Who Controls Your Cash Flow?
The difference between the Fast Track and the Rat Race
Last week, we talked about establishing an action plan for controlling your cash flow in the New Year. One of the things I asked you to do was to fill out your financial statement, and to write down your financial goals for the upcoming year and for five years down the road.
Today, I want to talk about why this type of planning is important.
The most important skill
My rich dad said, “People who can’t control their cash flow work for those who can.” Unfortunately, most people don’t know how to manage their cash flow, and consequently, most people struggle working as employees for most of their life.
Many people think that making more money will solve their financial struggles. But this usually isn’t the case. In fact, it, more often than not, causes bigger financial problems. Why? Because they haven’t learned how to manage the money they make. People who make more money often increase their spending and get deeper into debt.
If you want to be financially secure, that will not do. An important part of becoming the CEO of the business of your life is to take control of your cash flow. That is your most important skill.
Keep two sets of books
Most people think that keeping two sets of books is illegal…and it is, in most cases. But if you truly understand the world of finance, there must always be two sets of books—yours and someone else’s.
As CEO of your life, always remember these simple words from my rich dad, “For every liability you have, you are somebody else’s asset.”
The following is an example of two sets of books, yours and your banker’s.
For every liability, such as a mortgage, car loan, school loan, and credit card, you are an employee of the people lending the money. You’re working hard to make someone else rich.
Good debt and bad debt
Rich dad often cautioned me about good debt and bad debt. He said, “Every time you owe someone money, you become an employee of their money.”
While rich dad did borrow money, he did his best not to become the person who paid for his loans. He would explain to Mike and me that good debt was debt someone else paid for you. Bad debt was debt that you paid for with your own sweat and blood. That is why he loved rental properties. He said, “The bank gives you the loan, but your tenant pays for it.”
The Fast Track and the Rat Race
The two books concept can be used to show you the difference between the financial Fast Track and the Rat Race.
There are many types of financial Fast Tracks. The diagram below is one of the most common. It is the track between a creditor and a debtor. If you take the time to study this simple diagram, you’ll see the relationship between those who are financially secure and those who struggle financially.
Which statement is yours?
The path of money flowing between the two sets of books is what is called the financial Fast Track and the financial Rat Race. For one to exist, the other must exist as well. That is why there are always two financial statements. The question is, which statement is yours? Even better, which statement do you want to have?
Rich dad constantly told me, “Making more money will not solve your problems…if cash-flow management is your problem. The people who understand the power of financial numbers have power over those who do not.”