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Millionaire Money Habits

October 31st, 2008 at 4:57 pm

What is Cash Flow

Wealth “gurus” say that the secret to becoming rich is more cash flow. But what is cash flow and how do you get it?

Cash flow is a finance term that used to describe financial performance, and measures the amount of money that comes in and out of a business. Simple put, it is income as it compares to expenses, which can quickly be determined by looking at a “cash flow statement.” In order for a business to be profitable, the amount of money that it brings in must exceed overhead expenses and other costs of doing business.

When we’re talking about wealth creation, cash flow is used to describe how profitable you are by analyzing your own cash flow statement. This is done by looking at the amount of money you or your assets bring in compared to your cost of living. Usually when talking about building personal wealth, cash flow refers to a more broader concept of creating passive income models In other words, building assets that produce an income for you. For example:

  • Rental income from real estate
  • Dividend payments from stocks
  • A franchise business
  • Vending machines
  • Royalty fees from books

These are things that have the potential to produce a paycheck with our without your intervention. The idea is to create enough of these income streams so the incoming cash flow these systems generate exceed your outgoing cash flow, or expenses. That’s when you’ve achieved financial freedom.

So now that you know what cash flow is, how do you get it?

There are a few ways to improve your cash flow. Probably the fastest way is a defensive maneuver, which is to reduce your living expenses. You already have an income in place, so if you decrease the amount of money that goes out, you increase the amount of money that you get to keep.

The other way is to take an offensive approach, which is to obtain assets - or things that have an equitable value and can be converted to cash. This can be accomplished by:

  1. Build assets
  2. Buy assets

For instance, you can generate a cash producing asset by sitting down, writing a book and then publishing it. This requires some up-front work, but for the most part it has the potential to bring in an endless amount of income, year after year.

If you have cash on hand, you can buy assets such as real estate, stocks, and profitable businesses. By purchasing income producing assets, you retain your cash in the value of the equitable asset, and in the meantime that asset produces income for you and potentially increases in value.

Where the rich get rich is when they take advantage of compounding their wealth by moving their funds right back into more cash flow producing assets. This allows you to accelerate your wealth and eventually enjoy a much greater income than you may ever need.

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