The Introduction to “Cash Flow Your Way to Wealth”


I’m excited to say that my second book, Cash Flow Your Way to Wealth, is fully written and going through the first edit.  It should be coming out in a couple of months.  To give you a taste for what this book will be about, I’ve provided the introduction below.

Introduction

Most people have the opportunity to become wealthy within their lifetimes, just using the income they have from their jobs. The reason that few do is because of the way they handle their money once they earn it, also known as how they setup their cash flow. Their whole lives they setup and maintain the cash flow of a middle class person, or even the cash flow of a poor person. People who will become rich and stay that way have setup the cash flow of a rich person. Even if you were to take all of the wealth accumulated by the wealthy people away, they would be wealthy again in a few years because of the way they have configured their cash flow. Likewise, if you gave the poor or the middle class people a bunch of money, in a few years they would be back where they were again because of the way they setup their cash flow. Knowing how to setup the cash flow of a rich person is the key to becoming wealthy, regardless of your income level.

The term “cash flow” is often used to describe the amount of money passing through your fingers each month, and many people say that the reason they cannot improve their financial place in life is because their cash flow is too small. But your cash flow is also how money flows into, through, and out of your life. This is the definition we’ll use in this book. Everyone has some sort of cash flow, regardless of their income. Even if you don’t deliberately configure and control your cash flow using a cash flow plan, you still have one.

Most people have a cash flow that is exactly balanced – every dollar that comes in goes out. In fact, many people don’t even see their money at all since their checks are direct deposited and their bills are paid automatically. They just know that their lights don’t typically get shut off, so things must be working. The issue with this sort of cash flow, however, is that it is extremely fragile. Any disruption in your income stream will result in the light bills not being paid and your lights being shut off.

The purpose of this book is to help the reader develop a different sort of cash flow. One that causes wealth to be built over time. Very quickly (in less than a year) an individual with this sort of cash flow will be protected from minor disturbances such as a missed paycheck or an unexpected expense like a car repair. Within a few years the same individual will be protected from major disturbances like a job loss with a couple of months spent finding another one. After a couple of decades, financial independence can be built – that magical state where one no longer depends on a job to pay for basic bills and put food on the table. In other words, financial security.

To understand the different kinds of cash flow, picture a large canyon. A water source flows into this canyon from one end. For some people it is a small creek. For others it is a moderate stream. For others it is a raging river.

Many people would see the raging river and think that the individual who owned that canyon would never run out of water. Truth be told, most people we think of as rich do not necessary have a rich-person cash flow, but instead are individuals with a raging water income. These are people who are NBA stars with multi-milllion dollar deals, rock stars, brain surgeons, and Wall Street financiers. They probably drive Lamborghinis and Ferraris, live in huge homes with maybe a servant or two, and are always going on lavish vacations and out to the finest restaurants.

Those in the middle class would have a moderate stream income. Many of them would drive late model cars, but be limited to SUVs and maybe a lessor luxury-brand like a Lexus. They would stilll eat out a lot but usually at the moderately priced chains with perhaps a spurge on a nicer restaurant once in a while. They would have nice homes with large yards and granite counter-tops, but nothing like the mansions owned by the raging water set. While they would not have as much water flowing through their canyons, you would still not expect them to run out of water very easily and expect the stream to always be flowing.

Those in the working class would have a creek flowing into their canyon. It would be steady, but nothing excessive. They would drive older cars, live in modest homes or apartments, and generally need to watch their money carefully to cover everything. At times the creek may slow and even dry up for a period of days. If you were living with a creek income, not being able to afford the things you need would be a concern.

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The truth is, however, that all of these individuals are equally vulnerable. All of the water flowing into the canyon flows right back out. Even for the individuals with the raging river income like a movie star, if there is a disruption in the flow of water coming into the canyon – like if someone builds a dam upstream (a job loss or an injury), they could very quickly be in trouble.

