The rich think very differently from the poor. This is partially why the poor remain poor.
Poor: It is risky to invest money in a business.
Rich: It is risky to rely on a job for livelihood.
Poor: If we do what everyone else is doing, we will not get into trouble.
Rich: If we do what everyone else is doing, we will not be able to achieve what everyone else could not achieve.
Poor: I seek to improve the my life situation.
Rich: I seek to improve other people’s life situation and earn money from it.
Poor: I work for money with my job or small business. I must keep working or else I have no money.
Rich: I make money work for me with my businesses. I do not have to work and yet I get money.
Poor: We educate ourselves to get better jobs.
Rich: We educate ourselves to make better investments.
Poor: We should try to postpone retirement so that we will not run out of money afterwards.
Rich: We should find ways to retire as early as possible without running out of money.
Poor: Money is real.
Rich: Money is an illusion; we know how to play the game instead of being played.
Basic Concepts of the Rich
Cash Flow = Income – Expenses
Income brings money into our life and expenses take money out. Cash Flow is the amount of money we have for spare use. It is an indication of our financial health.
Our Wealth = Our Money / Our Expenses
Wealth is measured by how long we can continue to live our current lifestyle if we stop working. If we have $10,000 and spend $1,000 per month, then our wealth is 10 months.
True Wealth = Unending Cash Flow
The rich people are able to extend their wealth indefinitely. This means that they have attained Financial Freedom Velocity and need not work anymore.
Understanding True Assets & Liabilities
Many people make the mistake of many people of acquiring liabilities while thinking that they are assets. True Assets feed you by generating income. Examples include:
- Licensed Intellectual Property
- Rental Real Estate
- Interest Bearing Loans
True Liabilities feed on us by generating expenses. They include:
- Personal Car (petrol, maintenance etc)
- Personal Home (land tax, utilities etc)
- Personal TV set (electrical bill, maintenance etc)
Active vs. Passive Income
Active income requires much constant effort from us. Examples include working in a job, small business and speculating in shares. Passive income may require much initial effort, but little constant effort. Examples include establishing a business franchise, writing a best selling book, renting out real estate property to a long term tenant and making a long term interest bearing loan. Passive Income is the “secret” of attaining Financial Freedom Velocity.
Since money has to come from somewhere, passive income comes from using other people’s effort and money to enrich yourself. However, in order to leverage on other people, you must offer them something in return that they want.
Capital Appreciation vs. Cash Flow
Capital appreciation occurs when something you own increases in value. For instance, a house you purchased for $100,000 in 1975 may be worth $800,000 today. When we seek to attain Financial Freedom Velocity, cash flow is what we are really looking for. A house can wait 10 years to appreciate, but I doubt that your stomach can wait that long for the next meal.