Cash Flow: How To Make It Work For You

The article was written by Gil Mahesh and was originally published on DataDrivenInvestor.

Cash flow is the income and expenses associated with the activities of a person, family or enterprise. Generated from assets and liabilities. Determines financial well-being and is a key indicator of the success of economic activity.

In financial literacy, it is customary to first analyze all cash flows in order to find out what exactly leads to difficulties, poverty, or, on the contrary, wealth. Unfortunately, many have already stepped on a mine when they considered themselves stable in the world of money. Receiving large wages, they forgot about the structure of their income and one day they ran into trouble.

The most striking example that I often cite is the billionaire Telman Ismailov. With a rich source of profit in the form of a huge market, he overlaid himself with liabilities, spent money without regard to his financial situation, and when the only asset ceased to exist, he very quickly became bankrupt and mired in debt.

The Importance of Cash Flow

As a rule, an ordinary person has a simple structure of his wealth. There are wages and a lot of expenses. Pay for an apartment, loans, food, clothes, put aside for rest, repairs, and so on and so forth. That is, one asset covers all liabilities.

In the event of loss of work or performance, there is a real problem. Expenses have not gone away, but income is no more. The cash flow is disrupted and this leads to an increase in the debt burden with a simultaneous drop in living standards.

But the saddest thing is that the fear of losing this income forces you to stay in an unloved job and deprive yourself of the opportunity for self-development. As the saying goes, “money is earned in your spare time.” If you have nothing but hired labor, then this greatly increases the risks.

Types of cash flows

When there is not enough money, one idea comes to mind — to find a second job. This is the decision of most people, simply because they are not familiar with other options. As income increases, spending increases and the circle closes. A person is forced to work more and more, he does not have time for himself and his family, and the situation does not change dramatically.

It is possible to raise the standard of living and gradually reduce the amount of one’s own efforts only thanks to the competent construction of cash flow. To do this, you need to know all its types. A financially literate person has both.

Active cash flow

Active cash flow is the profit associated with the performance of activities, that is, with one’s own efforts. All the money that you receive for work in the truest sense of the word.

This includes hired labor. It doesn’t matter what profession and what salary, the only important thing is that a person receives money while working and stops receiving it as soon as he stops doing it. Dismissal means the cessation of active cash flow.

Passive cash flow

Passive cash flow is the profit received from investing activities. In other words, dividends. Own efforts are not required here and all income is completely autonomous. For example, a person owns shares of some companies and is paid a percentage of the profits of the enterprise. The more securities, the greater the dividend.

In this case, our goal is precisely the volume of assets, so investors do not look at the value of shares. If they have fallen in price a lot, then this is great news, it’s time to pick up a good source of income at a bargain price.

Speculative cash flow

Imagine you bought a computer on Avito and then resold it for 20% more. You have such a talent. This is what will be considered speculative cash flow. In Soviet times, this was prohibited, however, as was the passive DP. You could only work for money, everything else was limited by law.

Many people naively believe that speculation is easy money. Bought for a dollar, sold for two. But in fact, this is the most dangerous and unpredictable cash flow. You can easily burn out, lose everything and be left with nothing. Neither in the stock market nor in other places, I do not recommend this option.

Many of my clients open accounts, buy stocks, expect a small uptick, and sell on the profits. But after a few transactions, luck turns away, prices go the other way, and leverage very quickly makes a bankrupt out of a speculator. In general, this method should be used carefully and only in relation to goods that, if not sold, will be useful to oneself.

A friend of mine buys socks on aliexpress, and then sells them among friends. He charges a little, but always has a stable income, because it is more convenient and profitable for friends to buy from him. The product is necessary and if anything, you can wear it yourself.

Negative cash flow

There should be multiple sources of income. If the salary is good, then it is quite reasonable to start buying assets for passive income. When there are at least 5–6 of them and each of them is able to cover living expenses, we can talk about achieving financial independence.

It is better to have 10 assets that bring in $5000 a month than one that brings $1000ff. This is an absolutely logical conclusion, but in reality, few people think about it. I regularly meet people who speak negatively about investments. This, they say, is for fools who do not know how to work.

How to Earn Passive Income with Foundation Capital

If you want to generate a sustainable passive income stream, Foundation Capital is one of the most reliable organizations to invest in.  Our process has been refined, perfected, and proven over the past 12 years of renting our clients’ assets to the construction industry.

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