Cashflow Investing

September 20, 2012 — Leave a comment

Cashflow Investing is what we are all about.  Specifically we are about investing in income producing assets where we control the investment & decisions which allows us to beat the system.

Most people invest in cashflow by giving their money to the system, by purchasing annuities, mutual funds, bonds and other investment products that produce cashflow.  The problem though is that you have very little control.  You may own a portion of the asset but you do not have control over the investment or decisions that actually affect the cashflow that asset produces.  As a result you do receive cashflow for your contribution but as you see in the diagram you receive the smallest portion of money back.

We are talking about a different type of cashflow investing.

We invest in cashflow where we control the asset/investment, meaning we have control over the investment, processes and decisions that affect the cashflow the asset produces.

This is a fundamental difference in how one invests.

We don’t turn our money over to the “pros” or “brokers” (the system).  Instead, we invest our own money and other people’s money (by raising funds) in assets that give us more control over how the asset performs.

When we invest our own money, we actually side step system and it looks like this.

When we raise money and invest other people’s money it looks like this

Cashflow Funnel

September 20, 2012 — Leave a comment

Creating multiple sources of cashflow or your own cashflow funnel is essential to your financial freedom. The common mistake people make is that they create cashflow funnels that require their time, money & energy in order to have cashflow consistently come in.

At the beginning, this is perfectly fine, and should probably be expected, but the purpose is to design your cashflow funnels so that they continue to funnel cashflow to you once you remove yourself from the operations.

Creating cashflow funnels that run in your absence is what produces passive income which minimizes your tax liability (allows you to keep more of the money you make) and frees up your time so you can live the lifestyle you desire.

So while most people create cashflow through a job (earned income)

or stocks (portfolio income)

our focus is on generating cashflow through passive income

….if I follow the plan of most financial advisors. The truth is ever since I read Rich Dad Poor Dad
at the age of 20, I created my own financial plan that I have followed. That plan has served me very well thus far and I started to wonder if it would continue to do so given the exciting changes I have coming up.

In two months I will be marrying Alexes,(one of the most amazing human beings I have
ever met and the love of my life) and we are planning to have children in the next few years. So, I thought it might be time to update my financial plan. After meeting with numerous “financial experts”
what I discovered shocked me.

Rather than bore you with the details of the meetings with the different financial planners lets cut right to the chase and talk about one of the meetings in particular. This financial planner asked me when I want to retire and how much money I want coming in.

I told him I never plan to retire ( I love what I do) but for the purpose of his exercise I said I want to retire in the next 10 years and make $250,000 each year after taxes.

He ran his computation (not including existing assets) and told me that I would need to create a nest egg of over $1.6 Million dollars in the next ten years to achieve my goal.

With that nest egg I could then invest in the stock market, mutual funds, annuities and other financial products to achieve my annual retirement income goal.

Lets take a look at this plan in 4 parts.

1. Coming up with an extra $1.6 Million
2. Risk of Income
3. Risk of Investments
4. The Alternative
1. Coming up with an extra $1.6 MillionMost people if they had to save an extra $1.6 million dollars over the next 10 years would do what they know how to do…work harder.

That means I would need to save an extra $160,000 / year for the next ten years. This amount wouldn’t even include the money I need to live, to feed my family, to have some fun etc. But for the purposes of this example and to be ultra conservative, let’s say that I managed to live extremely frugally and lived off of $40,000 so my needed income would be an even $200,000 after taxes.

That means I would need to make $240,000 / year to net approximately $200,000 after taxes.
This is not realistic for most Americans given the median household income in the US is $46,326
But, even if you can make $240,000 / year busting your a$$ at a job, why would you?

As we’ve discussed, earned income is the highest taxed type of income AND you are putting in lots of time to achieve your goal. That time you lose, not spending with your family, not doing the things you love to do, you cannot get back.

