My friend is fairly wealthy. He doesn’t make a ton of money, but he has made some great financial moves lately and now has $100,000 in his bank account because of it. We were out putzing around the other day and came across a sweet lawn mower that would nicely replace his old rickety one that he’s had for years. We drooled over it for a second, but he wasn’t ready to pull the trigger. As we walked away, I said something like, “Dude, why didn’t you just buy it? It’s not like you couldn’t afford it.”
“True, but think about how much that costs vs. what I typically earn each month. It’s just way too much money.”
Doh… I felt about the size of a pea. All this financial coaching that I do, and I just suggested that he drop thousands of dollars on a whim? All this because he has a load of money in his account. I totally missed the larger picture in this moment. Lucky, he already knew the importance of cash flow.
Out of the two scenarios below, which would you choose?
- A lump sum of $1,000,000 right now, or
- $100,000 a year for the rest of your life
Some of you might choose option #1 immediately. After all, it’s a million bucks! That’s more money than you’ve ever seen in your life, and if that dropped in your lap right now, you’d be happy, no questions asked.
Others of you are a bit more logical and might start thinking about how many years you expect to live yet, and if the $100,000 per year would end up being more than $1,000,000. In other words, if you’re 50 years old and in good health, then you’ll probably live for another 25+ years, which would equate to $2.5 million, which is obviously more than the lump sum million bucks.
The most nerdy among us would likely take out their financial calculators and start figuring out the time value of money over time. By factoring in inflation from year to year, how much will that $100,000 per year really equate to? Yeah, it’s pretty nerdy, but you have to admit it’s smart.
While the exact answer to this question might interest you, it’s really not the point. The point is to get you thinking about the importance of cash flow vs. a lump sum of money. How are they different? And is one more important than the other?
There is this myth going around that says rich people are born that way. Their parents were rich and their parents parents were rich. The wealth is passed down from generation to generation, and we simpletons therefore have no chance at becoming wealthy. This is totally false. Out of the richest 400 people in this world, only 21% of them inherited their wealth. This means that 79% of these billionaires started with very little and amassed some amazing wealth within their lifetime alone. How in the world is this possible?
The answer is simple – by doing what the rich do, even before they were rich themselves.
Just like my friend, the future rich folks ignored that fancy lawn mower because they realized its cost was much more than their typical earnings each month, which means of course that it would take a long time for them to recover from this purchase. So what do these future rich folks do instead? They totally ignore the massive amount of cash in their bank account, they fix their used mower for just a few bucks, and then they invest the savings into a wealth-producing asset. In other words, the rich are not just trying to stock-pile money, they are trying to increase their monthly cash flow by investing their cash. And, with the increase in cash flow each month, they can invest in greater and greater assets that produce more and more money each month! This is why I harp on the importance of cash flow. With it, can become rich. Without it, you’ll stay poor for life.
Abandon Your Poor Mind For a Rich One
I have countless friends that go out and buy something every time their bank account exceeds a thousand bucks. Now, I credit them for being able to get their account up to a grand – that’s a step above many Americans – but when all you do with your money is buy sound equipment, televisions, and video games, you’ll never become more wealthy than you are at this moment. The cycle of save, buy, earn, save, buy, earn will never turn into an abundance of money.
If you want to become wealthy, you’ll need to turn your focus from a “lump sum” mentality into a mission for cash flow. If you can build your discretionary cash each month from $200 to $400, and then $400 to $800, and $800 to $1,600, think about what this could do for you! Within just ten years, you could develop a cash flow of $10,000 per month. Do you think you could live comfortably on that for a while?
What do you think about the importance of cash flow? What are you doing about it?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.