Now picture the same canyon with the same water source flowing into it, but now place an earthen dam at the downstream end. Now the water does not all flow out instantly – water starts to rise in the canyon, forming a small pond, then a small lake. Obviously the water level would rise a lot faster for the individuals with a raging river flowing into their canyons, but even those with just a creek would see water building up over time.

Now, these individuals are protected somewhat from an interruption in their income stream. When the water stops flowing for a period of time, depending on how far their canyon had filled with water before the interruption, they would have some buffer before they ran out of water. The amount of time they had would depend on how many holes they had in their dam – how many expenses they had each month.

Individuals who become wealthy – truly wealthy – build dams at the end of their canyons. They also limit the number of holes in their dams and work to increase the water source coming into their canyons. In fact they build additional feeder streams into their canyons, called assets, that build upon themselves to increase the flow over time This causes their canyons to fill with water and become large lakes from which they can draw and never worry about running out of water because of the feeder streams replenishing any water that they remove.

In this book you’ll learn how to manage your cash flow to build a dam at the end of your canyon. You’ll learn how to increase your income by adding feeder streams, assets, that will increase how much water is flowing into your canyon. You’ll learn the investments that you must make to pay for important things like retirement. And then you’ll learn how to set yourself up to never need to worry about money again. It all starts and ends with a cash flow plan.

 

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Small Investor Book Club Reviews Bogleheads’ Guide to Investing


 Last month I started The Small Investor Book Club, where we would read a book together and offer our thoughts in a later post.  Hopefully a few readers out there joined me in reading our first book, The Compound Effect.  I know that I got a lot out of the book and hope that others did as well.  You can read my review of the book here and add your own comments.
For our second book I’d like us to read The Bogleheads’ Guide to Investing.  I’ve always been a big fan of Jeffery Bogle, founder of Vanguard funds.
 

The Bogleheads’ Guide to Investing

The description for the book is as follows:

The irreverent guide to investing, Boglehead style

“The Boglehead’s Guide to Investing is a DIY handbook that espouses the sage investment wisdom of John C. Bogle. This witty and wonderful book offers contrarian advice that provides the first step on the road to investment success, illustrating how relying on typical “common sense” promoted by Wall Street is destined to leave you poorer. This updated edition includes new information on backdoor Roth IRAs and ETFs as mainstream buy and hold investments, estate taxes and gifting, plus changes to the laws regarding Traditional and Roth IRAs, and 401k and 403b retirement plans. With warnings and principles both precisely accurate and grandly counterintuitive, the Boglehead authors show how beating the market is a zero-sum game.

Investing can be simple, but it’s certainly not simplistic. Over the course of twenty years, the followers of John C. Bogle have evolved from a loose association of investors to a major force with the largest and most active non-commercial financial forum on the Internet. The Boglehead’s Guide to Investing brings that communication to you with comprehensive guidance to the investment prowess on display at Bogleheads.org. You’ll learn how to craft your own investment strategy using the Bogle-proven methods that have worked for thousands of investors, and how to:

  • Choose a sound financial lifestyle and diversify your portfolio
  • Start early, invest regularly, and know what you’re buying
  • Preserve your buying power, keeping costs and taxes low
  • Throw out the “good” advice promoted by Wall Street that leads to investment failure

Financial markets are essentially closed systems in which one’s gain garners another’s loss. Investors looking for a roadmap to successfully navigating these choppy waters long-term will find expert guidance, sound advice, and a little irreverent humor in The Boglehead’s Guide to Investing.”

Please buy a copy of The Bogleheads’ Guide to Investingand read it during the month of July and August.  In early August we’ll get back together and share our thoughts.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Small Investor Book Club – Book Review Time


Allrightythen, I hope that everyone has had a chance to read this month’s book,  The Compound Effect by Darren Hardy, as part of the SmallIvy Book Club.  It’s like a bunch of folks sitting around the coffee table in the living room, except I don’t need to clean up and no one needs to bring snacks.
The description for the book was:

“No gimmicks. No Hyperbole. No Magic Bullet. The Compound Effect is based on the principle that decisions shape your destiny. Little, everyday decisions will either take you to the life you desire or to disaster by default. Darren Hardy, publisher of Success Magazine, presents The Compound Effect, a distillation of the fundamental principles that have guided the most phenomenal achievements in business, relationships, and beyond. This easy-to-use, step-by-step operating system allows you to multiply your success, chart your progress, and achieve any desire. If you’re serious about living an extraordinary life, use the power of The Compound Effect to create the success you want.”

