the_cashflow_quadrant

Passive Income=

Unterest + Dividends +

Real Estate + Business Cash Flows)

Total

Incoune-

Number of

Children-

(Begin game with 0 ChOdran) Per Child

Expense.

Total

Expenmms

Monthly

(Cash Flow;

Balance Sheet Pay Check)

01998, CASHFLOW Technologies, Inc.

bl.

pq

202

*I

The CASHFLOW Quadrant

CMPTER 12

STEP 2:

Take Control Of

Your Casb Flow

Many people believe that simply making more money will solve their mon

problems but, in most cases, it only causes bigger money problems.

The primary reason most people have money problems is they were never dooled in the science of cash flow management. They were taught how to re

J write, drive cars and swim, but they were not taught how to manage their cash

hw. Without this training they wind up having money problems, then work iiarder believing that more money will solve the problem.

As my rich dad often said, "More money will not solve the problem, if cash management is the problem."

ies, Inc. THE MOST IMPORTANT SKILL

I After deciding to mind your own business, the next step as the CEO of the -kir~ess of your life, is to take control of your

ime money will not make you richer... i twr because they often go out and get deep

Tim.

cash flow. If you do not, making n fact more mone makes most people

er into debt every time they get a 7-be C4SHROW Quadrant

WHO IS SMARTER - YOU OR YOUR BANKER?

The majority of people do not prepare personal financial statements. At

most

they try to balance their checkbooks each month. So congratulate yourself, you

now ahead of most of your colleagues simply by completing your financial statement and setting goals for yourself.

As CEO of your own life, you can learn to be smarter than most people ev

your banker.

some instances. Yet, in reality, if you truly understand the world of finances, the

must always be two sets of books. Once you realize this, you will be as smart, an

maybe smarter, than your banker. The following is an example of a legal "two se

of books" - yours and your banker's.

As CEO of your life, always remember these simple words and diagrams

from

my rich dad, who often said, "For every liability you have, you are somebody else's asset. "

Most people will say that "two sets of books" is illegal. And that is true n

And he would draw this simple diagram.

Assets

Your Balance Sheet

Liabilities

Mortgage

Your Bank's Balance Sheet

Assets

Bank's Balance Sheet

Liabilities

Your Mortgage

As CEO of your life, you must always remember that for each of your liabilities, or debts, you are someone else's asset. That is the real "two

sets of

books accounting." For every liability, such as a mortgage, car loan, school loan

and credit card, you're an employee of the people lending the money. You're working hard to make someone else rich.

204 I I C-

I GOOD DEBT AND BAD DEBT

The C4SHROW Quadrant

who paid for his loans. He would explain to his son and me that good debt

was

debt that someone else paid for you, and bad debt was debt that you paid for with

your own sweat and blood. That is why he loved rental properties. He would encourage me to buy rental property because "the bank gives you the loan,

but

),our tenant pays for it." 1]VCOME AND EXPENSE

in

s, there aart, and two sets

ms from

Oody

of

4 loan u're

Not only do the two sets of books apply to assets and liabilities, but they also

thcome and expenses. 'Yhe more COMP~etC Verbal leSSOn ~TQM My

ACh dad

was this: "For most every asset, there must be a liability, but they do not appear on

the same set of financial statements. For every expense, there must also be income,

.&TA &%ma tvQ~j & ftot 'app4tw M tve swmeset .1 kmwac"A sme-mev~s This simple drawing will make that lesson clearen

payee

income

Expense

Payor

Income

e

Most people cannot get ahead financially because every month, they have

bills

to pay. They have phone bills, tax bills, electric bills, gas bills, credit card bills,

food bills, and so forth. Every month, most people pay everyone else first and pay

t1aemselves last, if they have anything left over. Hence, most people violate the

golden rule of personal finance, which is, "Pay yourself first."

That is why rich dad stressed the importance of cash flow management

and

basic financial literacy. Rich dad would often say, "People who cannot control their

cash flow work for those who can."

205

The C4SHROW Quadrant

THE FINANCIAL FAST TRACK AND THE RATRACE

The concept of "two sets of books" can be used to show you the "Financial Fast Track" and the "Rat Race". There are many different types of financial

fast

tracks. The diagram below is one of the most common. It is the track between a

creditor and a debtor.

It is overly simplified, yet if you take time to study it, your mind will

begin to

see what most people's eyes cannot. Study it and you will see the relationship

between the rich and the poor, the haves and have nots, the borrowers and the

lenders, and those who create jobs and those who look for jobs.

THIS IS THE FINANCIAL FAST TRACK

AND YOURE ALREADY ON IT

A Debtor's Financial Statement

Your

Income Statement

Income

job

Expense

Llabiflties

Assets

Rat Race

_I-an/U.ne or Crecut

A Creditor's Financial Statement

Income Statement

Expense

heet

liabilities

Fast Track

At this point, the creditor will say, "Because of your good credit, we'd

like to

offer you a bill consolidation loan." Or: "Would you like to open line of credit just

in case you need some extra money in the future?"

