calculated how long the retirement savings will last, the second table was calculated without social security benefits. I calculated that with very conservative 1% yearly return rate.  
It looks like it might be enough until I am 97 years old. But as you know I have a "Challenge102" going to beat my granduncle who is 102 years old. In that case the money can become tight and I don't like it. 

Somewhere I read about the risk to die without using up all your money or "outliving your money" but it doesn't concern me at all. I am generous and my daughter can have whatever is left. 

Back to the retirement calculations. There is a way to improve this situation and this is to reach a higher rate of return, 5% will probably do it. 

Now I am changing the previously very conservative return rate of 1% to more realistic return rate of 5% per year and recalculating everything.  

I used bankrate retirement income calculator with settings of 3% inflation and 5% yearly returns. Per that calculator the $3,000,000 will be enough. After 50 years the ending amount is still approximately $3,000,000 and I can withdraw about $13,000 per month before taxes for 50 years without changing the capital (it is because they use withdrawal rate of 4% which is less them my set return rate of 5%). 

With this monthly withdrawal amount the ending balance will still be $3,000,000. If I want to withdraw more, I will have to use some of the capital but it still should be enough. 

Now, after this recalculation it looks like I only need 2 things:
1. I need to reach $3,000,000 in savings.
2. I need to reach stable 5% yearly return after I reach $3,000,000 in my savings. 

This simplification is motivating.
Here are my new 2 goals which I will track and update:
1. Track the savings and see when I will reach this magic number of $3,000,000. 
2. Learn how to reach stable 5% return per year. 
(3). Beat my granduncle so all my savings efforts make sense. 

When I reach the goals I will celebrate big! 

Challenge "cash flow" - why?

Why do I want this challenge?


The most common advise is to do "indexing". That means to invest long term in an exchange traded fund or a mutual fund that tracks a major index like S&P500. I already do it in my 401k. 

But I don't feel like I am in charge of what is happening. It is a very passive position. I feel like I am carried by the waves on a flotation devise. 

Indexing is easy and the wave may take you up for a nice ride when the market goes up. Buth the wave can also take you down when the market goes down. 

Instead of just floating up and down with the wave I want to learn to swim by myself. I plan to add individual stocks and not be restricted to the ETFs.

So I am starting a new challenge: "Cash flow"

0. "Floating" = yearly expenses are not covered by investment income
1. "Swimming" = yearly expenses are covered ($50,000)
2. "Sailing" = double of yearly expenses is covered ($100,000)
3. "Motor boating" = anything over $500,000
4. "Cruise ship Capitan" = $1,000,000 and above (yes, as long I am dreaming why not?) 


It might not be a very wise decision to do more then just indexing. So many people support it and warn against individual stocks. 
I will carefully select stocks and keep them in a separate account where I will do no indexing. I will do that for a few years and compare the returns to the SPY. If I will not be able to beat the index within 5 years, I will just go back to indexing only. 

What is "Indexing"?

Indexing is a passive long term investment strategy.

Indexing can be achieved with mutual funds or exchange traded funds (ETFs) which closely tack the performance of the underlying index.


SPDR S&P 500 ETF (or SPY) is an example of an ETF which closely tracks S&P 500 index.
SPY holds 500 companies that make up S&P 500. 
People like indexing because with little effort this is a way to diversify. The 500 companies of the SPY are supposed to be approximately 80% of the overall US stock market.


With this method the investor will:
1. Achieve the same rate of return as the underlying index.
2. Will be exposed to the same risks as the underlying index.
3. Achieve a good degree of diversification.

Most of my investments are in index funds at this time. As mentioned above, it is easy, it is diversified and the return averages are acceptable. 

I have another post about how I do indexing for myself: Indexing simplified.