People struggle financially because they cannot read numbers or words that the rich can. In financial reports, reading the numbers is looking for the plot, the story of where the cash flows.
A cash flow pattern of poor person:
A cash flow pattern of a middle-class person:
A cash flow pattern of a wealthy person:
Students leave school without financial skills, so millions of educated people pursue their profession successfully, but later struggle financially. What is missing from the education is not ‘how to make money’, but ‘how to spend money’ wisely.
Working hard without self-knowledge, without asking ourselves what we do, and without understanding money, allows money to have control over us.
Our inner wisdom is a genius inside of us, but we tend to ignore it. We just follow the crowd. We do what the rest do. We conform rather than question.
This fear of being different prevents us from opening up to new ways of solving problems. We can be true to our inner wisdom, rather than be true to our fears.
Owning your house is better than nothing, but a home is a liability as it takes money out of your pocket each month. And a bigger home takes more money. Many will disagree with this because a nice home is emotional thing, and emotions tend to lower our financial intelligence. Money has a way of making decisions emotional…
If you want a bigger house then first buy assets that will generate the cash flow to pay for the house.
Concentrate on buying ‘income-generating assets’.
This is the cash flow of most of us:
Wealth is measured by how much money your money makes. This indicates financial survivability. The cash flow from assets, compared with the cash flow from expenses. For example, expenses of £1000 per month, with assets cash flow of £1000 per month – make you a wealthy person, because there is no dependence here on a salary, but on assets that fully cover and pay for your month’s expenses.
Now, the goal will is to increase cash flow from assets so there is more money coming from assets than taken by expenses, and then to reinvest the money in new assets. The more money goes to assets, the more assets grow, and the more cash flow grows.
A new car loses nearly 25 percent the moment you buy it. A car is not an asset, even if the bankers consider it as an asset when you come to apply for a loan.
Real estate assets are:
– Businesses that do not require your presence. (You own them and they are managed and run by other people. If you work there, it is not a business but a job).
– Mutual funds.
– Income-generating real estate.
– Notes (IOU’s).
– Royalties from intellectual property, such as music, scripts, patents.
– Things that produce income and have a ready market.
Buy what you love. If you don’t love it, you will not take care of it.
Once a pound goes into your assets do not let it go. The pound becomes your employee, working 24 hours a day, for generations long.
The last things that the rich buy are luxuries. They first sort their cash flow, and only once it grows they buy the luxuries they want. The middle class, on the other hand, tend to buy luxuries first.
In the history of Britain and the USA there were no taxes, rather temporary pay levied to finance wars. In Britain, tax was levied to pay for the war against Napoleon 1799-1816. In 1874 England made the income tax a permanent levy. These taxes were initially levied against only the rich, and they were popular because the middle class and the poor were told that taxes are created to punish the rich. So the masses voted for the tax law, and it became legal. This resulted in taxes expanded to the middle class and the poor as governments got a taste of money, and their appetite grew.
Tax laws passed because the masses believed in a Robin Hood theory of taking from the rich and giving to the poor. But governments soon started to tax the middle class, not just the rich.
No matter how strong is the idea of taking from the rich, the rich always find ways to outsmart. When the rich got taxed, money flew to the government to create jobs and pensions. But it went back to the rich via their factories receiving government contracts.
When income-tax was passed, the income-tax paid by corporations was less than the individual income-tax rates, so corporations became popular.
Code 1031 in the USA allows a seller to delay paying taxes on real estate that is sold for a capital gain through an exchange for a more expensive real estate. As long as you keep trading up in value in real estate, you will not be taxed on the gain, until you liquidate.
Financial IQ requires four broad areas of expertise: Accounting, Investing, Understanding the Market, and Understanding the Law.
A corporation provides tax advantages and protects people from law suits.
Corporation’s Tax advantages:
– Pay for expenses before paying taxes. Employees, on the other hand, earn and get taxes, and then live on what is left. A corporation earns, spends as much as it can, and is taxed on what is left. It is one of the biggest legal tax loopholes that the rich use.
– A corporation can pay its owner for car payments, insurance, repairs, club membership, and partial expenses, which are spend using pre-tax money.
Protection from lawsuits:
– In our society everyone wants a piece from your action. The rich hide much of their wealth using vehicles such as corporation and trusts, which protect their assets from creditors.
– When someone tries to sue a wealthy individual, they often have to face well-paid lawyers that work for the corporations.
The rich that have a corporation – earn money, spend it, and only then pay taxes.
People who work for a corporation – earn money, pay taxes, and then spend.
Fear suppresses the genius mind. Students who know the answer may lack the courage to act on the answer in the class room. In real life it is not the smart that gets ahead but the bold.
27 May 2012. © Gil Dekel.