Cashflow is a critical element in the field of personal finance yet very few people understand. At times even accountants fail to get it even though they spend the rest of their careers doing company finance. The principles may be a bit different but the fundamentals are almost the same. Stay with me as i take you through some of the most critical of the fundamentals.
You need to know the difference between an asset and a liability..and buy assets!
An asset puts money in your pocket, whether you work or not. If you acquire an asset you have also acquired the PASSIVE INCOME that comes with it. That the key to FINANCIAL INDEPENDENCE because it makes your money work for you. Money is a good employee.
A liability is something that takes money out of your pocket. If you acquire a liability you also get the expenses that are inherent to its acquisition.
Examples of Liabilities are as follows:
There are other liabilities that you know yourself that just drain cash out of you.
Once you understand the cashflow pattern of an asset and liability, you now need to know the different cashflow patterns of the Poor, Middle Class and the Rich.
In 80% of of families, the financial story paints a picture of hard work to get ahead. However, this effort is because they spend their lives buying liabilities instead of assets. So how does one avoid that?
We will elaborate further. However, in basic terms the poor person cashflow pattern only has the income statement. The person usually has a job or a self employed occupation that generates income but all the income is eroded through the expenditures which in most times exceed the income anyway. This one will tell you they do not have anything left to invest. They won't be wrong, right? (Read: Pay Yourself First)
The middle class person usually has a higher income than the poor. However, the distinction between a poor person and middle class is not the level of income here. The differentiating factor is the Financial statements and Cashflow. The middle class person spends his/her extra money on appearance and general comfort i.e they buy liabilities. They are the typical successful professionals our parents tell us about when they say "Go to school, get good grades so that you can get a safe secure job". They usually have big paychecks, which they use to buy liabilities that they think are assets. Their biggest investment is usually their home, which they believe is an asset. This is somehow the most straining of all brackets.
The Rich Don't work for money. They let money work for them. They spend their money, time and effort acquiring assets and finding ways to have their money work hard for them. Over time, they get richer and richer while working less and less hence they can get the time to contribute to making the world a better place, which the poor and middle class class can hardly get for obvious reasons.
More money will often not solve the problem. In fact, it may compound the problem. Money often makes obvious our tragic human flaws, putting a spotlight on what we don't know.
Money only accentuates the cashflow pattern running in your head. If your pattern is to spend everything you get, most likely an increase in cash will just result in an increase in spending. "A fool and his money is one big party".
If you want to be financially free, know the difference between an asset and a liability and BUY ASSETS!
1. Financial Literacy
You need to know the difference between an asset and a liability..and buy assets!
- - The Rich acquire assets. The poor and middle class acquire liabilities that they think are assets.
- - What defines an asset are not words, but numbers. And if you cannot read the numbers, you cannot tell an asset from a hole in the ground.
- - If you want to be rich you have to read and understand the numbers
2. Cashflow Pattern of an Asset
3. Cashflow Pattern of A Liability
A liability is something that takes money out of your pocket. If you acquire a liability you also get the expenses that are inherent to its acquisition.
Examples of Liabilities are as follows:
- - Mortgages
- - Self occupied house
- - Car
- - Loans
There are other liabilities that you know yourself that just drain cash out of you.
Once you understand the cashflow pattern of an asset and liability, you now need to know the different cashflow patterns of the Poor, Middle Class and the Rich.
In 80% of of families, the financial story paints a picture of hard work to get ahead. However, this effort is because they spend their lives buying liabilities instead of assets. So how does one avoid that?
4. Cashflow Pattern of a Poor person
5. Cashflow Pattern of The Middle class person
6. Cashflow Pattern of The Rich
The Rich Don't work for money. They let money work for them. They spend their money, time and effort acquiring assets and finding ways to have their money work hard for them. Over time, they get richer and richer while working less and less hence they can get the time to contribute to making the world a better place, which the poor and middle class class can hardly get for obvious reasons.
7. Cashflow tells a story of how a person handles money.
More money will often not solve the problem. In fact, it may compound the problem. Money often makes obvious our tragic human flaws, putting a spotlight on what we don't know.
Money only accentuates the cashflow pattern running in your head. If your pattern is to spend everything you get, most likely an increase in cash will just result in an increase in spending. "A fool and his money is one big party".
If you want to be financially free, know the difference between an asset and a liability and BUY ASSETS!
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