I’m in a financial crisis and that doesn’t feel good. After buying my house in 2023 and living paycheck to paycheck for six months, I promised myself I would never return to this state. Yet here I am. Some of it is just bad luck, but some of it comes down to poor planning on my part. I never expected a $20,000 capital call to happen in the middle of the winter holidays. WTH.
During my last bout of financial hopelessness, that unwelcome feeling where no matter how hard you try, you just can’t seem to move forward, I realized. Even though my investment portfolio is hitting the S&P 500 this year, I’m still feeling defeated by a series of surprise expenses, especially as my car repairs pile up with no clear end in sight.
Theoretically, I would should feel fine. If the stock market gives you big profits, those profits should be bigger than a few thousand dollars in surprise bills. But that’s not how the psychology of money works. That’s not how building extraordinary wealth works either.
Cash flow and investment profits are two completely different financial animals with different uses and different emotional effects.
Let me explain, especially if you want to FIRE.
Cash flow is for the present, investment profits are for the future
Imagine you have a $1 million portfolio that has increased by 15%, or $150,000. Great year. Pay for a slice of cheddar cheese with your next burger and celebrate. You barely lifted a finger and your wealth increased significantly.
Now let’s say your car coughs up a $2,000 repair, and your house coughs up an $8,000 plumbing problem for good measure. In theory, you could sell $13,000 worth of stock to cover the $10,000 in after-tax costs. Simple.
But emotionally? It feels terrible.
- You are robbing your future self of compounding. And we all know that stealing is bad.
- You’re triggering capital gains taxes that you wouldn’t have to pay if you had sufficient cash flow.
- You are violating the purpose of these investments: long-term financial security.
Cash flow is meant to handle the chaos of everyday life. Investment profits are meant to build freedom for decades, not put out today’s fires.
Here’s why you can be six figures up on paper and still feel financially stressed by a few thousand dollars in unexpected bills. This is one of the big disadvantages of early retirement that no one talks about.
Where we get into financial trouble: mixed funds
Some people struggle to build more wealth because they use investment accounts as giant pools of funds. There is no separation of purpose.
If your retirement money becomes your emergency fund, college fund, car repair fund, and vacation fund, you’re guaranteeing long-term underperformance. Once you start ‘borrowing from your future’ it becomes a habit.
That is why a mortgage is so effective. It forces you to save even if you can’t resist eating after 8 p.m. You pay it or you lose the house. No mental wiggle room.
The idea of “saving and investing the difference” as a renter for decades is comically difficult. There is always something to spend money on, other than your investments. As a result, housing insecurity sometimes arises.
To protect yourself, build virtual barriers between accounts.
Creating barriers between current money and future money
The more you can spread your money, the better.
1. Have a dedicated cash flow bank. This is where your paycheck comes in, the rent comes in, and the bills get paid. Its purpose is liquidity, not returns. Of course, your banker would like you to open an investment account and several other financial products. But try to keep it simple with your cash flow bank.
2. Keep investments at another institution. The more steps it takes to transfer money, the less you plunder your future. Personally, I keep all but one of my investment portfolios at Fidelity, which is separate from my cash flow bank, Citibank. I have my rollover IRA with Citibank, but I can’t withdraw the money without penalty, so it doesn’t matter.
3. Use illiquid investments strategically. Private funds, venture capital and private real estate deals hold your money for seven to ten years. You can’t panic sell them or dive into them emotionally. The forced illiquidity is a feature, not a bug. The capital calls give you an average dollar cost over a three to five year period, and you invest for up to ten years. The longer you can stay invested, the better.
Every dollar intended for the future should be kept as far away from your cash flow account as possible. This way, the money can be built up for longer without interruption.
A middle ground: reserve part of the profit
If you must If you’re connecting the two worlds because of cash flow issues, do so consciously.
You could assign 5–10% of annual investment profits for life’s inevitable surprises.
Example:
Portfolio: $1,000,000
Profit: $150,000 for the year
Allocation for surprise costs: $7,500 – $15,000 (5% – 10% of profits)
You’ll still keep $135,000 – $142,500 in long-term profits and avoid beating yourself up over every broken device or medical bill.
