The Magic of Cash Flow 2: How to Create Wealth

We all love having money flow through our hands, right? Then why is it so difficult for us to understand the concept of cash flow?

The primary reason is that our parents and teachers taught us to look for a job. Looking for a job shifts the responsibility of our cash flow from us to our employers.

There has never been a better time to establish multiple forms of passive income—that helps increase our cash flow.

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Today, I want to answer the following questions: what is cash flow? And how do I build a portfolio of income-producing assets outside my regular 9-5 job? Let’s begin.

What is cash flow? Cash flow is the difference between income and expenses. The more cash flow you produce, the wealthier you become.

Cash flow is different from income. It truly doesn’t matter how much income you generate if your expenses are high. For example, if you make $100,000/year but spend $110,000.

That’s right; you can have negative cash flow. This happens when you start to assume debt. Debt is the power of compounding working against you, your income, and your cash flow. Avoid bad debt at all costs.

Understanding your cash flow situation is paramount if you want to become rich. In fact, there are only two ways to become rich: 1) increasing income and 2) lower expenses.

Happy Cash Flow Retirement 8

Let’s start by lowering expenses. Lowering expenses is a great way to begin your debt payoff journey and your path to financial freedom.

Living on a tight budget and counting every penny are the best ways to lower expenses. The process doesn’t sound motivating; however, becoming debt-free is life-changing.

I became debt-free on April 15, 2021—a day I will never forget. I was in Okinawa, Japan, at the time. I remember the sun being twice as bright that day.

That experience prompted me to write “From -$77,000 to +$150,000 in 22 Months” on April 16th, 2021. I’m glad I wrote that article on that day.

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However, I want to focus on the “increasing income” side of the equation today. You don’t need a lesson on budgeting (do you?). It’s better to learn to increase your cash flow.

Time to get rich. Let’s do a step-by-step analysis on how to become rich. Although it is simple to write about, it is even easier in reality.

In fact, the most challenging part of becoming rich is dealing with your emotional spending or keeping up with the Joneses’ habits.

I routinely say that everyone has some magical gift that can help them become rich if they exploit it.

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This gift can be their brain, abilities, parents, inheritance, insurance payout, etc. Once you learn to grow your cash flow by accumulating assets, you’d better equip yourself to see your gift.

My gift was my ability to follow orders; that’s how I spent 24 years in the US Marine Corps. My military career (along with budgeting) allowed me to retire at age 42. Now I am focusing on becoming rich.

A step-by-step analysis of becoming rich. Let’s say the Smiths earn $120,000/year as a family, and they spend $120,000/year. They have zero cash flow.

The first step is reading Dave Ramsey’s and Robert Kiyosaki’s books. This will give them a balance of being debt-free while accumulating assets.

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Let’s say the family reduces their expenses to $90,000/year by downgrading their cars, paying off student loans and credit cards, and following a strict budget. They now have $30,000/year of cash flow to save and invest.

The first step is to save $30,000 to $50,000 in a high-yield savings account. After doing that, they can start investing in dividend-paying stocks.

Now, it’s time to exploit their gifts. Let’s say they have parents allowing their four-person family to move in. The generous parents will allow the Smiths to stay for free and also handle their childcare. This saves the Smiths $40,000/year in housing and childcare expenses.

They now have $70,000 of cash flow to save and invest. They make an even split between investing in dividends ($35,000/year) and saving for a house down payment ($35,000/year).

After three years, the Smiths have $100,000 in their house account and decide to make a purchase. They don’t buy a home for themselves, they purchase a $500,000 triplex ($100,000 down).

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After the mortgage payment, the triplex generates $2,000/month in passive rental income. The Smiths decide to rebuild their house account, using the original $35,000/year plus $24,000/year from the triplex.

After two more years, the Smiths purchased another triplex, with the same financial stats. Let’s review their cash flow.

1. Their jobs: $120,000/year
2. Dividends: $20,000/ year
3. Triplex #1: $24,000/year
4. Triplex #2: $24,000/year

The Smiths are bringing in $188,000/year on expenses of $50,000/year. The Smiths decide to keep exploiting this “cheat code” for another ten years. This way, they can assist the parents as they age.

Is this scenario realistic? No, this situation is unrealistic—the Smiths would be making far more money than I listed. How?

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Their financial intelligence would compound faster than their income. They would determine that working their jobs was costing them more in taxes than not working. They would probably quit their jobs and focus on doing real estate deals.

Their dividend income would compound quickly, and the rents would continue to rise. If their triplex’s value increased significantly, they could perform a cash-out refinance to purchase another triplex much faster.

The moral of the story is that the Smiths exploited their gift to benefit everyone in the family. What was their gift? Their gift was having loving, generous parents.

Getting rich is a team sport. The Smiths’ parents would love to see their kids and grandkids becoming smarter and wealthier. I have spoken to so many people since I became financially free; they all have gifts to exploit. However, they don’t.

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The American mindset keeps people poor. Yes, you can become wealthy by lowering expenses and increasing income. So why don’t more people become rich? Everyone has a different reason, so let’s review some of them.

1. I only shop at Target, not Walmart.
2. I don’t want to live with my parents.
3. I can’t live with my brother or sister, and they can’t live with me.
4. I can’t join the military.
5. I don’t know how to spend my time if I retire early.
6. I need a new car every three years.
7. I need to renovate my kitchen.
8. I need a pool.

You get the idea. Instead of focusing on becoming rich, they focus on today. And that’s okay. I have stopped convincing people to do what is in their best interest.

My wife and I climbed out of $77,000 in debt to accumulate $400,000 in savings, stocks, and bonds. It took us six years. We have been retired for over a year, and our passive income has never been higher.

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I know brilliant people who just don’t want to be rich. They would rather have the boat, ATV, golf cart, and RV—on credit. Plus, they will continue working until they can no longer function.

Focus on cash flow. You’ll have to do things differently if you want a different result than most Americans. Instead of focusing on getting a pay raise, create an income stream.

Start by getting a roommate. This is the purest form of passive income accessible to the average American. 

You can also rent out your car, buy a vending machine, Airbnb a room, trade options, write books, etc. The list goes on until infinity.

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I spent 20 years focusing on getting a pay raise in the military. Finally, I reached the top of the enlisted food chain (E-9) and had nowhere else to go.

I would have to do things outside of my job to increase my income. Therefore, my wife and I got roommates and paid off the debt.

I started writing books and publishing them on Amazon. I learned how to trade options and invest for dividends. I am learning new things as we speak.

Conclusion. Cash flow is magical—once you understand the concept. The gap between income and expenses is called cash flow.

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Therefore, if you want to become wealthy, you must increase how much money you bring in and reduce how much money goes out.

Step one is identifying your spending and forcing yourself to live on a budget. That means looking at your $100,000/year salary and saying you want to live on $75,000.

That is the essence of cash flow. Eventually, you’ll make far more than $100,000, and you can live the life you want.

However, instead of living on earned income (from a job), you will live on passive income (rents, dividends, royalties, business) from your assets. That’s how I choose to live. Good Luck!

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing