A few simple ideas, when understood fully, lead people down the road to financial independence and wealth. You need to understand the difference between and asset and a liability. You need to understand the difference between earned income and passive income. You need to understand the three basic cash flow patterns. Finally, you need to understand how your focus in life ties it all together.
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Do You Work For Your Money Or Does Your Money Work For You ... ... continued from above
The Poor Cash Flow Pattern
In order to understand the three basic cash flow patterns, you must first
understand the difference between an asset and a liability. When you stop
working for money, an asset is something that will put money in your pocket
every month. A liability is something that will take money out of your pocket
every month. This idea touches on the difference between earned income and
passive income.
The first basic cash flow pattern is the poor cash flow pattern. Before most
people even learn about money they want things, and so they learn first to work
FOR money. As their income is earned it is just as quickly spent on their list
of wanted items. The poor cash flow pattern has earned income flowing in and
entirely back out to expenses.
It does not matter if you have a sizeable income, because money does not make
you rich or poor. Money is just a tool. It is how you are managing the tool
(money) that determines whether you become rich or poor. Even with a substantial
income you are still poor as long as your focus is only to earn your income and
pay your expenses.
You may make $500,000 a year, you may have enough income to cover all of your
expenses, but if you were to stop working for money you would quickly realize
that you are poor, and the idea that you were not was just a temporary illusion.
The Middle-Class Cash Flow Pattern
Eventually people get tired of this routine and begin to gain better
understanding and control over their expenses. Enough time spent focused on
working for money may produce extra income in the way of a raise or a promotion.
Most people still have not spent any time to financially educate themselves,
so they don't know what to do with the extra money. They don't have any ideas of
their own about financing their retirement, either. The extra money is usually
used to buy a newer car, a bigger house, and anything left over usually
accumulates as savings. Eventually most are sold on putting the extra money into
a portfolio for their retirement, usually consisting of mutual funds.
These purchases make life more comfortable, and so feel like assets...but
they create an expense every month for a very long period of time. The
misunderstanding is made worse by bankers who ask you to list your cars and home
as assets against loans. By definition, these purchases are liabilities.
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The Wealthy Cash Flow Pattern
A change of focus to passive income leads people down the path to a wealthy
cash flow pattern. When you look at the pattern of the wealthy you may notice-
they do not get their income from a job. Their cash flows in from assets.
Imagine spending your time figuring out a process that will automatically
produce some income for you every month. Now imagine duplicating and improving
upon that process until it automatically produces your ENTIRE income every
month. Finally, you will stop working for money. That process is a business, and
that income is a passive income.
From that point forward you will be financially independent. You will not
work for money, you will have money working for you. It might take you 2, 3, or
even 5 years to establish a system to that point, but once you do you can
retire. Once you retire, you have all of your time to spend however you like.
This is the reason understanding the three basic cash flow patterns is so
important. These patterns demonstrate the reason why you can become financially
independent in just a few years working at a seven dollar an hour job. Your
biggest obstacle in the beginning is controlling your expenses and changing your
focus from earned income to passive income. Once you have become committed to
these fundamental ideas, only persistence stands between you and great wealth.
Disclaimer:
The information contained above has been provided as a general
service. Any references to specific financial, legal, accounting, or
taxation issues are done so in the context of general information
and should not be relied upon as fact or construed as advice by the
us in any of these areas. You should consult a relevant financial,
legal, tax or accounting professional to assist in your particular
circumstance. |
