To establish the terms of reference, here is the “use case” I am referring to in this article: you have a job so you are an employee and you get paid wages at regular intervals.
Naturally, this is a very common use case that many people fall into.
Now you have a job and it’s your sole source of income or at least accounts for the lion’s share of it. Every month / fortnight / whatever your pay cycle is, cash flows in but before long cash flows out in the form of bills, living expenses, and doodads.
The 3 cash flow patterns
If less cash flows out than in, you have surplus cash flow. They call this savings.
If an equal amount of cash flows out as in, you have net zero cash flow. They call this breaking even, also known as living from paycheck to paycheck. Hence the origins of the joke “j.o.b. stands for Just Over Broke” as you really are a paycheck away from not being able to eat or make rent. Of course, this is bad but not as half as bad as…
If more cash flows out than in, you have negative cash flow. Is this even possible?? Of course it is and happens everyday, they call this being in debt or living on your credit card. This means you are essentially trading your future for the present. Trading tomorrow for today. You are promising to repay today’s spending with future dollars that you must somehow earn in the future.
You see there’s no escaping it. Unlike what enticing credit card advertisements would have you believe, in the end every dime must be repaid back, every dollar accounted for and then some, in the form of interest on borrowings. So you may want to think twice before your next credit-fuelled purchase.
But I digressed.
The math doesn’t add up
The main reason you are poor is because you only have one source of income / cash flow and ten, fifty, a hundred sources of expenses / cash flowing out.
Thus it’s easy to see how most employees are trapped in a vicious cycle (also known as the “rat race”) of chasing their tails. Money comes in one end, only to drip out through many tiny holes in the bucket. It’s a leaky bucket.
Contrast this with the rich who often have their “hands in many pies.” On the extreme end, some of the rich are so diversified they might not even know all the things they own — take Bill Gates for example who has his own private hedge fund (let that sink in for a moment) Cascade Investment, LLC.
In other words the rich have many sources of cash flowing in that can serve as proxies for their time. This frees them from Time-Money-Servitude — that bloodsucking relationship between time and money that is the lot in life for all employees — which in turn allows them to build up even more sources of cash flow.
Realize that if you are directly exchanging time for money and selling your hours at an hourly rate, how can you expect to be rich when you only have 24 hours a day? Does that seem like a big number to you?
Building multiple sources of cash flow that can act as proxies for your time is the name of the game.
What do you think? I would love to hear your thoughts on this, whether you have anything to add or subtract.