Cashflow, what it is really?

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Cashflow as the word itself means the flow of cash.

This is a continuation of my blog series about the 7 steps to fatten your wallet taken from the book “The Richest Man in Babylon“. To read the first click “7 steps to fatten your wallet” and for the second click “Budget 90% of your income”.

As mentioned the very first step is to set aside at least 10% of your income and then budget the remaining to your needs and wants. If you have been diligent in doing so you will soon notice that your savings starts to grow. But saving is not enough. This is what we call linear growth.

source: morguefile by quicksandala

source: morguefile by quicksandala

Linear growth means that the growth of your savings will depend on what you put in. This idea may be okay at the start, but money’s value erodes over time due to inflation. Thus, one has to grow this saving to fight inflation and continually make money flowing until such time that one does not need to rely on active income but rather on the passive income coming from such savings.

Putting your money to work as mentioned in the book means putting it in an investment that will give a return. We can put savings in a bank as a deposit, but now a days interest in a bank deposit is so low. So putting your hard-earned savings to an investment that gives back a reasonable return would be good. Also, most people would get the earnings of their savings and spend it on luxury and others. They would argue that since it is their money they have the right to enjoy it since it is its earnings. But Arkad taught the students that they should re-invest such earnings thus making the children of the children of their investments work for him.

Re-investing is the key. By the magic of compounding, once a small saving will turn into a huge investment which will be able to give you your day-to-day living expenses and thus no need for your to generate active income and rely solely on passive income.

This though will take time since you need to accumulate wealth that will generate wealth from its own. This is true to the self-made millionaires who endured lots of sacrifice at the beginning and later enjoyed the fruits of their hard work after so many years to the point that they no longer need to work.

They have what we call cashflow in the form of money machines. These are investments that generate income on their own. It could be investment in a profitable company they have built or a small business they have acquired and made it more profitable.

This does not mean though that we need to amass huge wealth just to have money machines. Our small savings can grow if we put it in a safe and manageable small business like a profitable foodcart franchise, an investment in treasury bills or fixed income papers, a small business like a computer shop or retail store where you are a lender or investor by contributing capital.

Remember that your savings can be greater if invested and generate cashflow. It should be tied to a linear growth.

Financial Freedom Advocate About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Check him out in Google+ Learn more about Louis and his financial freedom advocacy here.

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