What if you don’t end up using the entire “surprise fund”? Reinvest, of course.
Difficult to go from a saver to a spender
I have been keeping cash flow and investments separate for more than 25 years. It has worked wonders in building wealth. So we have to think about selling risky assets to pay for nasty repairs feels like breaking a sacred rule.
Selling government bonds before maturity to pay bills and buy stocks was hard enough. Selling shares that could be three to five times larger in five years to pay for surprise costs feels terrible.
Imagine selling $25,000 from a future winner just to pay off a car loan that’s already annoying you. Then imagine realizing that you’ve lost out on another $100,000 in profit as a result. This is a real possibility when investing private AI companies Today.
On the other hand, these tech stocks could just as easily take a nosedive. And when they do, you can really feel it relieved that you took some profit off the table to cover life’s necessary expenses while you had the chance. But since stocks rise about 70% of the time in any given year, your opportunity cost of staying uninvested will likely continue to rise.
FIRE is a heavy burden on cash flow
When you are FIRE, you no longer have the comfort of a fixed salary. Sure, you may have a few side hustles, but consistent active income is gone. If you have given the gift of FIRE to your spouse or partner, then you really have no one to rely on.
After I bought a new house a few years ago, my cash flow took a major hit. This was a self-inflicted wound due to desire, which is the cause of all suffering. I found my way back with solid progress. However, I’m still about a year out, assuming the stock and real estate markets work together.
If you want feeling Like a poor millionaire, try to live with a razor-thin or even negative monthly cash flow. It doesn’t matter what your net worth is. Tight cash flow makes everything feel stressful.
If you want feeling just like a rich millionaire you need two things:
- A cash flow after taxes that covers comfortably at least 120% of your monthly expenses, and
- A minimum of 12 months of living expenses that you can enjoy without difficulty.
That’s the difference between living rich and simply having a high net worth on paper.
Give yourself some grace after 20 years of discipline
If you’re still in the first twenty years of your financial independence journey, you should keep your cash flow and investment gains strictly separate. Let your winners remain untouched.
But if you’ve been disciplined for decades, it’s okay to tap into a small, predetermined portion of your investment gains every now and then to smooth out life’s bumps. After all, the whole point of saving and investing for so long is: not worrying about money, rather than feeling financially hopeless when something goes wrong.
For most people, the optimal strategy for building wealth is simple: use cash flow for the present. Use investment profits for the future. And don’t let one ruin the other’s atmosphere.
Over the past year I’ve had to accept that my cash flow just isn’t what it used to be. With expenses rising as inflation rises and income declines, the only realistic way to absorb unexpected costs and still provide for my family is to tap into more and more investment gains. And honestly, that’s exactly how it should work once you retire.
It’s just hard to rewire the mindset after a lifetime of relentlessly saving and investing for the future. But I’m doing my best to change.
Readers, do you differentiate between how you use cash flow and investment gains? Do you worry that tapping into investment gains for too many different expenses could weaken your financial discipline over time? If you plan to BURN, are you prepared for the uncomfortable reality of feeling cash flow squeezed more often than you’d like? And when the time comes, do you think you can actually sell risky assets to finance your post-retirement lifestyle?
Get your year-end financial audit
One tool I have leaned on since leaving my day job in 2012 is Empower’s free financial dashboard. It remains a core part of my routine for monitoring wealth, investment performance and cash flow.
My favorite feature is the portfolio cost analysis. Years ago, it turned out that I was paying about $1,200 a year in hidden investment fees – money that is now being collected for Mine future instead of someone else’s.
If you haven’t reviewed your investments in the last six to 12 months, now is the perfect time. You can do a DIY check or one free financial assessment through Empower. Either way, you’re likely to discover useful insights about your allocation, risk exposure, and investing habits that can lead to better long-term results.
Stay proactive. A little optimization today can create much greater financial freedom tomorrow.
Empower is a long-term partner of Financial Samurai. I’ve been using their free tools since 2012 to track my finances. Click here for more information.
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