Rich vs Poor People’s Cash Flows
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The ideas in this article are originally the ideas of Robert Kiyosaki, described in his magnum opus ”Rich Dad Poor Dad.” Described herein is a key concept Kiyosaki meant separates the rich from the poor — their different cash-flows, specifically, how the rich have a constant endeavor to acquire assets.
Definitions and the Cash-Flow chart
Let’s start with the necessary definitions. First of all, the image below — the cash flow statement — is essential to comprehend the differences in cash flow between the rich and the poor.
Now, If you are an accountant, forget your preconceived notions of what assets and liabilities are. This is a simplified sketch made by Kiyosaki to prove a point. Definitions:
An asset is something that puts money in your pocket on a regular basis. Example: Dividend paying stocks, bonds, IOUs, real estate, businesses you own etc.
A liability is something that takes money out of your pocket on a regular basis. Example: car, house, apartment, consumer loans, credit card debt, student loans, utilities, phone bills.
Income is money coming in (from work or assets).
Expenses are money going out (restaurants, gas, food, liabilities etc.)
With all the definitions out of the way, let’s start comparing the different cash flows, beginning with the poor.
The poor’s cash flow
Firstly, the poor’s cash flow. The simplest in terms of explanation, and I’d say the image presented above is sufficient. A poor person has an income, albeit a low one, and this income is spent — necessarily, might I add — on living expenses, such as food and housing. There is nothing left at the end of the month, and the poor usually do not have enough money to obtain liabilities like the middle class.
The Middle Class Cash Flow
The middle class’ cash flow statement differs from the poor person’s, but the result is the same — both have little to nothing left after a month. However, the middle class do not only have expenses, but liabilities too. When their monthly paycheck hits their bank account, liabilities eat a big chunk of this cash flow.
What liabilities do they have? Well, I suggest you look around in your life. Most people have fancy houses, financed cars, watches etc. These consumer loans, their interest, have to be paid every month, and this is what keeps the middle class in the rat race. It’s these liabilities that result in a lot of financial struggle.
The Rich Cash Flow
So now that we know what not to do, what are we supposed to do? Let’s look at the cash flow of the rich. Note, this section is the most important in this article, and the one I hope you strive to remember after putting away this article.
Simply put, the rich have focused their working life on acquiring assets, and thus have a recurring passive income. This allows the rich to stop working, since their assets — requiring little to no work input — produces enough income to pay off their expenses and liabilities.
Now, this is a simplified chart. Of course, the rich have expenses too. Usually very large ones, but the key is that their assets produce enough income that they can afford it. Instead of financing a Ferrari as soon as they get a pay raise — like the middle class when they decide to get a new car — they instead focus on buying assets first. For example, they buy a duplex, providing enough monthly income to cover the cost of the new car. This mindset difference is what separates the rich from the middle class and poor.
Practical advice
So, we’ve learnt that we should acquire assets, and not liabilities. How do we do that? I’d say the simplest way is to start buying stocks that have a dividend yield, meaning you get a steady cash flow. This doesn’t require anywhere near as much capital as real estate, and thus is the best choice for a majority of people.
However, after years of collecting dividends and investing in stocks, I would gradually move towards real estate. It is true, it requires quite some capital, however, the upside is truly enormous. The fact that you have the ability to leverage your money, and using tax advantages, allows you to truly scale your net worth fast.
The ideas presented in this article are from the book Rich Dad Poor Dad [Note: This is an Amazon affiliate link, meaning I earn a small commission if you make a purchase using this link. If you want to, just head over to Amazon.com and search for the title name and you will find the book]. If you want to learn more, I suggest reading the book — I’ve read it five times now! — and absorbing the knowledge presented.
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