How the Rich Manage their Cash Flow

By: Adam Khoo

Once again, the key difference that sets people apart in their ability to create wealth is not just how much they earn but more importantly, how they manage the cash that flows through their hands.

The rich manage their money very differently from the average Joe. They have a very different set of habits in the areas of saving, investing and cash spending. To become a millionaire, you must learn and adopt the cash flow management habits of the rich.

You have to first understand the concept of an 'asset' and the fact that some assets help you accumulate wealth while some other assets reduce your wealth. Assets are physical or intangible items that you own. They can be classified into Positive Cash Flow Assets (Assets Cash+) or Negative Cash Flow Assets (Assets Cash-).

Sometimes to purchase an asset like a house or a car, you have to take a loan from the bank. When we borrow money, we incur a liability. As you know, liabilities incur the extra expense of interest payments you must make.

Positive Cash Flow Assets (Assets Cash+) are assets that provide you with positive cash flow and/or capital appreciation even after deducting interest expenses from liabilities incurred.

Examples are stocks, bonds, profitable small businesses, properties with positive yield, intellectual property, fixed deposits and so on.

Negative Cash Flow Assets (Assets cash-) are those that depreciate in value and/or incur additional expenses such as maintenance or interest payments for liabilities incurred.

For example, if you bought a house and rented it out for $2,000 a month but had to pay a mortgage interest of $2,200, it would be a negative cash flow asset. A house which you buy to live in, or a car which is purchased for personal use will obviously not generate any form of income. They only incur negative cash flow and should be considered as Negative Cash Flow Assets.

Bearing this in mind, let's see how the the rich manage their cash.

So how do the rich manage their money? How do they achieve a level of wealth where they do not have to work if they choose not to?

Those with the wealthy mindset adopt a 'earn, save and spend' habit of managing their cash. They set a specific target of how much they want to save every month, usually 15-20%. They deduct this savings from the income they earn and spend the rest.

Unlike those with the 'middle class mentality', the rich mindset motivates them to take their savings and invest in Positive Cash Flow Assets that will generate returns and appreciate in value. They would rather put their money in carefully selected stocks, mutual funds and businesses than to splurge on the latest LCD Plasma Television.

Although they may buy a few luxuries to pamper themselves, their Positive cash flow assets far outweigh their Negative cash flow assets. As a result, the additional passive income generated from their investments outweighs whatever expenses they incur on these 'extras'.

They continue to diligently save and invest until their positive cash flow assets begin to 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 sustain their current lifestyle indefinitely. This is the level that you must aim to attain within the next few years.

An important thing to know is that it doesn't always take money to create positive cash flow assets. Now that you know what you must do to achieve ultimate wealth, it is time to take action to make it all happen.

Article Source: http://yourfinance.co.za

About The Author
Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his million dollar secrets and claim your FREE audio CD program '7 Steps To Financial Freedom' here.