Cashflow Pattern-The Money Secret To A Lifetime Of Financial Freedom

Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.

-Ayn Rand

One of the secret of the rich and wealthy is that they are in control of their money. They know how to direct cash flow into their money reservoir.

In my previous post, I talked about how you can plug the money leaks in your life.

I also mentioned the key to having a financial reservoir, was to plug your money leaks and create multiple streams of income from the three money mountains.

There are three proven money mountains to wealth: real estate, stock market, and starting your own business.

I must admit it can be challenging to plug your money leaks and create multiple streams of income of income at the same time.

However if you can grasp what I am about to share with you, you will develop money habits that will give you a lifetime of unlimited wealth.

I am talking about, understanding how money flows into your hands and your cash flow pattern.

In his bestselling book, Rich Dad Poor Dad Robert Kiyosaki identifies   3 types of cash flow pattern; that of the poor, middle class, and the rich

He points out that your spending habits and your core beliefs about money determines the kind of cash flow pattern in your life.

In addition, your cash flow pattern will determine your ultimate financial destiny.

Let us briefly look at the different kinds of cash flow patterns.

Let’s imagine we have a simple balance sheet (a balance sheet is a financial statement listing your income and assets)

The balance sheet has a double entry ledger: income and expenses, assets and liabilities.

The first two entries-income and expenses are clear to many.  Income is money you make; expenses are things that take away your money.

Mr. Kiyosaki contends that the greatest cause of financial failure is not understanding the second set of entries-assets and liabilities. I believe He is right on the money.

Here are his “Rich Dad” definitions

Asset –any venture that puts money in your pocket

Liability- anything that takes money from your pocket

The important thing to note about assets and liabilities is they occur in the passive mode.

What do I mean by passive mode?  You only have to take the action once on creating the effects that these two entries create in your financial life.

Let me explain.

Let us say for instance, you buy an income producing property-an asset by the rich dad definition, you will continue to earn income for as long as you own the property. This is passive income because you do not have work for it.

On the other hand, if you took out a credit card loan-a liability by the rich dad definition, you will continue to incur expenses as long as you have that credit card balance.

Let us now describe the various cash flow patterns.

The Poor -earns money and spends it all. With no assets, the poor lives from hand to mouth.

The middle class –earns a high income but acquires many liabilities that generate expenses leading to money flowing out of his life.  He may have one or two assets- (his house, mutual funds, savings in 401k or ISAs). The middle class appears well off but a close look at his balance sheet will reveal a picture of financial disaster waiting to happen.

The rich- rich buy assets and these assets pay for their expenses. The rich do not have to work, money works for them.

Your ultimate objective should be to have the cash flow pattern of the rich, regardless of what your cash flow pattern right now. Because key to being wealthy is to do- what the rich do -get money working for you instead of working for money.

I would like to stress an important point. Money is not everything. However, the lack of money can really cause you misery.

For the sceptics who still question the wisdom of changing your cash flow pattern, would you bet your future on the stock market- for your retirement? Do you trust your politicians to guarantee your pension? I don’t need to stress the point further. Just ask the average worker in the United States, Britain and Greece.

Here are some home truths you need to know about money

  • money without financial intelligence is money soon gone
  • it’s not how much money you make, it’s how much money you keep
  • you must know the difference between assets and liabilities
  • Assets put money into your pocket. liabilities drain money from you

You cannot make all the changes overnight. The good news is you can make a decision to examine how you spend your money.  Each time you decide to spend money, ask yourself this question… Will my spending money make me richer or poorer?

You can only get wealthier when you take control of your cash flow.

Action Steps

You can start to take control of your beginning today.

Here is a simple exercise to get you started

  • Take a sheet of paper and list all your sources of income
  • Next, list all your expenses by category using the money leak category I mentioned in my last post. you can use  the worksheet provided
  • Calculate all your assets. By assets I mean the value of all what you own (house, car, boats wristwatches art collection) assuming you had to sell them at the open market rate. Be honest with yourself here. When you have finished  write them down
  • Calculate all your liabilities. I mean your outstanding personal  loans, credit card balances, mortgages, overdrafts  and any other form of financial obligation you owe

Here is the most important part of this whole exercise.

Using the following formula:

Assets-liabilities = Net worth

Divide your net worth by your monthly expenses.

Net worth divided by monthly expenses =   days you are financially free

Let us use an example.

Assuming your net worth is $ 100,000 and your monthly expense is $5000

You are only financially free for only 20 months.

If we take the net worth of Bill Gates for instance at $50 billion dollars and divide it with his monthly expenses at say roughly $500,000 per month,  he is by all indication financially free.

Bottom-line about wealth is this time. Wealth is a function of your net worth.

This is why the Rich focus on acquiring assets- because as long as they acquire enough assets that can pay for their expenses even when they are not working, they are financially free.

The good news is you too can start the journey to financial freedom starting today.

All you need to do is to focus on your cash flow pattern, make a conscious decision to change your cash flow pattern.

Think rich and grow rich