Updated: Jun 8, 2019
Money is just an idea - Robert Kiyosaki
The differentiating factor that determines if a person has the ability to create wealth is not just how much he can earn but more crucially how he manages his cash flow. First, you have to understand the concept of “assets”.
Assets can be physical or intangible. Some assets help you to accumulate wealth while others depletes your wealth. Sometimes, we even borrow money to buy these assets and thereby we incur debt liabilities and interest expenses.
Below are two types of cash flow assets:
a) Positive Cash Flow Assets
These are assets that can bring you positive cash flow:
Some examples are:
i. Dividend paying stocks
ii. REITs distribution
iii. Bond yields
iv. Profitable cash business
v. Intellectual properties royalties
vi. Stock options premium
vii. Fixed deposits
viii. P2P lending interests
ix. Online advertisement revenues
x. Rental property
Contrary to popular belief, property that do not generate rents and put money in your pocket on a regular basis is not considered a positive cash flow asset.
b) Negative Cash Flow Assets
These are assets that takes money out of your pocket.
Some examples are loan repayments and maintenance for:
ii) Luxury goods
iii) Home property (the house you stay in that is not rented)
iv) Rental homes that is bleeding cash
(For instance, a rental property that generates $1,000 rent a month, but incurs $2,000 monthly loan re-payment + maintenance is considered a negative cash flow asset.)
Well, I am not saying positive cash flow is definitely better than negative cash flow assets.
Some of the above positive cash flow assets can also depreciate in value. For example, your stock may be giving you dividends but yet falling in stock price. Therefore, it is also crucial to acquire assets that have potential for capital appreciation.
For that we need to consider if the Return of Investment (ROI) is worth it. Without factoring inflation, we can derive simplistically for discussion purposes:
ROI = [Cash returns + Projected value of investment] / [Cost of investment] -1
A common scenario for Singaporeans is that we spend much of our life paying mortgage for our flat thinking of it as an investment. However, it is bleeding cash from our pockets (negative cash returns). In order for the ROI to be positive, we rely on the projected value of our investment to grow.
Many of us will agree that property price will rise in Singapore and the ROI should be good. However, there are a couple of things we need to realise.
i) We are locked in place by our debt repayments
ii) Most flats have a 99 years lease and thus is depreciating
iii) If the flat value does rise, are you going to sell it to cash out and accept a downgrade? If not, are you really cash rich, or are you just sitting on a pile of cash that you can't use?
Therefore, I believe acquiring positive cash flow assets with potential for capital appreciation is the smarter choice.
Now that you are equipped with this concept, let me reveal the secrets of cash flow management patterns of the poor, middle class, and the rich.
1) Poor Man Cash Flow Management
The poor man usually spend whatever he earns to receive instant gratification. He save little or nothing for the future. Even if there is a pay increase, the surplus will be spent immediately. He don't believe that investing in education can alleviate his financial status.
The chart below illustrates the cash flow patterns for the poor man. The income from their job just flows into expenses. No assets are acquired.
2) Middle Class Cash Flow Management
Next, we have this group of people that command higher pay checks because they have invested in some form of education. Most middle-class Singaporeans is in this category.
The middle-class man usually use the hard-earned income from his job to purchase negative cash flow assets such as a expensive houses and luxury cars. He has limited positive cash flow assets to support his lifestyle and therefore is highly dependent on his job income.
The chart below demonstrates cash flow pattern from his job which flows mainly to expenses and negative cash flow assets.
3) Rich Man Cash Flow Management
Now for the ultimate highlight - The Rich Man! This group of people are smart with cash flow. While it not easy to become them, they have a few things in common which we can learn from.
Firstly, the rich man invest in education to develop high-income skills. High-income skills are not high-income job (unlike surgeons, lawyers etc). This are skills that is transferable across various industries and is highly valued in the current market.
One such skill is financial management. By learning this skill, the rich man can generate massive wealth and cash flow. So what do the rich man do?
He does not buy luxury goods when he first started out to impress others. Rather, he buys
positive cash flow assets with a potential for appreciation. His objective is to ensure that his positive cash flow assets will begin to generate enough cash flow to pay for his expenses and fund his luxurious demands not now, but in the future. (Delayed Gratification)
The chart below illustrates how the rich man work to build positive cash flow assets or use his job income to acquire them. Then, he patiently work on it until the positive cash flow assets grows big enough to generate enough cash to pay for his expenses and his luxurious lifestyle.
These cash flow management patterns gave me a sense of epiphany when I was first introduced to them by Robert Kiyosaki and Adam Khoo. Because of this new concept, I personally do not like to invest in assets that do not generate positive cash flow (doesn’t mean I don’t). Some examples of these investments include: Crypto-currencies, Gold, expensive property for staying, cars etc.
As a young working adult, I believe this will help me make sounder financial decisions as I try to steer myself from the middle-class to the rich man cash flow management. I hope that you Millennials will find them useful as well.
Anyway, what works for me may not work for you. Only you can determine your lifestyle that bring you the greatest joy and satisfaction. In any case, there is one investment that will give you the greatest returns – and that is time and love given to your family and your loved ones. I think no amount of investments can give you that true joy to love and be loved.
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