How to Get More Income from Less Investment
If I told you there was a way to make more income from less money invested, would you want to know about it?
I hope you would.
You could retire earlier, with more money. And have more time to spend experiencing the world with your family and friends.
More money and more time to live your life sounds like a great deal!
This is a concept I call "cash flow equivalence". It's one of the most important but least understood ideas in personal finance.
In this post I'll show you how to get more income from less investments and answer the question "What is cash flow equivalence?"
I'll also give you specific examples.
The Math Behind Cash Flow Equivalence
Cash flow equivalence is the amount of income you can generate from different types of investments.
Some investments only provide 4% of income. Other types of investments offer 7-12% of income to the owner. With one specific type of investment you can get 20-50% of income each year.
This is not made up. I'll show you specific examples later in this article.
Cash flow equivalence means you can get the same cash flow (income) from a much smaller amount invested.
Think about if you wanted $100,000 of annual income in retirement.
Investment Needed for $100k at Income % of:
With an investment that provides a 4% income, you would need $2,500,000 of that investment.
$100,000 / 0.04 (4%) ＝ $2,500,000
With an investment that provides a 8% income, you would need $1,250,000 of that investment.
$100,000 / 0.08 (8%) ＝ $1,250,000
With an investment that provides a 20% income, you would need $500,000 of that investment.
$100,000 / 0.20 (20%) ＝ $500,000
With these three examples, you get the equivalent cash flow ($100,000) from different amounts invested.
That is cash flow equivalence.
You will see real examples of each of these below.
Breakdown: 3 Types of Cash Flow Equivalent Investments
What are the three types of investments I used in the hypothetical examples above?
- Publicly traded investments
- Private real estate deals
- Personal business ownership
Here is a break down with pro's and con's of each one.
First is public stocks and bonds:
Public Stocks & Bonds
Mutual funds, exchange traded funds, stocks, etc.
Public stocks and bonds are the most common way to invest. With technology it's never been easier (or cheaper) to get started. Simple to automate your savings and investing. Takes a long time to save enough to provide a good income (40+ years?). Stock (and bond) market crashes are a feature, not a bug. Widespread news coverage can lead to panics and fads. Income over 4-5% not sustainable.
If you're new to investing in pubic stocks and bonds, or want a refresher, I have an Investing Boot Camp course coming out soon.
You'll learn the types of public investments, how to get started, how to automate your savings, and how to maximize your wealth with your investment accounts.
This is for people with a Roth IRA, Traditional IRA, 401k, 403b, or other common investing accounts. If you invest in mutual funds, exchange traded funds or stocks and bonds directly, this course is made for you.
Next up is private real estate investing:
Private Real Estate Investing
Rental property - both residential and commercial
Private real estate investing involved joining a small group of investors to purchase (and get income from) a rental property. Often an apartment complex or commercial building. Income can be higher than stocks/bonds. Access often limited to accredited investors. Owning only one property is not diversified. External risks like weather or demographic changes can affect returns.
People new to private real estate investing should start by learning basic real estate investing principles.
Coach Chad Carson has a terrific blog about real estate, rental properties and building wealth through real estate investing.
Often people start with a local rental property, then graduate to private real estate deals. Some investors eventually put the deals together themselves.
You have lots of options (and income) possible with real estate.
Finally there is personal business ownership. My absolute favorite:
Personal Business Ownership
Starting or buying a cash-flowing business that you own.
Private business ownership is where most wealth (and freedom) is created. It's super easy to get started today with low overhead. You can get massive leverage through the internet and automation. Starting can be scary if you haven't learned some basics or get bad advice. Most people quit too soon or get into bad business types (restaurants, MLMs, high-overhead, etc.).
Name the richest person you know of.
There is a 99% chance they started through personal business ownership.
- Warren Buffet - Amassed his first millions via an investing business he owned.
- Bill Gates - Started Microsoft as a personally owned software business worth $350 million (his 45% share) when it went public in 1986.
- Jeff Bezos - Started his personally owned online bookstore with money from his parents.
