Since I was a kid, I had it set in my mind that I was going to be rich. And for years, I thought that the only way to become rich was to accumulate as much money as possible. And while that is one to get rich, it’s probably not the most efficient – especially because inflation loves to work against the money that you’ve saved. It took me a long time, but I’ve learned that the accumulation of cash-flowing assets is a much better way to reach financial freedom.
What the heck is an asset??
An asset is just something of value. If you’ve read any of Robert Kiyosaki’s books though, he takes it a step further and says that an asset is anything that puts money in your pocket. Some examples of assets might be real estate rental property, businesses that you own, paper (stocks, bonds, mutual funds, etc.) and commodities (gold, silver, oil, gas, etc.).
On the flip side, a liability can be considered anything that takes money out of your pocket and doesn’t give you back anything in return. That nice, new car you bought recently, albeit pretty awesome, is a liability. That smart phone that you love so much… liability. The 80″ TV with the surround sound that turns your living room into a home theater… still a liability. And, under Kiyosaki’s definition of the word, even your own residence is a liability. I know, you’re *hoping* that it’s going to appreciate and give you a nice return on your money somewhere down the line. However, when the housing market crashes, you learn very quickly that it’s a liability.
Here’s a great article from Kiyosaki that discusses this further.
So what’s so good about cash-flowing assets??!!
The wealthy know to invest in assets that provide cash-flow. So, let’s say you have $25,000. If you hang onto that $25,000 and save it until you retire, maybe it will be worth $35,000. Cool deal, right? But once that money is spent, it’s gone for good.
However, let’s say instead of hanging onto that money you decide to buy a cash-flowing asset with it. You find a rental property that costs $100,000, put down your $25,000 and use other people’s money (OPM) to pay for the remainder, which in our example would be the bank. Keeping it simple, let’s say that your monthly payment is around $700 (including taxes and insurance and all that jazz). We’ll also pretend that you allocate another $100 per month for repairs, vacancies, and other fun. So your expenses are around $800. Now, let’s say that this is a single family home and you’re able to get $1,000 a month in rent. So your cash flow is $200 per month (income of $1,000 minus expenses of $800).
That’s nice, Jim – $200 a month is Ok, but I can’t retire with that.
Right, but here’s where an asset like real estate has some hidden benefits that you might not think of. In our example, let’s assume that you had a fixed loan on the mortgage. But here’s what’s not fixed – the rent. So over the years, rent will likely continue to go up over the years, which means your cash flow will more than likely go up as well. But here’s the real exciting part that makes it even more worthwhile – once the tenants pay your mortgage off for you, your cash flow should take a very large jump every month.
Although this is an oversimplified example of numbers, hopefully the premise makes sense.
Buying stocks and mutual funds that you hold onto hoping for appreciation is better than buying liabilities, but they don’t produce cash flow for you. This can make it more difficult to gain financial freedom sooner rather than later. Dividend stocks, on the other hand, pay you passive income (usually on a quarterly basis). Get enough of these, like Dividend Mantra, and you’ll be good to go! And if you decide to sell them at some point, appreciation would just be icing on the cake.
The moral of the story is to put your money into assets that produce cash flow – don’t chase appreciation. Do that enough times and you’ll be set for life. The two asset classes I’m building up on is real estate rentals and dividend stocks. You should find out which areas are the best for you. If you have that entrepreneurial spirit and want to build a big business that you can step out of, then maybe that’s the winner for you.
Regardless of which cash flow assets you choose, these choices can be your key to key to financial freedom! Are you investing in any cash flow assets?
Thanks for reading!!