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Your Cash Flow Patterns
Rich or Poor?
In order to understand the three basic cash flow patterns, you must first understand the difference between assets and liabilities. When you stop working for money, an asset is something that will put money in your pocket every month. A liability is something that will take money out of your pocket every month. This idea also touches on the difference between earned income and passive income...
A poor pattern is characterized by a lack of financial education. In this section people only know to work for money, so the focus in this section is on earned income (working for money).
At this point income is usually small, and there is very little control over expenses. Earned income flows in, and flows entirely back out to short term expenses.
In the middle class pattern there is also a lack of financial education. The middle class try to improve their financial position by focusing more aggressively on their earned income. Unfortunately, money does not make you rich.
Their income is usually a little bigger, and they have leaned to control expenses that are needless or excessive. Earned income flows in, and flows back out to expenses and long term liabilities (such as a car or home). Not knowing what else to do, anything left over is usually parked in a portfolio for retirement.
A wealthy pattern is established through a journey of financial education. Wealthy individuals build and manage systems that produce their income for them. These systems are all assets. Expenses and liabilities are controlled, and excess cash is used to establish additional assets.
The smaller systems figured out and used in the beginning are improved upon and used to finance the next, bigger deals. In this way people with a wealthy pattern have money work for them and aggressively increase their wealth.
This is the reason understanding these patterns is so important. They demonstrate how you can become financially independent working at a seven dollar an hour job. Your biggest obstacle in the beginning is controlling your expenses and changing your pattern. The first step to controlling your expenses is to work out AND follow a personal expense budget.
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