Cash Flow: The Bloodline of Financial Wealth

Today I would like to take the time to examine another fundamental of wealth building: cash flow.

What is cash flow? Few concepts are more important to fully understand than this one. It doesn't matter what great idea you might have to build your wealth. If you don’t understand the basic principles behind cash flow you're doomed for failure.

You find a way to pull in a six figure income over the course of the year and still find yourself scrapping along broke. Income, taken by itself, isn't cash flow! A high income with improper cash flow management is perhaps the most dangerous way to live and is a surefire ticket to bankruptcy.

Don’t understand? Well, that’s why I’m here to explain it to you.

It is a little known fact that most winners of the lottery end up worse off than when they started. Having several million dollars in the bank does not make you rich. When people win the lottery, the first thing they usually go out and do is spend their lucky win on LIABILITIES.

A liability, in accounting terms, is anything that ends up sucking money from your bank account without an offsetting cash return. A good example of this is a fancy car. A fancy car is nice to own and might even raise your personal happiness level, but it's ultimately a liability. You have to pay high insurance premiums to keep it covered and maintenance can cost you a bundle. The car will lose value over time due to depreciation (wear and tear accumulated over time). Now, if you've got a proper cash flow for this type of luxury, all is fine, but if your money is simply sitting in a bank you will be amazed at how quickly even a car will gobble up the funds in your account. The same holds true for a nice house, a nice TV, and all the other little luxuries you might find yourself drawn to once you have some money.

People who win the lottery usually end up trying to live the lifestyle they equate with such a strong bank account and are usually shocked to find that, as little as a year later, they have nothing left. In the end, their money itself was a liability, as it only led to negative cash flow!

That's a rule to take to heart. Money in the hands of a person with no understanding of finance is ultimately a liability. Such a person can have all the money in the world and will still end up broke.

Taking this concept to heart, we can proceed to define what wealth really is. Wealth is not the possession of a certain value in property, but rather the amount of positive cash flow over a certain period of time. A person who brings in $200,000 a year and spends $195,000 in expenses is far worse off than a person who brings in $60,000 but limits their overall expenses to $20,000.

Cash flow, then, is the amount of income one draws from one’s assets minus the expenses that person pays due to their liabilities. That’s really all there is to it. The trick, then, is to find a way to maximize asset income while minimizing liability expenses. Most people screw this up, which is why they don’t go anywhere over the course of 20 years.

An expensive home is a liability. Yes, some will mistakenly label it as an asset - after all, isn’t a home ultimately an investment? After you've gained enough equity (ownership) of the home, can’t you sell it or mortgage it for money later on? Sure. Such an approach, however, misses the mark on numerous points which I’ll cover in a later posting. The key to remember is that an expensive home is going to take far more money out of your wallet over the course of the next year than it will ever hope to bring in. For our purposes, that makes owning an expensive home a major liability for the goal of wealth building. The money you're spending on your house, if allowed to grow as positive cash flow, could be used to acquire actual assets that will increase your cash flow. Having done this, housing costs won’t take a major bite out of what you bring in every year down the line.

There are only two ways to increase your cash flow - you can increase your income through investments in assets or you can decrease your expenses by getting rid of your liabilities. There is no way around this. You cannot become wealthy unless you are constantly doing either (or preferably, both) of these things.

Now, I’m not saying that you have to avoid liabilities - far from it! There is next to no point to becoming wealthy if you aren’t allowed to live a life that reflects it! The often overlooked key, however, is that you must take every effort to ensure that the expenses from your liabilities do not measurably cut into the wealth produced by your cash flow. A person who's found a way to create a $10,000,000 positive cash flow every year can afford to live in a multi-million dollar home. A person whose bottom line cash flow shows several thousand dollars probably should reconsider, even if it's within their means.

Your assignment today, then, taking into consideration all the great stuff you dreamed in from the last posting, is to examine where you are in your life today. What contributes income to you at the end of the year? What cuts into your cash flow that you can do without? Don’t think in overall money value - think in terms of what makes you money and what takes money out of your pocket.

It's absolutely essential that you train yourself to think in these terms if you're ever going to build the fortune that's rightfully yours.

The Road to Riches is Paved by Your Mind

America is truly the golden land of opportunity. For over two centuries, men and women have been immigrating to this great land seeking to make names for themselves. American history is full of stories about those whom, through hard work and patience, paved their own way from rags to riches.

You and I both know that you're looking for the same thing. Everyone wants to make money. It's desirable to have the means to both look after yourself and your loved ones. Unfortunately, not everyone is born with the knowledge necessary to get ahead in life. That's where I come in, along with this blog.

I'm here to help you. But I can’t promise you this success. The fruits of prosperity never come in an instant. The labor put forth to produce those fruits is entirely in your own hands. All I can do is motivate you with my own knowledge and experience and perhaps give you some of the great tips that have led to my own personal success.

Creating wealth is much like constructing a building. There has to be a basic structure but what's primarily important is the foundation that you lay. The foundation to building wealth is the development of your own personal outlook on the world around you.

I’m sure you've heard that before from other motivational writers and speakers. It's very true. The only limit upon the wealth you can earn lies within what you choose to believe about the reality around you.

You must decide at the outset the answer to a question that is purely a matter of choice. Which do we live in -- a Malthusian world of limited wealth or a world of abundant prosperity?

I wouldn't dare answer that question for you. I've got my own answer to that question which defines my own reality, but it'd simply be out of place for me to define your paradigm for you. All I'll say is that if wealth is limited and money making opportunities are both risky and few and far between, then your ability to prosper and make your fortune is severely hampered. If you believe in a world of limited wealth, I can't help you. That wealth is obviously spoken for. I guess some of us just lucked out in the wealth game and the rest are doomed to scraping together their existence from our table scraps.

In such a scenario, there just isn’t much material with which to build your foundation and you might be better off sticking to your boring 9 - 5 job, whatever it may be. There is no shame in that.

If, however, you are willing to live in a reality of ample prosperity, where opportunities exist wherever you are willing to make them, then there is hope! The next step for you is a very big one. It'll sound very hokey, but it's quite necessary for a wide variety of reasons.

Just do it and don’t ask questions… don’t even entertain questions for a second.

Close your eyes and imagine the wealth you desire. Imagine yourself living in the house of your dreams, sitting on the couch of your dreams watching TV on the big plasma TV screen of your dreams. Your son or daughter calls - they need you to pick them up from school. You walk out to your garage, in which sits the car of your dreams. You pull out into the driveway, stopping for a second to appreciate your beautiful yard… as you pull out into the road, the mechanical gate shuts behind you.

You get the idea.

You have to imagine the wealth you desire, but that’s only the first half of this step. The second half is that you must force yourself to realize that this wealth already belongs to you! It's yours, even as you read this blog entry! The trick is that you must accept that all you have imagined really belongs to you. It might not be in your possession right at this very minute, but you have to open your eyes and see that it's truly yours!

God WANTS for you to have your hearts desire. The catch, however, is that it can't simply drop these things in your lap. Due to some hidden clause in the Contract of Life, you have to be both willing and able to receive what God wants to give you. I’m not going to get into details, but it’s not as simple as God inspiring some wealthy stranger to write you a check for several million at random… the intricacies of THAT occurring are far too complex.

Instead, what's required is that you help things along. Your goal, in making wealth, is to find ways to enable God to funnel your wealth to you. This isn’t about getting rich - it’s about enabling the world to give you that which is rightfully yours.

If you take that to heart, this blog will certainly be an aid to you in your journey. If it is simply beyond the bounds of what you are willing to accept as your reality, however, then perhaps that reality is just not for you.