If you're following me on instagram, which I hope you are (@thelaymaninvestor), I released a video on cash flow a few days back. This is was after posing the question to my followers about whether they thought the house that they own and live in was an asset. In fact, it's what we talked about in the last blog. Now, no matter what you believe in, the concept of cash flow is vital for long term financial independence. I really have to say that after reading Robert Kiyosaki's perspective on being cash flow oriented when thinking about assets, it's really changed my outlook for my own personal financial journey. I now understand what to look for when I invest. Cash flow, cash flow, cash flow. Those are the two words we're going to be talking about today in really simple terms. Of course, cash flow can become a very nuanced topic when talking about it's application in business, but for now let's keep it simple.
Cash flow is exactly what it sounds like-the flow of cash. When we buy things in our lives and they don't bring any income back into our pockets our money is flowing out of our pockets. So, in other words we have cash flow going out. When we buy stuff that brings us income, we have money coming into our pockets and therefore we have cash flow coming in. That's really as simple as it needs to be. Now, when we zoom out and look at the big picture of our spending habits, we have to ask ourselves a very simple question: Do we have more money flowing into our pockets (cash flow in) or do we have more money flowing out of our pockets (cash flow out)? And you guessed it, we, over the long-haul, on average, want more cash flowing in than flowing out.
When we think about this question, we now have to pay close attention to our spending habits. Thinking about assets in terms of cash flow makes us more accountable when we spend our money. We want to spend our time and our money on assets that bring more cash flow in. This way over the course of our lives we build up multiple streams of income. Although I love Index funds, I now know, after reading Robert Kiyosaki's Book, "Rich Dad Poor Dad," (RDPD) that I can't stop there. I have to keep moving forward and learn about other assets like rental properties, even buying and owning a business. And this takes time and patience, of course, but the training starts now. That's the beauty and the curse of self-teaching: The more you know, the more you don't know. The process is never ending.
"The rich don't work for money, they have their money work for them," says Robert Kiyosaki (RDPD) and that is very true. Even when they don't work they earn. They earn passive income through dividend payments, rental income, businesses they own, etc. That's the game we all need to be playing. I'm not saying everyone should quit their day job and start a business. No, keep your day job, I know I am, but when you make that $70k, $100k, $500K, from your job, focus on building the asset column of your balance sheet with cash flow assets. Again, as I've mentioned before in other blog posts, I am not a financial advisor or licensed expert, and personal finance is PERSONAL, so you must do what you choose, but thinking about assets in terms of cash flow can set you up for financial independence in the long run. Let's take a look at some different financial statements of different types of people--Poor People, Middle Class, and Rich People. Images always help drive a point home
Each of these pictures are my version of what you can find in chapter 2 of Robert Kiyosaki's book, "Rich Dad Poor Dad." Below we have a picture of the cash flow pattern of a poor person:
Here, we see that a poor person does not invest in assets. This is could be for a variety of reasons, maybe they don't have the funds to do so, or maybe they don't have the financial literacy, or maybe it's a combination of both. We can see that all their income is generated from their job, which is not an asset, because we don't own our jobs if we work for a company, right? They have one source of income and that income is used to pay for their expenses: Taxes, food, rent, transportation, clothes, etc. They have cash flow going out and no cash flow coming in through any investments in assets.
A middle class person's cash flow looks like this:
Remember, Robert Kiyosaki does not believe the house you live in and own is an asset, so the middle class person has nothing in the asset column. You may or may not agree with this point, but it's still important to understand the cash flow pattern of most middle class people. Their main source of income is their job and that job pays for everything in their lives. They have no income from dividends, rental income, or owning businesses. Once again, the middle class is not making their money work for them, they are working for money. A rich person's cash flow pattern looks starkly different from the others. Below, we can see the cash flow pattern of the rich:
The Rich make their money work for them. They have multiple sources of income: Rental income from real estate, dividend payments from stocks (Index Funds perhaps?) Interest payments from Treasury Notes and Bonds, royalties from products they've patented, and passive income from their other side businesses. They don't make the traditional income from a job like the others.
Now, as we know, becoming rich is a long term process. It requires a lot of work and patience. A big reason the rich get rich is because they do the work. They learn the things they don't know and they make it a point to execute their ideas regardless of success or failure. That is not anything we, the layman investors can't do ourselves, but first it starts with a financial education. And right now, as the education system stands, financial education has to be self-taught. It is our responsibility to teach ourselves.
Which of these cash flow patterns shown above reflects the cash flow pattern of your life? If it's that of a poor person, then we have some work to do. If it's that of a middle class person, then we have some work to do. If it's that of a rich person, then we still have work to do. Remember, the process of learning never ends because the more you know the more you don't know. Don't panic if you're not at the rich person's cash flow. I'm nowhere near there, but I know where I am going. I have a goal and I have the ability to get there and so do you. All it takes is the right education. This is why it's IMPERATIVE to up your financial literacy. Building multiple sources of income is not a pipe dream. It is very much a possibility. Keep reading, keep implementing, and keep learning. From one layman to another, remember, the more you know the more you don't know. The process is never ending.