Understanding the Difference between Income and Cash Flow

This is part 4 of 8 blogs on what today's smart investors need to know in order to create sustainable wealth for you and your family.

Income and cash flow are not the same thing even though most people think they are.

Most people think in terms of how much they can safely take from their portfolio for living expenses. The correct way to think is how much they can safely spend from their portfolio for living expenses.

It is a big mistake to think that you should get the cash flow that you need only from portfolio income (dividends and interest) without ever touching your principal. This is an emotional issue that is sometimes hard for folks to overcome. By doing this, you can pay more taxes than necessary.

Investors need to focus on the total after-tax return of their portfolios. Selling stocks when they are have appreciated and using that money for living expenses is a far more tax advantageous way of creating the cash necessary for lifestyle.

Bottom line: The way in which you generate income can have a tangible effect on the growth of your assets as well as on the taxes you pay.