206

The r-ASHROW Quadrant

DO YOU KNOW THE DIFFERENCE?

The path of money flowing between the two sets of books is what my rich dad called the "Financial Fast Track." It is also the "Financial Rat Race."

For one to

exist, so must the other. Hence, there must be at minimum two financial statements. The question is, which one is yours? And which one do you want to

have?

This is why my rich dad constantly told me, "Making more money will not solve your problems, if cash flow management is the problem," and "the

people

who understand the power of financial numbers have power over those who do not.',

This is why Step No. 2 to finding your own financial fast track is, "Take

control

of your cash flow."

You need to sit down and map out a plan to get control of your spending habits. Minimize your debt and liabilities. Live within your means before

you try to

increase your means. If you need assistance seek the help of a qualified financial

planner. He or she can help you lay out a plan where you can improve your cash

flow and start to pay yourself first.

TAKEACTION

1)Review your financial statements from the previous chapter.

2)Detern-dne which quadrant of the CASHFLOW Quadrant you receive your income from today.

3)Determine which quadrant you want to receive the bulk of your income from in five years.

4)Begin Your Cashflow Management Plan:

A) Pay yourself first. Put aside a set percentage from each paycheck or each payment you receive from other sources. Deposit that money into an investment savings account. Once your money goes into the account, NEVER take it out, until you are ready to invest it.

Congratulations! You have just started managing your cash flow.

B) Focus on reducing your personal debt.

207

The CASHFLOW Quadrant

The following are some simple and ready-to-apply tips for reducing and eliminating your personal debt.

Tip #I: If you have credit cards with outstanding balances...

1. Cut up all your credit cards, except for 1 or 2.

2, Any new charges you add to the 1 or 2 cards you now have must be paid off every month. Do not incur any further long-term debt.

Tip #2: Come up with $150-$200 extra per month. Now that you are becoming more and more financially literate this should be relatively

easy to do. If you cannot generate an additional $150-$200 per month then your chances for financial freedom may only be a pipe dream.

Tip #3: Apply the additional $150-$200 to your monthly payment of ONLY ONE of your credit cards. You will now pay the minimum PLUS the $150-$200 on that one credit card.

Pay only the minimum amount due on all other credit cards. Often people try to pay a little extra each month on all their cards, but those cards surprisingly never get paid off.

Tip *4: once the first card is paid off, then apply the total amount you were

paying each month on that card to your next credit card. You are now paying the minimum amount due on the second card PLUS the total monthly payment you were paying on your first credit card.

Continue this process with all your credit cards and other consu r credit such as store charges, etc. With each debt you pay off, apply the full amount you were paying on that debt to the minimum payment of your next debt. As you pay off each debt, the monthiv

amount you are paying on the next debt will escalate.

Tip #5: Once all your credit cards and other consumer debt is paid off, now continue the procedure with your car and house payments.

I

kd

Often it

,card. I

)nsumer apply monthly

~ off, now

Tbe CASHFLOW Quadrant

If you follow this procedure you will be amazed at the shortened

amount of time it takes for you to be completely debt-free. Most people can be debt-free within 5 to 7 years.

Tip *6: Now that you are completely debt-free, take the monthly amount you were paying on your last debt, and put that money towards investments. Build your asset column.

That's how simple it is.

Tbe CASTIFLOW Quadrant

10

ass

Tbe CASHFLOW Quadrant

Chapter 13

STE

P 3*0 Know The Difference

0

Between Risk

And Riesky

n hear people saying, "Investing is risky."

gree. Instead I say, "Being uneducated is risky."

IS PROPER C4SH FLOWMANAGEMENI?

Proper cash flow management begins with knowing the difference

between an

asset and a liability... and not the definition your banker gives you.

The following diagram is a picture of an individual who is 45 years old

and

who has properly managed his or her cash flow.

211

The CASHFLOWQuadrant

job

Fxpense

A Assets s

Income Statement

Income

Sheet

Liabilities

I use the age 45 because it is halfway between the age 25, when most

people

begin to work and 65, the age when most people plan on retiring. By age 45, if

they have properly managed their cash flow, their asset column should be longer

than their liability column.

This is a financial picture of people who take risks, but are not risky.

They are also in the upper 10 percent of the population. But if they do

what

the other 90 percent of the population does, which is mismanage their cash flow

and not know the difference between an asset and a liability, their financial pictur(

looks like this at age 45:

212

7he rASHROWOuadrant

Income Statement

Income

job - 1~

A nnancial training and knowledge that is riskv.

Assets

le

er

hat IFINANCIAL LITERACY ow

icture

Balance Sheet