Total Cash Flow or Total Net Worth? How to Maximize Them.

If you forced us to decide we would choose the highest cash flow at this point in our lives. Trying to maximize net worth is becoming less and less important since the money doesn’t go with you when you die. That said, everyone has different opinions on what is most important to them. Maybe they have families (where the future requires setting up trusts and declaring “bankruptcy” to hand over assets) and maybe making money is just a game to them where they’re pushing the number up to change their lives as fast as possible.

Cash Flow Maximization

We’re starting with cash flow because we’re biased. Once you’re financially independent… what is the point in growing your net worth aggressively if you can’t even use it? There is practically no point at all. While you don’t want to go negative we would strongly prefer to have tens of thousands of dollars coming in per month than have $5-10M locked away in an investment that can’t be pulled out for 5-10 years.

Untouched Cash Flow Setup: The first step is creating a cash flow machine that allows you to sleep at night. This is a framework that you can use when deciding how to allocate money to your streams of semi-passive and fully passive income. You’ll have at least 8 different streams of income flowing into your P&L and more importantly, you’re likely still working since no one really quits. We set it up with the same assumptions as a prior post ($5K a month) to keep the math simple. (Click to Enlarge)

Total Cash Flow

Application for Various Assets: In this example, you have everything you need. It isn’t perfect but it’s pretty solid asset allocation to protect against many different types of “risk”. The first three items are at risk to inflation. Why? If inflation suddenly goes to 5% and you’re earning 1-4% in CDs/bonds… that value is being diluted over time. This is why you’re going to have assets that have the potential to go up if inflation increases. These assets typically include rental properties, dividends and preferred distribution assets (preferred dividend instruments). Finally, you’ve got a set of static Internet properties that generate good monthly income off of sales (not content based income since that eats up valuable time). These internet properties are more important than any of the above items because you can always build more of these boring small sites if you need more income without material updates in the future.

Variance in Cash Flow: In the top right corner is an important point. The primary reason this is “good cash flow”? There is minimal difference between your minimum cash flow and your maximum cash flow on a month to month basis. The spread is $1,200. Since you have $60,000 in a checking account for either 1) starting another Internet based business or 2) cash flow issues for your living expenses… you’ll never have to worry about eating into the principal.

In your worst case scenario, you pull out $50,000 and you have to do so in April when your cash flow is lowest. This gets you down to $8,500 in cash balance that will be replenished pretty rapidly. In addition, this incentivizes you to pursue cash flow rich businesses in the future (fast payback on your $50,000 investment).

Psychological Bank Accounts: The last thing we recommend is placing all of the cash flows from these items into one bank account. All of your future ventures will be funded from a different bank account(s). This is a way to prevent you from eating into the principal. Lets say you took out $50,000 to fund a new venture… well all of that money must replenish your “safe account”. Then, take a chunk of profits and throw it into a new cash flowing item. After a year or so your new account will look something like this (Click to Enlarge).

Total Cash Flow 2

What are the Other Bank Accounts for? The other accounts you open should be for your active income. By the time you’re a millionaire, you’re likely working for yourself so the cash flows will not be stable. The entire point of creating a “passive income” bank account is to prevent you from ever going overboard on debt load and risky ventures. If you’re levering up a *single* business that goes bust, you can always recover. Levering up all of your assets once you’re above the age of 30 is probably not worth it (as you know we anticipate most of you will be millionaires within 10 years). Once you’re set up with multiple accounts you’ll want to manage and monitor all of your cash flow using tools such as those provided by Personal Capital.

Total Cash Flow Maximization

With the basics out of the way lets move on to the good stuff: Maximizing cash flow. This way you can spend *more* every single year without worrying about going broke. Given the nature of financial investments it will be difficult  to maximize both net worth and cash flows so here are three simple strategies to maximize cash flow:

Bar-Bell Cash Flows: Take your income and split it up into two different types of instruments. Say, Junk bonds and CDs. Your income will now be split between an aggressive high yield bond portfolio (90% of excess income generated from active earnings) and 10% into boring dull instruments like CDs and money market accounts.

Lever Up: Take all of the leverage you possibly can out on one business and buy income producing assets (keep the spread). If you’re willing to lose that business then the “get cash or die trying model” can absolutely work. You can make millions with other people’s money.

Mini Leveraged Buyout: We’ve been messing with this idea lately. You lever up and buy assets you can fix on a small scale (not classic private equity, but a mini private equity). You can do this with homes, internet properties, small businesses etc. Since a lot of our readers are interested in internet businesses you can use Flippa which sells tons of websites (“we may or may not” have done several of these with other people paying them to set everything up including the bank accounts). You’ll do one of the three: 1) buy it straight and fix it knowing there is an issue with the site or 2) you can see a new business model and apply it to a different niche you know well or 3) you can rebrand it.