2. Risk of IncomeHow are you generating this income? Even if you have gotten resigned to paying high taxes, how secure is your job? Is your job going to be safe with the economic changes we are undergoing and will your job be necessary in the new global economy? If it is, then you should do ok. But I would argue that very few jobs will really be safe with the changes that are coming. If you know your job is not going to be safe, now is the time to start looking at new ways to produce income.

Make sure to get a free copy of “The Freedom Report” if you haven’t yet to ensure your freedom in the new economy. If your job is safe then keep on producing income, because that is only the first step of the plan. The next step is then investing that money.

3. Risk of InvestmentsI find it mind boggling that the majority of Americans
work so hard for money and then they turn their money over to the “so called” experts without doing much
diligence.

Most financial advisors want you to put your money into the stock market, mutual funds etc and hope to get a 10 or 15% return on your money.

This sounds crazy to me for a few reasons. First off, I think 10-15% return is extremely low. There are ways to get higher returns with less risk. Second, you have absolutely no influence over how your investment performs.

It doesn’t make any sense to me to work hard your entire life and then “trust” your retirement to strangers. Does that really sound like a safe and secure plan to you?

I know many people who lost at least 50% or more of the value of their retirement accounts after the mess of 2008.

How much influence did you have to actually affect the value and profitability of your retirement account when the financial storm hit? If the answer is not much, it may be time for you to change your investment strategy, especially because the worst is still yet to come.

And yet this is what is scariest to me. Lets say I had taken the financial advisors’ advice 10 years ago and had found a way to save $1.6 million dollars in my retirement account and then after the subprime mess of 2008 that account dropped to $800,000. What would I do then? I busted my a$$ for 10 years, did everything I was supposed to and because I had limited influence over my investments, when the financial storm hit I ended up only halfway towards retirement instead of being able to retire.

The unfortunate thing is that today lots of potential retirees find themselves in this exact position. Yet today when I sit with most financial advisors they give me the same advice that they have given in the past.

Do you think that potential retiree who can’t retire now would endorse the plan that the financial advisors gave me?

The problem now though is that potential retiree has been practicing how to make earned income for the past 40 years and that is the only thing he/she knows how to do. And since he is now $800,000 short to retire he has three choices.

1. Cut his lifestyle for the last years of his life

2. Continue to do what he has been doing the past 40 years, work for earned income

3. Learn an entire new skill set and take control of his investments and learn how to create passive income.

Unfortunately at this age, most people aren’t willing to even consider number three as an option so they resort to 1 or 2, neither of which is very appealing.

4. The AlternativeAfter meeting with financial planners and listening to their options I’ve come to the conclusion that the plan I first created after reading Rich Dad Poor Dad, when I was in my young 20′s is still the best plan for me and my “new, soon to be” family.

I realize this plan isn’t for everybody, but for me, it’s the only one I have confidence in because I am able to influence the results and am 100% responsible for how it goes.

It’s a simple plan, but it takes hard work. The exciting news is that the harder you work upfront, the less work you have to do on the back end and the more money you make.

Like Robert Kiyosaki says, acquire income producing assets.

Specifically I acquire assets that:

1. I control/influence
2. Are tax friendly – Allow me to make money and pay zero taxes or very little taxes (less than 10%)
3. Provide steady cashflow and capital gains appreciation
4. Allow me to use leverage ( I don’t use my own money)
5. Protect principal (allow me to recoup my initial investment in 12 months, if I use my own money)

The truth is at the end of the day, risk is always a part of any financial plan…nothing is guaranteed.
The question is which financial plan makes the most sense for you and will help you achieve our desired goals?

I believe I am able to reduce my risk by increasing the influence I have over my investments. In addition the more I educate myself, the more investing experience I get, I further reduce my risk. Not only do I further reduce my risk, but I also increase my financial returns.

This makes sense for me.

This also requires courage, especially at the beginning.

When I read Rich Dad Poor Dad at the age of 20, I learned a new way to create wealth and make money but it is one thing to know how to do something and to actually do it.

