3 minute read
Risk And Risky
I often hear people saying, "Investing is risky." I disagree. Instead I say, "Being uneducated is risky.-
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WHAT IS PROPER CASH FLOW MANAGEMENT?
Proper cash flow management begins with knowing the difference between an asset and a liability... and not the definition your banker gives you.
The Following diagram is a picture of an individual who is 45 years old and who has properly managed his or her cash flow.
I use the age 45 because it Is halfway between the age 25, when most people begin to work and 65, the age when most people plan on retiring. By age 45, if they have properly managed their cash flow, their asset column should be longer than their liability column.
This is a financial picture of people who take risks, but are not risky.
They are also in the upper 10 percent of the population. But if they do what the other 90 percent of the population does, which is mismanage their cash flow and not know the difference between an asset and a liability, their financial picture looks like this at age 45:
Assets Balance Sheet
These are the people who most often say, "Investing is risky." For them, that statement is true — but not because investing is risky. It is their lack of formal financial training and knowledge that is risky.
FINANCIAL LITERACY
In Rich Dad Poor Dad I told the story of how my rich dad demanded that I become financially literate.
Financial literacy is simply looking at the numbers with your eyes, but it is also your trained mind that tells you which way the cash is flowing. Rich dad often said, "The direction of cash flow is everything."
So a house could be an asset or a liability depending on the direction of the cash flow. If the cash flows into your pocket, it is an asset, and if it flows out of your pocket, it is a liability.
FINANCIAL INTELLIGENCE
Rich dad had many definitions for "financial intelligence," such as "the ability to convert cash or labor into assets that provide cash flow."
But one of his favorite definitions was, "Who is smarter? You or your money?"
To my rich dad, to spend your life working hard for money only to have it go out as fast as it comes in is not a sign of high intelligence. You may want to review
the cash flow patterns of a poor person, a middle-class person and a rich person as presented in Chapter 10 and remember that a rich person focuses his or her efforts on acquiring assets, not waking harder.
Due to the lack of financial intelligence, many educated people will put themselves into positions of high financial risk. My rich dad called it "financial red line," meaning income and expenses are nearly the same every month. These are the people who cling desperately to job security, are unable to change when the economy changes, and often destroy their health with stress and worry. And these are often the same people who say: "Business and investing is risky."
In my opinion, business and investing is not risky. Being under-educated is. Similarly, being misinformed is risky and relying on a "safe secure job" is the highest risk anyone can take. Buying an asset is not risky. Buying liabilities you have been told are assets is risky. Minding your own business is not risky. Minding everyone else's business and paying them first is risky.
So Step 3 is to know the difference between risk and risky.
TAKE ACTION
1) Define risk in your own words. a) Is relying on a paycheck risky to you? b) Is having debt to pay each month risky to you? c) Is owning an asset that generates cash flow into your pocket each month risky to you? d) Is spending time to learn about financial education risky to yob e) Is spending time learning about different types of investments risky to you?