Which to Choose? As always success is up to you. No matter what. Anyone who finds this website/article will be the master of their own future and they deserve all the credit in the world for their successful ventures. That aside, we can say option #1 is for risk averse people, #2 is slightly riskier and #3 is the riskiest. Option 1) The barbell strategy is straight forward. You just want to spend more money next year because you’re trying to upgrade your life a bit. Maybe you just want to pay for golf 1x a month for the rest of your life. Option 2) the lever up model is usually used in real estate and is more stable/predictable relative to most leverage models and Option 3) it is tough to get leverage to buy a random internet business so rates are higher, in addition there is usually an “inflection” point in most sites where the demand is tapped out. So you have to be certain of your venture and you also want to sell right around the green area (year 5 in this example). Why? The buyer will think there is more growth potential even though it begins to flat-line at 5% a year versus the 15% it was growing at previously “blue sky” still appears to be on the table if you sell in year 5. Note: Yes all of this is rudimentary math, there are deductions, depreciation, appreciation potential, valuation of websites and other items that are not included. Time frames can also be moved in if you do good work (returns in less than a year or two). (Click to Enlarge)

Total Cash Flow 3

Net Worth Maximization

This is a different way to prioritize your future. Many people who intend to have families (or those that already have families) want to build a large net worth so it can be passed on to their children. In addition, there are many people who don’t care too much about spending more and prefer  accumulating assets as a game (making money is just a fun game after all). If you’re in this camp you’re likely going to focus more on higher risk/growth type assets that will be locked up for longer periods of time.

Private Equity: This is one of the ways to lock up your assets with a high return profile. We laugh nowadays with people saying “it’s all about fees and you should never pay a PE firm even 2%”. These individuals don’t understand risk and returns. There is a trend to simply throw your money into index funds forever and that will outperform “every” private equity firm and VCs etc. (Wall Street knowledgeable readers will not believe this but it is true, most don’t understand private equity). If this type of thinking were true… all of those firms would have a difficult time staying in business (last time we checked KKR isn’t a small company). We digress. If you’re looking to optimize for net worth Private Equity can be used as a vehicle to accelerate investment returns assuming you’re willing to leave it untouched for several years. In addition, do not go in blind and simply hand over money to any firm, you must research and be 100% comfortable with the investment vehicle you choose.

Small Cap Overweight: You can also get aggressive during downturns with small cap indexes assuming you’ve built a cash portfolio. This means you’re unwilling to lock your money away and you believe you have extreme emotional control. This is the most critical part of buying baskets of small caps. You have to buy them when everyone is selling. We don’t mean you “time the market” on a yearly basis, instead you’re going to buy as soon as we’re officially in a recession (build massive cash position and acquire small caps like no other). Once the economy is *factually* in a recession and the market in general has puked you unload all of your excess cash into small cap investments. Aggressive? Yes. Is that the point? Yes.

Below is a clear example of this strategy. We used three simple tickers to show it (SPY which is the S&P 500, DIA which is a Dow Jones Tracker and IJR which is a S&P 600 small cap tracker). We entered into a recession in the 2008-2009 time frame (roughly), if you started buying when things started to go negative (grey bars) you’d make a ton of money. To emphasize this, if you bought small caps you’d make *more* money. Since small caps take a bigger beating during recessions that’s the group you buy. In short, the small cap index went up about 357% vs. the S&P at 228% vs. the Dow Jones at 202%. Those are big differences. (Click to Enlarge)

stocks

Angel/VC Type Investing: This is yet another high risk strategy. You’re going to invest in early stage companies after they have tapped out every single source of funds they could find using their personal networks (you should be an accredited investors). Some people attempt an aggressive “bar bell” strategy here where they are taking their excess income and putting 10% into CDs and then 90% into high risk Angel/VC type project where a few outsized returns make them rich. This is not for the faint of heart and requires quite a bit of knowledge.

Concluding Remarks: The one thing to takeaway is that we did not mention a “dual process” approach. This means we would recommend choosing *one* path. You’re going to either maximize your cash flow in the future or you’re going to try and maximize your net worth. Many will disagree and that is fine. From what we’ve seen most people decide on one path (either cash flow or net worth) and develop extreme expertise in a few of the ideas listed above. There are very few people doing heavily levered real estate transactions while angel investing and buying small cap stocks. The reason? Specialized knowledge. If you can crack any of the above strategies you’ll see strong out-sized returns relative to what everyone else is doing. All that said… If you have a great strategy that doesn’t give it all away feel free to leave it in the comments.

Comments

  1. AM says

    I like the small cap strategy, it’s a good middleground between simply buying the S&P and higher return more time-intensive investments (RE, VC, etc.).

    Sure buy small caps during a recession, but I wouldn’t recommend selling before a recession, it’s easier to know when to buy than when to sell. Too many end up missing most of the gains. I prefer not to sell and just buy some more at the next recession.

    • Wall Street Playboys says

      Nice, there are many studies that show asset allocation rebalancing works best this is essentially taking that to an extreme level.

      Not easy mentally to buy a massive dip at -20% and *keep* buying through a down -40-50 trough.

      It is easier to see if the market is taking/economy goes into a recession as you pointed out

  2. Mr. Chopra says

    I think the bottom line with a good small cap strategy is to make sure you know what you are buying.

    There is no point to holding small cap when it is a bad bussiness. In the other word, you always should “do your homework” first.

