I’ve gotten several questions about the cash flow diagram in my last post, so I’m going to explain it in detail today.
First, if you haven’t already read Robert Kiyosaki’s short book Rich Dad, Poor Dad, I highly recommend it. I even bought copies for many of my friends and team members. It’s a short read, but it packs a lot of financial intelligence in amongst its folksy yarn. It’s not biography (or necessarily factual), but the fictive stories illustrate his points.
Kiyosaki categorizes income into two income families, each of which comprise two types of people:
- Active Income
- Employees (E) have a job and work for someone else.
- Self-employed persons (S) have a job but work for them selves.
- Passive Income
- Business owners (B) have a system that employs other people’s time, energy, and intelligence to generate income without requiring the business owner’s direct input.
- Investors (I) put their money to work to make more money.
If you look closely at these two graphics, you’ll see how they align. Real estate wholesaling and redevelopment are essentially forms of employment or self-employment. If you don’t work at them, the income goes away. Rental and interest income are more passive, but managing rental properties can become a jobby-job. Ask me how I know.
That said, you could turn your active businesses more passive by employing enough people to minimize your active effort in them. That’s the goal, isn’t it?—to have the business create the income you use to buy your way out of it.
These are lessons I’m still working on. It’s very easy for me to get down into the weeds of my investments until managing them takes so much time I’m not creating new opportunities. Moving from the left side of the graphics to the right requires a real shift in mindset. It requires stepping away from the illusion of security into the security that comes from understanding how money works and how to make it work for you. That’s not an easy transition, but at least I can see where I’m going.
The goal of any income stream should be wealth creation. Wealth eventually becomes self-sustaining, unless you gamble it away or try to live above the means it provides. When wealth becomes self-sustaining you have achieved a goal most of us only dream of: freedom.