Rich Dad Poor Dad – CashFlow Diagram
One of my favourite ideas from the Rich Dad, Poor Dad Personal Development books is the CashFlow Diagram. It is a KEY concept which you must understand to help you achieve Financial Independence.
As you can see there are four boxes. Each box represents a different aspect of your personal finances:
This is money coming into your life, which can be from a job, a business, assets, etc.
This is money going out of your life – rent, mortgage payments, food, petrol, luxuries, etc.
These are items which put money into your pocket each month – Investment accounts, stocks and shares, Rental property, book royalties, etc.
These are items which take money out of your pocket each month – your house if it has a mortgage, any loans, credit cards, other debts which you must service.
Personal Financial Audit
So if you are aiming for Financial Independence, and trying to improve your lifestyle by looking at your finances, this is a great place to start. Print off, or draw, a copy of the CashFlow Diagram.
1) Draw an arrow into the INCOME box, showing where your money comes from each month (for example your job)
2) Draw an arrow out of the EXPENSES box, showing where your money goes each month
3) If you have any ASSETS, write a list in the assets box, and draw an arrow from there to the Income box, showing that they produce income for you each month.
4) If you have any liabilities, write a list in the LIABILITIES box, and draw an arrow from there to the Expenses box, showiung they take money out of your pocket each month.
Here are some examples…
CashFlow Diagram for someone who is poor…
As you can see, their income from a job, or benefits, goes straight to pay their expenses. They have no assets, and no liabilities. They have not yet started on their route to Financial Independence.
CashFlow Diagram for a typical Middle Class person…
For a middle-class person, the story is slightly different. Their income pays their expenses, but in addition, they have extra expenses in the way of mortgages, credit card payments, loan payments.
CashFlow Diagram for a Wealthy person…
A wealthy person does not need to work to pay their expenses. They have built up income generating assets (property, stocks and shares, investment accounts). These assets provide their income. In addition, they reinvest some of their income in more income-producing assets – so their income increases every month. They are already Financially Independent.
So what does this tell us?
When I first read Robert Kiyosaki’s book, these pictures made me realise that most of my working life had been spent using the middle-class model. Working hard at my job, using the creditworthiness of my job to take out bigger mortgages for better homes, buying nice cars on loans, but never having any extra money at the end of the month, just having bigger repayments each month.
So I decided to start working towards the Wealthy model. I wanted Financial Independence. This is where another book came in handy. “The Richest Man in Babylon” by George Clason, talks about living on only 90% of your income, so you can save and invest the 10%.
I had to cut back on some of my luxuries (Beer, Sky TV, eating out regularly), and I then started using the 10% to pay off some liabilities, and start buying some assets.
I am now somewhere between the two. I still have mortgage payments to pay on my home, but I have no other debts. I also now have some properties that are paying rental income each month. This has taken me 5 years, but I can see where I am going now. I can see that I have a path to Financial Indpendence. Whether I follow it or not is up to me.
How about you? Can you see yourself in one of these pictures? Do you want to change? Let me know your thoughts.
Bye for Now