Step 2: Take Control Of Your Cash Flow

CHAPTER 12

Many people believe that simply making more money will solve their money problems but, in most cases, it only causes bigger money problems.

The primary reason most people have money problems is they were never schooled in the science of cash flow management. They were taught how to read, write, drive cars and swim, but they were not taught how to manage their cash flow. Without this training they wind up having money problems, then work harder believing that more money will solve the problem.

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

THE MOST IMPORTANT SKILL

After deciding to mind your own business, the next step as the CEO of the business of your life, is to take control of your cash flow. If you do not, making more money will not make you richer... in fact, more money makes most people poorer because they often go out and get deeper into debt every time they get a pay raise.

The majority of people do not prepare personal financial statements. At most, they try to balance their checkbooks each month. So congratulate yourself, you are 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, even your banker.

Most people will say that "two sets of books" is illegal. And that is true in some instances. Yet, in reality, if you truly understand the world of finances, there must always be two sets of books. Once you realize this, you will be as smart, and maybe smarter, than your banker. The following is an example of a legal "two sets 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."

And he would draw this simple diagram.

Tow Hokum Sheol Assets Liabilities

MOrtgaee

Your Bank's Balance Sheet

wk's Balance Sheet

Assets Liabilities

Your tiortsage

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.

Rich dad often cautioned me about "good debt and had debt." He would often say, "Every time you owe someone money, you become an employee of their money. If you take out a 30 year loan, you've become a 30 year employee, and they do not give you a gold watch when the debt is retired."

Rich dad did borrow money, but he did his best to not become the person 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 your tenant pays for it."

INCOME AND EXPENSE

Not only do the two sets of books apply to assets and liabilities, but they also apply to income and expenses. The more complete verbal lesson from my rich 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, and again they do not appear on the same set of financial statements."

This simple drawing will make that lesson clearer:

Pity= Paror

Income Incense

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 themselves 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."

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 YOU'RE ALREADY ON IT

A Debtor's Financial Statement A Creditor's Financial Statement

Job

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?"

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

TAKE ACTION

1) Review your financial statements from the previous chapter.

2) Determine 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.

Tip #1: 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 lust 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 consumer 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 monthly 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.

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.