When I first started my Financial Education journey, I read a book called “Rich Dad Poor Dad” by Robert Kiyosaki – one of the first things I learned was the Cash Flow Patterns of the Rich, the Middle Class and the Poor.
Cash Flow Pattern of The Poor
You will often hear those who struggle mightily when it comes to finances say, “I’m living paycheck to paycheck.”
The unfortunate reality for those who are poor is that they make hardly enough to pay their monthly expenses. I have met many of them in my life. Life is hard. Often times, they are hardworking and honest people – sometimes even working two jobs just to make ends meet; but they have a hard time getting ahead because they are simply treading water.
They save little or nothing with the excuse that they earn too little to save. Even if they get a pay raise or a bonus check, they will spend the surplus just as quickly. As a result, they have no financial stability or security.
If something unexpected happens in their lives (e.g., job loss, accident, illness, death in the family), everything comes crashing down and their families suffer tremendously.
The Cash Flow Pattern of The Poor looks like this:
As you can see, all the income from their jobs go to expenses, and there is nothing left in their pockets.
Cash Flow Pattern of The Middle Class
The Middle Class also often lives paycheck to paycheck, but for different reasons and in a different way.
This is the Cash Flow Pattern of the Middle Class:
This cash flow pattern is considered typical by our society.
Those with the Middle Class mindset adopt the very common habit of “earn, spend then save”.
After putting aside some money into their retirement saving accounts (e.g., CPF in Singapore, 401K in the US, RRSP in Canada), they tend to spend their money on different toys and liabilities. They use their hard earned savings to buy a bigger house and a newer car, which comes with bigger mortgage payments and bigger loans.
They buy the latest handbags, gadgets, watches or home entertainment systems on credit and max out their credit cards. As a result, there is no additional cash inflow but a lot more cash outflow. For this reason, most Middle Class families appear to be wealthy, but have very low or even negative Net Worth. Although their houses and cars may be worth millions, they often owe just as much, leaving very little equity.
Over time, they build a lifestyle that must be maintained by either getting higher paying jobs (which often come with increased responsibilities and stress) or working longer hours. Many of these people suffer high financial pressure, working hard every month for the bank. They cannot afford to quit or lose their jobs, and find themselves truly caught in the “Rat Race”. And if they get fired or laid off, everything comes crashing down.
As a result, they will have to work hard for the rest of their lives, hoping that they do not become seriously ill. For many, as they approach their retirement age, they will be confronted by the cruel reality that they may never actually be able to retire in their life time.
When I first played Robert Kiyosaki’s Cashflow 101 board game 1+ years ago, I realized for the first time that I was trapped in a “Rat Race”.
It was an enlightening moment.
It was a moment that changed my life.
As I struggled through the board game, I begun to realize what I was doing wrong in my life even though I looked wealthy and successful from an outsider’s perspective.
After playing the game, I begun to change my thinking pattern and devoted my time massively towards financial education and personal development. 6 months after I started my journey, my lifestyle start to change and i just follow what i learn and applied it into my life. Amazing, i have more fun and freedom after that.
Cash Flow Pattern of The Rich
Now, let’s take a look at the Cash Flow Pattern of the Rich – you will notice that there is ONE simple but yet important difference:
For the Rich, they adopt the “earn, invest, save, then spend” mindset. Unlike the Middle Class, the Rich is motivated to build, develop and acquire Assets – Businesses and Investments that generate positive cash flow and appreciate in value. So their first priority is to ‘invest’ their earnings, before saving or spending that money.
Assets put money into your pocket and Liabilities take money out of your pocket.
Now, certainly the Rich also have Expenses and Liabilities, but their Assets and Incomes (often generated by their Assets) are so much higher than their Expenses and Liabilities that they are insignificant in comparison.
Their Assets generate sufficient cash flow to meet and even exceed their monthly expenses. When this is achieved, they are at a level of financial freedom where they can choose to stop working and they can still sustain their current lifestyle indefinitely.
Although they may ‘spend’ and buy a few luxuries to pamper themselves, often the luxuries are paid for by the income generated by their Assets.
They are now FREE – they can live their lives on their own terms. That means money-freedom and time-freedom. Whether that means spending time with their loved ones, travel the world, building schools in developing countries, volunteering their time to the causes that are closed to their hearts or simply doing what they truly love.
As they continue to build their assets, they can expand their desired lifestyle as they wish.
A Few Final Thoughts
If you want to escape the “Rat Race” and become wealthy in the Information Age, the faster you develop your financial and emotional intelligence, the faster you will achieve financial freedom and financial abundance.
In a world with more and more economic uncertainty and less and less job security, understanding how the Cash Flow pattern of different classes work is vital today and will be even more so in the future.
To achieve true freedom in life, you need to see the world from the perspective of a Business Owner and an Investor, not as an Employee or Self-Employed person.
My Mentor once told me, “As you begin your financial education journey, you will start to see the World differently and you will begin to see Business and Investment opportunities everywhere.”
This has proven to be true for me; and it is my hope that it will be the same for you.
I hope you have found value in this posting. Please share this with your friends and loved ones, so they too can begin their own financial education journey today and live a more purposeful and fulfilling life.