I would bet the wealthiest people in your city or town are business owners.
Business ownership provides the best opportunity for wealth, time freedom and making a difference in the world.
Here are some real examples of the three types of cash flow equivalent investments.
Real Examples of Cash Flow Equivalent Investments
Now let's look at examples of the three types of cash flow equivalent investments.
You can combine them for better diversification and more income. That means you'll be better off when the stock market wobbles and be able to retire with less money invested.
That's a great combination!
4% Income Investment (Stocks and Bonds)
When you invest in your Roth IRA, 401k or brokerage account, you're saving money that will give you around 4% of income in retirement.
The majority of financial advisors use the 4% income rule of thumb. This has been a standard practice for the last 20+ years in retirement planning.
The 4% rule is inaccurate for planning purposes. While not completely worthless, you should know the problems with using it as a planning tool.
Here's further reading on the traditional 4% Rule:
- Four Percent Rule (Investopedia)
- Is 4% Withdrawal Rate Still a Good Retirement Rule of Thumb? (Kiplinger)
- How Long Will My Money Last? (Wealthific.com)
7-12% Income Investment (Private Real Estate)
Private real estate involves owning a residential or commercial property and renting it for income.
It's not unusual for the net rental income to be 7-12% of the purchase price. This can vary widely depending on the type of funding used.
If you were to buy a rental property yourself and fix it up, your income could be even higher. Maybe 10% or 12% on your invested money.
The benefit of starting with a single rental is you get all the experience.
Once you understand how it works you can add more properties or try private investing deals.
20%+ Income Investment (Business Ownership)
You can buy an operating business with current cash flow. This is best for someone who has more money than time.
You can start your own business and build up the cash flow over time. This is best for someone with more time than money.
Here are some examples of existing businesses for sale:
Yes that is a 35-55% annual income on the purchase price.
That's the power of personal business ownership to get more income from less investment.
Sure there's work involved, but you could hire someone to help out and it would still crush other income options for your investment money.
Maybe it takes you 3-5 years to feel comfortable buying a business. So what?
Imagine having an investment that pays you 20%+ that is not related to the stock market and that you have control over.
When you're getting 0.05% in a bank account, how could you not consider having some money in a cash flowing business paying out over 20%?
How to Get 158% More Income With Better Diversification by Combining Investment Types
Let's compare the amount of income you get from only stock and bond investments with having a combination of public, private and personal investments.
You can be better diversified while increasing the amount of income you receive.
We'll assume you have $1,000,000 to use.
Stocks and Bonds Only
Strategy: Invest entire $1,000,000 in a diversified stock and bond portfolio. Increase income by 2.5% annually for inflation for 10 years.
Year 1 Monthly Income: $3,333 per month
$1,000,000 x 0.04 (4% Rule) = $40,000 / 12 months = $3,333
Year 10 Monthly Income: $4,279 per month
Combo of All Three Types
Strategy: Invest one-third in each type of investment (public, private and personal). Increase income by 2.5% annually for inflation.
Year 1 Monthly Income: $8,610 per month
$333,333 x 0.04 (4% Rule) = $13,333 / 12 months = $1,111
$333,333 x 0.07 (private r/e) = $23,333 / 12 months = $1,944
$333,333 x 0.20 (business) = $66,666 / 12 months = $5,555
$1,111 + $1,944 + $5,555 = $8,610
Year 10 Monthly Income: $11,053 per month
A monthly income of $8,610 is 158% more than the $3,333 you would get using only stocks and bonds.
In fact, the $8,610 you could get with the combo in year one is double the income from stocks and bonds in year 10.
And you would have two-thirds of your money NOT in the stock market.
Imagine how that would feel next time the market crashes.
Summary and What to Do Next
You've taken the first step toward building more wealth and income, which is education.
You now know what cash flow equivalence is and what an impact it can have on your retirement planning.
It's the key to getting more income from less investment.
The next step is to get started on adding these other types of investment to your financial life.
Where will you start?
- A local rental property?
- An online business?
- Private real estate?
Let me know in the comments below.
- Tommy Sikes