The Compound Effect

Today I thought I’d give my impressions, and then see what other people out there think.

I was actually a bit surprised by the material covered in the book, in that I thought it would be mainly about investing and the effect of compound interest and the like.  Really it was more about the compounding effects of habits.  The idea is that if you do something once or twice, it really won’t make much of a difference.  It is the things that we do over and over again – habits – that shape our lives.  If you have bad habits, they may not effect you today or next week, but in a couple of years they’ll cause bad things to happen.  For example, buying a doughnut after eating breakfast on the way to work one time won’t make you fat, but you’ll be twenty pounds heavier in a couple of years if you do it everyday.  Likewise, doing on good thing today won’t make a difference, but do it as a habit for a year or two, and you’ll be amazed at how far you progress.

I thought there were a lot of good insights in the book.  One that he mentioned – writing things down when you want to control things, I put into practice for my health.  A couple of months ago when I assigned the book to the book club, I was severely obese and adding a cholesterol medicine prescription to my high blood pressure medicine.  In the past I rarely even took an aspirin, and now I have two regular prescriptions.  I decided I needed to do something.


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I started writing down what I was eating.  In particular, I started to keep track of how much sugar I was putting in coffee and tea, which was a lot.  Falling in line with the Compound Effect, I decided to change my habit of drinking 6-8 cups of sugar and powdered creamer -laden coffee and switching entirely to tea, putting in just one teaspoon per cup.  I am still getting 9-15 teaspoons per day since I drink tea all day, which is about 150-225 calories, but I was probably getting 800 calories per day from sugar and creamer in coffee and tea.  Add that to cutting back a bit at meals, splitting a meal in two for a dinner and a lunch when I go out instead of having a 1500 calorie meal, and I’ve lost about 20 pounds over the last two months.  My blood pressure is also down about 20 points (they say one pound adds one point to blood pressure), now on the border between high and elevated.  I’ll need to see where my cholesterol is at the end of the summer when I see the doctor again.

I’m not all the way there yet, but I think I’ll drop another 30 pounds or so if I keep eating the amount I’m now eating (I’m assuming that you’ll weight about ten times your daily calorie intake, as some medical sites suggest), so hopefully I’ll be about 50 pounds off my high by the time Christmas rolls around and high blood pressure and cholesterol will be a thing of the past.  I believe I would still be considered obese given my height and weight, but am on the border.


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One thing I don’t like about the book is his constant mention of SUCCESS Magazine, a magazine he publishes.  I thought that was a bit commercial.  I also like his enthusiasm, but I don’t think I’ll give up listening to music or talk radio in the car on the way to and from work in order to squeeze in a self-improvement book on CD.  It sounds like a great idea, but I don’t know if I’m ready to give up everything I enjoy to always be pushing to improve.  I am planning to find a mentor or two for my career, which has started to stall.  I will also find someone to call about once a week to discuss highs and lows as a way to have someone push me to improve.

In general I would recommend the book to a friend.

As far as investing goes, certainly good habits, like putting money away regularly, diversifying properly, and leaving things alone instead of trying to time the markets, are the keys to success.  Nothing happens over night, but if you keep up these habits, you’ll find yourself financially independent with a million dollars or so in your investment portfolio in 20-30 years.  Staying away from bad habits like buying new cars, buying things on payments, and raiding your investment and retirement accounts to buy stuff you don’t really need is also important.  Your million dollars will disappear if you keep spending more than you make and change your habits of saving and investing.  It won’t happen over night, but overspend and draw your account down just a bit each month, and it will disappear.

So what were your thoughts?  Please leave your review in a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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