Since the first episode here of the smart investor we have built a progression that starts in the mindset of the smart investor. I say this, because before talking about the various investments themselves, it is necessary to build this mentality.
The smart investor knows that it is necessary to have the fundamentals on how to deal with the money and not only the technical knowledge on each type of existing investment.
In today’s episode we will reflect on the types of cash flow and which one the investor should look for.
To recapitulate one of the points of our last episode, to achieve security, independence and financial freedom, it is necessary to have something that goes beyond having money.
There must be a flow of money. That is, it is necessary to build something that guarantees a constant inflow of money that is greater than your expenses.
So let’s talk about the 4 types of cash flow so you can assess which type is which type do you consider the ideal for your life.
Flow of Money in 4 Forms
Robert Kyosaky, in the book Rich Dad, Poor Dad, says that 4 types of people make up all the businesses in the world. That is, the entire flow of money comes from these 4 types of people:
- Business Owners
The employee is that person who seeks a safe and beneficial job. Seeks to have a job that will support you, if possible, until retirement.
A large number of people are subject to this type of cash flow because, in most families, parents insistently repeat their children’s education: “study hard and then get a good job”.
Employees depend on the companies they work for to have a cash flow.
If the company faces difficulties, it will suffer the consequences even without participating in the decisions. The cash flow of employees depends on the decisions of others.
The second group, that of self-employed professionals and also small business owners, are those who can work on their own, receiving according to what they produce.
They then work for themselves, that is, if they work they receive money and if they do not work they do not receive it.
In the case of the self-employed, they have the power to decide on their work, but they only guarantee the flow of money if they are actively working.
The third group is that of the owners of big businesses. They look for good systems, a good network and competent people who help in the growth of the business.
The great goal of these people is freedom. This freedom is perfectly possible since your business does not need your direct work to function.
The result of your work is enhanced by the systems and competent people that make the business generate cash flow. So, money works for big business owners.
The fourth group is that of investors. They are those who seek true freedom. They have employees, self-employed professionals and big business owners working for them.
With that, the money works fully for them, generating a constant flow that we call passive income. So to be an investor you need to build sources of constant cash flow. It is necessary to build a passive income.
Simultaneously Building a Passive Income
First of all, you need to understand the difference between assets and liabilities. Robert Kyosaki also explains this in the book Rich Dad, Poor Dad.
This is the main foundation of the concept of Financial Competence. And here I am not talking about the accounting concept of assets and liabilities. It is a much more intuitive concept.
Basically, assets are those things that put money in our pocket and liabilities are those that take money from us.
From there you should start to assess whether you have more things that take money out of your pocket or more things that put money in your pocket.
To understand better, let’s imagine that you buy the car or the house of your dreams. Will these two acquisitions put or take money out of your pocket?
In addition to the purchase price of these two assets, you will have, from then on, IPVA, annual insurance, revisions and maintenance and the continuous devaluation of the car, as well as IPTU, home insurance, house maintenance, etc.
In neither case will you have money going into your pocket after purchasing these two goods.
On the contrary, you will have money coming out of your pocket. So in these two examples, you would be acquiring a liability rather than an asset, as most people think.
It would be different if you acquired a property so that you could receive rent. In that case, every month the acquired asset would put money in your pocket. So, a property acquired to have a rental income is an asset.
While ordinary people prioritize consumption and immediate well-being, the smart investor makes decisions that increase the number of assets because he knows that these assets will generate enough cash flow to pay for the liabilities he wants.
Realize that the smart investor still has liabilities. The difference is that, before acquiring liabilities, he builds a solid column of assets that makes dreams, comfort, luxury, etc. possible.
The smart investor understands that he needs to go through the asset accumulation phase before starting to buy liabilities. He makes his assets pay his liabilities account so that he is free of those payments.