Our Current Focus For Cash Flow

I had meant to post this a couple months ago, but figure it still has some relevance.

I have been wrestling with where to put our monthly cash flow. Its smaller now than it was when we had 2 incomes, but we still have a regular amount each month to "put" somewhere.

Obviously our emergency fund (basically the $30k that sits in our interest bearing checking account) is a currently an area that we are trying to grow. However, I keep thinking about inflation. I believe the government has embraced a lot of tools to help the economy recover including mechanisms that will ultimately encourage inflation.

If higher inflation is on the horizon, how do I prepare?

Resist the urge to stuff all our monthly savings into our emergency fund. We agree that we need to regrow our emergency fund, but diversifying our monthly cash flow across savings and investing is still important.

The economy crisis has presented mountains of investments opportunities and now is the time to be thinking of embracing reasonable investment risk. There are a number of stock investments that look (to me) to provide a great long term return on our investment compared to sticking the money in a savings account or debt repayment.

I also have to continually remind myself that accelerating debt repayment is not necessarily the best move either. Given our debt load and our reduction to 1 full-time income this is an area that makes me a bit nervous. I would probably sleep a lot easier once one of the 4 mortgages we currently pay are retired. We currently have enough cash flow to cover our monthly living expenses, allocate ~$500 to a major purchases and still save money - fine for the short term. However long term we need to retire some debt in order to increase the options and flexibility we have going forward. If we focused all our monthly free cash flow on one of our mortgages we could potentially retire the mortgage in the next 3-5years. However with higher inflation, it may make more sense for us to keep the debt in place and use that cash flow elsewhere.

In the near term we have been focusing on continuing our monthly contributions to stock investments. Our thinking is once we no longer see such compelling investment opportunities we will shift focus to debt repayment.

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Comments (8)

Have you thought about using a TIPS fund?

Posted by JMan | May 25, 2009 3:37 PM

Jman, I have thought about it, but haven't convinced myself that TIPS are an attractive investment. Once we get to the point that saving money (em fund) is our focus, then I'll put the money where ever it earns the most attractive yield - CDs, online savings accounts, TIPS, etc.

Also I just found this article on inflation

Posted by 2million | May 26, 2009 9:47 AM

If $30,000 is what you currently have within your emergency fund, then I agree putting your cash elsewhere may prove to be more advantageous. While I understand your position of wanting to invest, I think the solution may be to find a balance between investing and putting more towards your debt. Four mortgages is no small feat, and as I recall, you've already had one tenant who had to leave due to job loss. I rather think that you have a good deal of money already invested within these four homes and you'd be better suited to knock out some of the debt, even if just one.

I don't know what your cash flow is each month, but is it enough to perhaps divide equally between the two endeavors; or is it simply best to choose one over the other?

Posted by Kristy @ Master Your Card | May 27, 2009 12:09 AM

I don't see the need to prepare for inflation when we are in the midst of one of the most viscous deflationary cycles in world history. The name of the game is capital preservation; chasing risk at this point is a fools game. Too much uncertainty in the economy.

Lets agree on one thing: we are where we are because of a 25 year credit binge, which started under Reagan, was juiced by Clinton, and popped under W. Will decades of excess be rectified in a year and a half? Doubtful.

The idea that stocks, real estate, commodities will come roaring back presumes that credit will come roaring back. Inflation is at root the expansion of credit. But Americans are eschewing credit, paying off debt, and boosting their savings. We are, gratefully, laying the foundation for a real economic recovery -- one spurred by real savings invested in productive enterprises.

Until then, credit will continue to contract, consumers will spend less, and our economy will continue to shed 500,000 jobs a month for the rest of the year.

In this environment, where could you possibly put that extra free cash flow? Stocks have rallied almost 40% off the lows, bonds are ridiculously expensive -- still, even after the recent pounding they've taken -- and real estate may be bottoming, but that means it's simply not going down as fast as before and should take several more years before a floor is found (perhaps another 10-15% lower?).

However, paying off those mortgages and owning the real estate outright while reaping all the cash flow seems like an excellent strategy.

Best of luck!

Posted by james | May 27, 2009 11:10 PM

I agree with James. You already have too much risk exposure. Don't get carried away by over leveraging. Does your emergency fund cover payments for your rental housing in case tenants leave?

Posted by Adi | June 2, 2009 1:18 PM

I do have a seperate account that holds the excess cash flow from the rental properties- currently ~$3,500 that we can/will use for vacancies. Its included as part of the cash listed in our net worth report. Obviously for extended vacanies we would need to tap into the emergency fund, but I don't expect to have any prolonged vacancies in the near future.

Posted by 2million | June 2, 2009 4:45 PM

I totally agree about the inflation problem. I have mostly solved this by keeping the bulk of my savings in silver and gold coins. The hard stuff, not the paper stuff. There are about 20 places that will buy it from me and they are open 5-6 days per week, and I can sell them just by walking in. So it is very liquid. I get the best deal by buying them on ebay. I spend almost 10% of my income on these things now....

Posted by Jason Dragon | June 14, 2009 6:37 AM

Fantastic Post, hopefully the economy can sharpen up, lately its all gone to hell and a handbasket with the recent global and economic crisis. Lately i have been investing in gold currency just as a precaution. Currency can be valued at whatever the governement says but having something with real value could be a real lifesaver.

Posted by John Jefferson | February 2, 2010 12:58 AM