Cash flow
What you do with money the moment it arrives decides whether you head toward wealth or poverty.
In One Sentence
Cash flow is simply where your money goes: where each dollar heads first after it comes in decides whether it brings more money back.
Why It Matters
Many people think a high income will make them rich, but what really matters is money's first stop after it arrives. Spend it on a moment's pleasure, and you're back to zero by the end of the month; send it first to assets that make money, and they'll bring more money back. Work hard to grow your income, but pay even closer attention to where your money flows.
One Number
A study that followed about two thousand American football players found that about 16% filed for bankruptcy within 12 years of retiring, and that this had almost nothing to do with how much they earned or how long they played (NBER 2015 · Chapter I).
In the Book
Chapter II compares the cash flows of the poor, the middle class and the rich, and asks you to use three family financial statements to work out how much to save each month.
Go Further
- Assets and liabilities Whether money flows to assets or to liabilities decides whether your cash leaks out or flows in.
- Passive income When money keeps flowing into assets, it eventually adds up to passive income.
- Robert Kiyosaki The comparison of three cash-flow patterns comes from his Rich Dad Poor Dad.
- Pay yourself first Saving first when your paycheck lands is the first step in steering money toward assets.
- Capital and labor The poor get almost all their income from work; the rich get most of theirs from assets.