When I purchased my first piece of real estate 7 years ago at the age of 22, I got in the game. For the past 7 years I have continued to educate myself in the “virtual classroom” by attending seminars, reading books, etc as well as getting real world experience by actually doing what I’ve read.

Each year I develop skill sets that enable me to increase my income producing assets, make more money, pay less in taxes and have the time to do the things I enjoy most with the people I love.

Stay tuned because in my next post I will be sharing in detail how my real estate assets are able to achieve the results I mentioned above.

If you are interested in doing the same, leave a comment below and let me know why.

$100,000 Tax Free

August 12, 2012 — Leave a comment

In my last blog post, The Truth About Money and Freedom, I discussed the difference between Absolute Income and Relative Income.

I started with this because at the end of the day, I believe it all comes down to lifestyle which is really measured by your relative income, because your lifestyle is given by both your time and your money….one without the other doesn’t work.

The most efficient way to increase your relative income is by simply keeping more of the money you make.
This is really all that matters. Most people get caught up in how much money they make.
The only thing I care about is how much money I keep.

When I read Rich Dad Poor Dad at the age of 20, it was the first book that introduced me to 3 different types of incomes.

  • Earned Income

You ever notice people get funny over money? And often times are willing to do just about anything to get it.

When I hear personal incomes being thrown around I’m always left wondering “how did they make their money?”

And I don’t mean, were they a doctor, a teacher or some other profession.

I want to know if they had to work hard for their money (earned income) or did their money work for them (portfolio or passive income)?

In the cases of the rich and wealthy it usually is the latter.

But this post isn’t about earned, portfolio or passive income.

It’s about two other types of income that the Rich have mastered.

I have had the opportunity to learn from not only the Rich, but the greatest teacher of all…personal experience.

In college I planned to become an investment banker and make lots of money until one day an alumnus came back to share his experience as an investment banker. He had been working at the bank for 6 months, worked 18-20 hour days and his 3 year relationship had ended because he had no time for anything other than work.

Ever since that day I continued to want to make a lot of money but not at that cost. The reason I wanted to make a lot of money was to have the freedom to do what I wanted.

I”m assuming that you feel the same way. Yes you desire to make a lot of money, but that is a means to an end. The end is having the life you want, the time you want, the freedom to call your own shots in life.

In the example I mentioned above, an Investment Banking job was the hot job on wall street when I was in college because you could graduate college and make $100,000 your first year out of school. So in the business school, everyone wanted this job.

Everyone wanted this job because they measured money in terms of Absolute Income. Absolute Income only considers the amount of money you make, and gives no consideration to anything else.

At that time, the Investment Banking job was the highly coveted job because there was no other job where an undergraduate was going to earn $100,000 upon graduation.

What I’ve found though is that the wealthiest people in the world focus on relative income. The wealthy focus on relative income because relative income takes into consideration our most valuable commodity…our time.

Relative Income is measured by the income you make and the time you spend working.

So lets figure out how much the Investment Banker makes in Relative Income.

Lets use the lower end of the amount of hours he said he typically works -18 hour days.

18 hours x 5 days = 90 hours / week

$100,000 / 52 weeks = $1,923 / week

$1923 / 90 hours = $21.36 / hour.

$21.36 per hour. All of a sudden that $100,000 income doesn’t seem as attractive (and we haven’t even spoken about how earned income is taxed at the highest tax bracket yet, which means he keeps even less, but that is another blog post).

Let’s compare this to an Entrepreneurial Investor, who runs his own business, controls his own destiny, and understands the value of his or her time. This investor is willing to work hard upfront. This Entrepreneurial Investor understands he may make less money than his peers initially, but thats ok because the best is yet to come. This investor is willing to invest the time now, because he knows doing so will give him the needed leverage to make more and more money with less and less of his time as the years go on.

And his first year the Entrepreneurial Investor works hard, building his business and investments and also puts in 90 hour weeks but only makes $50,000 .