    • Wall Street Playboys says

      Sure if you don’t want to do the homework you can buy a larger basket of small caps.

      600+ small caps is quite a lot of diversification. We’ve seen it work well.

      Yes, doing your homework always works best!

  3. Dylan says

    But what about someone in their early 20s who can launch a start up or business to make them maximise their cashflow?

    Is investing the only route? What about business building from the ground up?

  4. Jack says

    Hi WSPs, I’m interested in hearing your opinion on kids. Children are often overlooked by millennials, which in my opinion, is rather unfortunate.

    As you said in your post, you cannot carry your net worth into the grave. The 2 things that will last forever are your offsprings and the impact you made on the world. (e.g. If you are a real estate developer, you might’ve developed a condo, which would’ve had an important effect on society)

    I’m sure a lot of the readers for this blog are anti-natalist. And would love to hear your thoughts on the subject of children.

    • Wall Street Playboys says

      No opinion just do what you think is right.

      Side note not sure why everyone uses “WSP” we fixed it again in your comment. We’ve had people send us password protected documents only to be “shocked” when multiple people open it at the same time.

  5. Yb says

    In your example of small cap net worth maximation, how do you recommend that person withdraw profits for cashflow spending?

    I’ve played around with some excel projections based on bankroll growth and withdrawal rates and taxes. I’ve found around 10-30% withdrawal of profits each year to be a decent balance of enjoying the profits and still maintaining a high bankroll growth.

    Looking at bonds, and CD accounts for generating monthly cash flow, the small returns are imo not a good idea for say someone that is a specialist in “trading small caps” or any other financial asset. Manage a small hedge fund maybe as a way to leverage up the skill set of a small cap specialist?

    Real estate seems to have decent COCR with proper research done before buying. The drawback seems to be lawsuits and liability and lack of liquidity.

    Online sales seems good, not sure about the learning curve in # of hours spent to get profitable.

    • Wall Street Playboys says

      As long as your holding period is over a year and you’re well ahead of the market return (say 50% at least) then you can feel free to cash out and rebalance.

      Risk tolerance is up to you.

      You’re right on online income high learning curve (maybe a year investment or so). Huge benefit though is if things hit the fan you’re not tied to any specific location.

  6. Ambitious says

    Damn, I missed the Q&A, but I wanted to know how age factors into this.

    Also for investing – in the end private deals are amazing if you get the chance to get into one. The only way I know of is befriending the elite. I got into a deal simply by befriending someone, and they ended up doing me a favor and offering a chance for an investment they were going into. I also followed your advice and never ask questions about how it’s going besides maybe once every 3-6 months, and I don’t pry.

    Flipping houses can work out extremely well if you can find someone you trust with all your money and split profits accordingly.

    • Wall Street Playboys says

      It’s time frame not age really.

      If you don’t want to spend it for 20 years you can go to the maximize net worth strategies. If you want to spend it then you go the cash flow max route.

      Some people start in maximiing net worth then flip over to cash flow instead.

      Always up to you

      • Anon2 says

        Game sites are full of poor dudes.

        Wealth/success sites are full of blue pill dudes.

        WSPs is the only red pill wealth/success site I’ve found. it doesn’t have a forum.

        Keep out the poor dudes and the blue pillers so only high quality info remains? I’ll pay to join.

      • Invaluable says

        You have seen how well the whole real estate series with ownmyhood, RE Guy, etc. went. Imagine a whole forum like that, what a great resource it would be.

        A paywall would limit it significantly though, and you’re not doing it for the money. A free forum with the right mindset and swift bans, that’s the why to go. I am sure ownmyhood or some others would agree to become mods.

      • Wall Street Playboys says

        Lol! We can barely commit more than 5 hours a week no way we’re running a forum for free.

        Already going to lose money making the book. 0% chance of it ever happening for free. 0.

  7. Gerhard says

    Excellent article. Looking forward to buying ‘Efficiency’ as a way to express my gratitude for all of the amazing free content you have put out so far.

    Have you decided on an approximate price for it?

      • Mr. Red Pill says

        Damn. Is there any other way I can gain your expertise on the question above? On another platform?

      • Wall Street Playboys says

        It is not relevant or important you’re wasting your time squabbling about meaningless differences.

        The schools won’t be vastly different

        Focus elsewhere

        ^ this comment alone will save you more time and money than looking for the answer to meaningless differences. You’ll thank us later. Spend your time making your application and skills better.

    • WR says

      Doesn’t matter what school. One of the smartest kids I know who is now at Blackstone Tactical Opps went to Penn State. And I know many HYPSW kids who were idiots at the same time.

      At the end of the day, everyone’s on a almost-even playing field during the Super Day.

  8. Ben says

    Ha! Saw your piece on the barbell strategy and then realized that you guys had a 90% semi aggressive and 10% safe weight. Not sure if you guys have heard of the famous options trader Nassim Taleb, but he goes the opposite route w/ the same name: ~90% super safe, ~10% super aggressive options w/ huge upside over extended period of time waiting for a crash.

    Anyways, not knocking anything, just found it a bit amusing how strategies can almost be the exact opposite and both of you can still end up rich. No excuses!

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