What is cashflow and why it is important?
Cash flow is the difference between your income and expenses.
When your income is greater than your expenses, you have a positive cash flow. If your expenses is greater than your income, you have a negative cash flow.
Knowing where your money is coming from is an important part of any financial strategy.
Cashflow and debt management is the fundamentals of money management and wealth building. Without money or positive cashflow, there is nothing you can do to create more money.
Do you know where is your money coming from and where it is going?
Income can come from employment (earned income), investment (portfolio income) or from business or rental properties (passive income).
Expenses are any money you spend. There are living expenses, such as rent, mortgage payment, grocery, car payment, gas for your car, childcare, health insurance, life insurance, etc.
Poor people buy stuff.
Middle class people buy liabilities that they think are assets.
Wealthy people buy assets.
Which one are you?
Related article: How to Live Debt-free
ASSETS vs LIABILITIES
Assets are anything that generates "income" and increase your monthly cash-flow. Examples are businesses, stocks, bonds, mutual funds, cash value life insurance, real estate investments, rental properties, etc.
* Notice that savings and checking accounts are not listed, because they don’t generate income. Believe me…earning 0.01% on your $1 million sitting in your savings is not earning. Inflation averages 3% each year. Your $1 million is disappearing in front of your eyes if you let it sit in your bank account.
Liabilities are anything that generates "expenses" or creates “debt” and reduces your monthly cash flow. Examples are your primary residence, car, expensive watch collection, boat, yacht, country club membership, etc.
Sorry, your brand-new Mercedes Benz is not an asset even if it's worth $90,000. It is accruing expenses every month - auto insurance, gasoline, car wash, maintenance, etc.
If you become an Uber driver, and use your Mercedez Benz to take riders and generate an income, now your car is an asset.
The same is true for renting your car out via Turo.
In these cases, you can claim your car for business and deduct business expenses on your income tax.
Learn more at Turn Your Car into a Money-Making Asset with Uber
Same for your primary residence. It is a liability. You have monthly living and maintenance expenses - mortgage payment, water, sewer, electricity, yard, etc.
You can turn your home into an asset too with house-hacking on airbnb.com with you extra room, or extra unit.