Difference Between Cash Flow and Capital Gains with Chart

Scale Time Money | Difference Between Cash Flow and Capital Gains    There are two major reasons you invest; for cash flow or for capital gains. What’s the difference between cash flow and capital gains investing? Cash flow investing buys assets that generate income while capital gains investing buys assets with the expectation they will increase in value.   There are some important nuances with both cash flow investing and capital gains investing. For example, the term “cash flow investing” is often loosely used for investing in income generating assets. And many investments can have both cash flow and capital gains as you’ll see. This article will address these important factors and more. I also made a chart outlining the differences between cash flow and capital gains investing which is below so keep reading.

Major Investing Focus 

One of the primary differences between cash flow and capital gains investing is the reason you do each.   The main reason for cash flow investing is to provide funds to pay the bills, or even grow your wealth.   On the other hand, the main reason for capital gains investing is to buy assets that increase in value while you own them so you can eventually sell them for a profit.    difference between cash flow and capital gains

Timing for Cash Flow Vs Capital Gains Investing 

Another major difference between cash flow and capital gains investing is in how long it takes to accomplish the desired result.    The goal from cash flow investing is accomplished when the expected income flows into your account. This usually occurs ongoing monthly or quarterly.  Real estate rentals and bond interest income may flow in monthly, for example. Income can also be received immediately after an income generating asset is purchased.  For example, dividend income may be received within a day of buying a stock.   On the other hand, accomplishing the goal from capital gains investing often takes years. While there are exceptions, such as flipping real estate or short term stock trading, most investors have a very long term approach for achieving capital gains.  

Capital Gains Vs Income Investing and Taxes    

Taxation is treated differently among the various aspects of both cash flow and capital gains investing but the two investing methods can overlap when it comes to taxes.   Taxes are an important but often overlooked factor for investors to consider when choosing between cash flow and capital gains investing.   There are many variables that affect how taxes will affect your investing results from either method so let’s look at this more.   

Tax Favored Accounts 

Investments made for cash flow are usually owned in a different type of account than capital gains investments. For example, capital gains tend to be held more often within a tax deferred account or a tax free account, such as an IRA or 401K. (Rules vary.) On the other hand, income producing assets are often held outside a tax advantaged account. This is because, otherwise, the income would be “trapped” inside the tax deferred (or tax free) account. When this happens, the income cannot flow out to the investor unless a deliberate withdrawal is being made from the account, such as an RMD (Required Minimum Distribution).  

Cash Flow Investments with Tax Benefits 

Also, cash flow strategies can have benefits that lower overall taxes from investments based on the strategy itself, as opposed to just where the asset is held. For example, real estate rental ownership has the benefits of depreciation write-offs and 1031 exchanges that investors may use.   Another example is when cash flow investments have tax benefits as a result of being structured as an S Corporation, which is common with small business. 

Capital Gains Taxes   

Then there are also the tax benefits from lower rates that apply to long term capital gains. This benefit, however, can apply to both cash flow investments, such as real estate, and capital gains investments, such as growth stocks.    You can see how much a role taxes play into both cash flow and capital gains investing.  

Bull and Bear Markets  

Since the primary goal of income investing is getting paid income, goal achievement from cash flow investing is usually less affected by economic and market cycles. While the value of the asset that generates the income often drops as a result of a bear market or economic slowdown, if the income continues to be paid, the goal is accomplished.    For example, a stock paying a 5% reliable yield will likely continue to do so even if the value of the stock drops from $100 to $60 during the occasional bear market.    On the other hand, capital gains investing is very tied to economic and market cycles since accomplishing the desired result is dependent on the asset increasing in value.   In other words, if an investor buys a stock for $100 and it drops to $60, the goal has not been accomplished if the investor sells the stock. 

Acceptance of Cash Flow Vs Capital Gains Investing 

The most promoted method of investing among financial firms and the media is to buy stocks for long term capital gains. This is the easiest way to invest and it can work very well over long time frames.   Long term passive investing is what most financial advisors do. It’s promoted both in the media and by icons such as Dave Ramsey, and even Warren Buffett, although neither of them got wealthy from passive capital gains investing.   Cash flow investing is considered more alternative. Many cash flow investing methods take more effort than simply buying an asset with the hope that it will increase in value. In general, investors like to go with what is most common and easiest.   And many investors are just not aware of cash flow investing because of the overwhelming influence of mainstream investing. This trend, however, seems to finally be changing with the FIRE (Financial Independence Retire Early) movement among the younger generations and their affinity for AirBnB and various online investing platforms.  

Age Difference for Cash Flow Vs Capital Gains 

Most young people focus on capital gains investing while they are employed. This is because they usually already make enough money to cover their living expenses from their jobs.   On the other hand, retirees tend to need income to live, so cash flow investing can be the best choice. The newer trend, however, is toward earlier retirement from investments that generate cash flow for many younger, proactive investors. 


One last difference between cash flow and capital gains investing is how predictable successful results are.  

Cash Flow Predictability

With cash flow investing, a successful outcome is more predictable for many investments than capital gains are. This is because it is easier to see the likely income from an investment than it is to predict whether an asset will increase in value while you own it.   For example, you can see how much dividend a company pays, or how much rental income a property will generate. This is true from among the many types of cash flow investments. Income can change, of course, but it can be estimated with a more reliable and acceptable degree of accuracy than capital gains can. You know within a high level of certainty that when you buy a stock reliably yielding 6% those dividends will be deposited into your account.

Capital Gains Predictability

On the other hand, the value of a non dividend paying growth stock or index fund could drop and you don’t get the intended capital gain.   Of course, having an awareness of and investing around economic and market cycles increases the predictability of capital gains. It is for this reason I address the importance of having an awareness of such cycles in my work. 


While there are major differences in cash flow and capital gains investing, they don’t have to be mutually exclusive. When investors buy cash flow assets that also generate capital gains over time, they can both pay the bills and build wealth from the same assets. Now that’s what I call a double winner.     
The best place to start is with my Ultimate Wealth Plan. You can get it here now.  Thanks for reading. If you enjoyed this post, please share it with others on your favorite social media.  
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