90 hours / week

$50,000 / 52 weeks = $961.53 / week

$961.53 / 90 hours = $10.68 / hour.

$10.68 per hour is certainly not much money. But the difference is how the Entrepreneurial Investor spends his time. The Entrepreneurial Investor spends his time learning about business, real estate, cashflow investments that will produce passive income. So the Entrepreneurial Investor is ok that he put in 90 hour weeks and only made $10.68 / hour his first year. Not only is he ok with this but he is super excited because he is acquiring assets and building teams and systems that will continue to pay him passive income and allow him to work less and less.

And each year the Entrepreneurial Investor spends his time acquiring assets and building teams and systems. He is working HARD. Yet he sees his friends and buddies working who may or may not be working as hard as him, but making more money than him, buying fancy cars and fancy houses.

The fruits of the Entrepreneurial Investor’s labor takes time to fully blossom to reap the sweet benefits.

And after a few years though, things begin to change. The Investment Banker is making even more money now. He got a 50% raise to $150,000. His relative income is now $32.05 / hour . But he is working harder than ever. After being at his job for 5 years he hates it. He is tired of the long hours. he wants to quit, but he finds himself in the same position he was before he took this position…needing money. He now has the fancy cars, the big house and if he quit his job, he wouldn’t have the money to continue to pay for this desired lifestyle.

The Entrepreneurial Investor on the other hand now is starting to see the benefits of his hard work. He too is making $150,000 / year but instead of working 90 hours per work he is working only 60. His relative income is now $48.07/hour (50% more than the investment banker).

Over the next 5 years, the Investment Banker decided to stick with his job because he needed the money and he got another raise and now makes double the amount of money he did 5 years ago, $300,000 which in relative income is $64.10 / hour.

The Entrepreneurial Investor has continued to acquire more assets by leveraging the systems, teams, businesses and investments he has been acquiring. The Entrepreneurial Investor now makes $500,000 and works just 30 hours / week which is $320 / hour in relative income.

So at the end of 10 years, the Entrepreneurial Investor not only has higher relative income but he also has higher absolute income.

So you may be wondering how the Entrepreneurial Investor ended up with more absolute income if his focus was on relative income. That’s because when you focus on relative income you have to focus on things other than yourself because the way to maximize your relative income is to leverage other people, other money, other systems etc.

And when you use leverage effectively, not only does your relative income increase, so does your absolute income.

The rich focus on relative income and that’s what has their absolute income skyrocket.

This is why they are rich.

I share this example with you because this has been my personal experience. Now I’m not at the point where I make $500,000 working 30 hours / week yet, but it’s coming.

When I first started this journey my friends and colleagues I graduated with were making a lot more money than me. Today, years later, in some cases I have exceeded what they currently make and others still make more than me.

But I have a more valuable commodity than money… Time. I have the time to do the things I love such as travel the world and spend time with the people I love most. And each year I continuously work on freeing up more and more of my time and acquiring assets that make me more and more money.

I’ve had lots of set backs and obstacles along the way and I will face more moving forward. I’ve lost money, spent lots of money and made some huge mistakes. And as we all know, we learn the most from our biggest mistakes. The difference is I keep going go and never stop no matter the mistake. The mistakes that I’ve made in the past and the new mistakes I will make in the future all have me be a more successful business person, investor and human being.

I realize this lifestyle isn’t for everyone and the process of how I got here certainly isn’t for everyone either. It’s been hard work. I’ve busted my ass and guess what… there is still a lot more to go.

I’ve realized that this game doesn’t end. There is always what’s next. No matter what you do, what you accomplish there is always something else. Me personally, I love that. That’s what gets me up in the morning. Knowing that there is something else, a new challenge, something else to learn. Getting up each morning excited to get the day started.

I can’t live my life any other way. For me this is the only way.

P.S. I’d love to hear your thoughts and feedback by posting a comment below