If you rely on your investments for income, an important aspect of managing your portfolio is cash flow. Correctly structured cash flow is critical, so let’s have a look at what you might need to think about.
Cash flow simply looks at the payment frequency of income from an investment. This income is paid regularly (ie. monthly, biannually, annually), but can sometimes be erratic, particularly for longer term investments, such as private equity.
It differs from the total income return in that it examines how often and when income is paid rather than the actual level of income received from the investment over a set period.
It’s important to understand the cash flow components from your portfolio for two main reasons:
Diversification doesn’t stop at your choice of investment assets. You need to consider it from a cash flow perspective too. It is essential to have a sufficient mix of underlying assets within your portfolio so that a relatively even income is received throughout the year.
While some investments may look similar at first glance, a prime differentiator between them may be the frequency of dividend, distribution or yield payments and the terms on which they are paid.
Understanding cash flow is crucial to being able to maintain a budget, and following a workable budget is the key to efficiently managing your wealth and achieving your financial goals.
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