For me, cash flow is one of the most important aspects I check when I invest in a stock because I am a dividend investor and my dividend payments are coming from the net positive cash flow of the companies.
For companies, if more cash is coming in than is going out, then they are in a positive cash flow situations, and the excess cash can be paid back to their true owners, aka shareholders, in the form of dividend or share buyback or pay down debts.
And, most importantly I love those companies who improve their positive cash flow over time, so I can we receive growing dividends year over year.
Similar, when it comes to my finance, I think myself as a CEO of my wealth fund and look for a way to boost my free cash flow so I can use the excess cash to either buy more assets or pay down debts.
There are a couple of ways to boost my cash flow.
One of the possible options is to work hard and improve salary from my day job, but I am not interested in taking additional responsibilities along with stress to boost my salary. Because if I stop working, then this cash flow will also stop.
The second option is to buy income-producing assets (dividend stocks, rental properties, etc) using my excess cash flow.
And, the third option is to cut spending without scarifies my quality of life.
I love those last two options because they just need very minimum maintains to generate constant or improve cash flow for a longer period without my full presences.
I think many of you already know what are income-producing assets, especially dividend growth investing and how you can boost your cash flow by buying high-quality dividend growth stocks and hold them for a longer-term.
In this post, I will discuss a little bit about my spending.
Spending
Everyone one of us has two types of spending- fixed and variable.
Example of fixed and recurring spending is our insurance costs, utility bills, property tax, cellphone & internet bills, mortgage payments, interest payments, etc. No matter what, we will need to pay these bills almost every single month.
Example of variable expenses is our fuel cost, grocery bills, clothes, entertainments, etc. These spendings vary and can be easily controlled by choosing alternative options.
Some of the fixed expenses are almost impossible to reduce. A good example is the property tax. Only one possible way to cut this expense is to downsize your home or move to a different city with a lower property tax rate.
And, rest of the fixed expenses can be cut down by simple phone calls, emails and also with your bargains power. Even if you could reduce your interest payments by $50 per month, which translates to $600 per year.
If you invest $600 with 5% yield, then you could generate an additional $30 every year, and so on.
This is what I did with my mortgage and other interest payments last month.
My Mortgage
I purchased my first home in 2014, and signed a mortgage with 5 years fixed rate with Royal bank.
By the time, my financial situation was so bad with massive student loan debts around $30, 000 and net-worth around $50 000. Also, my financial knowledge is lower than today.
I had a very limited ability to negotiate for a better deal. I was in the same situation and mentality of first-time homebuyers.
Mortgage Renewal
Fast forward 5 years, my mortgage came for renewal. My actual mortgage renewal is on December 2019, but RBC offered me early renewal option 120 days before renewal date.
I shopped around, negotiated with my bank and reduced rate by a few basis points.
Besides, I was able to add $20 000 new debts into the mortgage. It is kind of re-mortgage, but without going through all the traditional paper works.
My actual plan to use the money to pay down my student loan debts and some other credit card debts.
My Student loan debt
Middle of last month, I had around $12500 student loan with the interest rate of 6.45%. It is the highest interest rate I pay for my debts.
Now, I borrowed money for 2.69% 5 years fixed and able to pay debts with interest rate of 6.45%. I think it is a good move to improve my cash flow.
In this way, I can boost my free cash flow by $470 per year. Also, I cut down a few other debts.
Actually, I didn’t immediately pay down my student loan debts. I just paid down a few thousand dollars in student loan now and used the rest of the cash to pay down some credit cards debts because their promotion rates are coming to end soon.
Once I receive a new low rate offers from my credit cards, I will pay down my student loans completely.
If I had waited for a few more weeks or months, I would have received even better mortgage rate, but the future is hard to predict. If the Canadian economy is improved, then the rate may move higher. So, I locked it now.
It is done.
Predictable payments
Now, I have 5 year fixed and importantly predictable payments. Even though my mortgage amount is slightly higher, but my bi-weekly payments are lower than before because of the lower interest rate.
Overall, my cash flow got a nice boost. Now I can use the extra cash flow to buy more assets or continue to reduce debts.
In my next mortgage renewal, 5 years from now, my financial situations will be even much better than today.
Therefore, I may able to pay down my mortgage completely in my next renewal.
Disclosure: I own shares of RoyalBank of Canada (TSE: RY). Here is my full list of investments.
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