Quite a while back I talked about the importance of having and being able to increase your free cash flow. As a reminder, your free cash flow is the portion of your income that is left over after you’ve paid all of your necessary living expenses. Many people also refer to it as their discretionary income, but instead of just spending it at your discretion on whatever you feel like, you need to start putting it to work for you.

Since it is your “free cash flow”, you can choose what you’d like to do with it, and there are a lot of different options available. You also need to realize that many of the available options can be considered good but not necessarily the best. Only you can decide for your situation how to best allocate your free cash flow, but it will require some thought on your part. So here are a few of my thoughts on the subject, and in my opinion, there are two main things that should be done with any free cash flow that you have:

1. Save up X number of months worth of living expenses as a security blanket, emergency fund, or whatever else you’d like to call it. I personally have the goal of a one year emergency fund, but again, you decide what’s right for you.

2. Buy investments that in turn produce more cash flow. By doing this, you’ll continually be increasing the amount of available income that you have with which to pay your living expenses and eventually become financially free. Investing for cash flow is in contrast to investing for capital appreciation which excludes most mutual funds and other traditional investments.

The reason for the focus on cash flow is because that’s what we live on. Even with a traditional retirement plan, people hope to accumulate enough over their working life which will produce enough income to live off in retirement. So it’s imperative to mind your free cash flow and find ways to increase it. And as always, I’d love to hear any comments that you have on the subject.

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