Cash flow is the income and expenses associated with the activities of a person, family or business. Generated from assets and liabilities. Determines financial well-being and is a key indicator of the success of economic activity.
In financial literacy, it is customary to first analyze all cash flows in order to find out what exactly leads to hardship, poverty or, conversely, wealth. Unfortunately, many have already stepped on a mine when they considered themselves stable in the world of money. Receiving big salaries, they forgot their income structure and one day they got into trouble.
The most striking example that I often cite is the billionaire Telman Ismailov. With a rich source of profit in the form of a huge market, he covered himself in debt, spent money regardless of his financial condition, and when the only asset ceased to exist, he very quickly went bankrupt and got bogged down in debt.
As a rule, an ordinary person has a simple structure of his wealth. There are salaries and a lot of expenses. Paying for an apartment, loans, food, clothing, setting aside for rest, repairs, etc. In other words, an asset covers all liabilities.
If there is a loss of work or performance, there is a real problem. The expenses have not disappeared, but the incomes are no more. The cash flow is disrupted, leading to an increase in the debt burden with a simultaneous decline in the standard of living.
But the sad thing is that the fear of losing this income forces you to stay in an unloved job and deprive yourself of the opportunity to develop yourself. As the saying goes, “money is made in your spare time”. If you only have hired labor, this greatly increases the risks.
When there is not enough money, an idea comes to mind: find a second job. It’s the decision of most people, simply because they don’t know the other options. As income increases, expenses increase and the circle closes. A person is forced to work more and more, he has no time for himself and his family, and the situation does not change dramatically.
It is possible to raise the standard of living and gradually reduce the amount of one’s own efforts only through the competent construction of cash flow. To do this, you need to know all its types. A financially literate person has both.
Active cash flow is the profit associated with the performance of activities, that is, with its own efforts. All the money you receive for work in the truest sense.
This includes hired labor. Regardless of profession and salary, the only important thing is that a person receives money while working and stops receiving it as soon as he stops doing it. Dismissal means cessation of active cash flow.
Passive cash flows are earnings from investing activities. In other words, dividends. Personal efforts are not necessary here and all income is completely self-sufficient. For example, a person owns shares of certain companies and receives a percentage of the company’s profits. The more stocks, the higher the dividend.
In this case, our focus is precisely on asset volume, so investors are not looking at stock value. If they have dropped in price a lot, then that’s great news, it’s time to find a good source of income at a bargain price.
Imagine buying a computer on Avito and reselling it for 20% more. You have such talent. This is what will be considered speculative cash flow. In Soviet times, however, this was prohibited, as was passive DP. You could only work for money, everything else was limited by law.
Many people naively believe that speculation is easy money. Bought for a dollar, sold for two. But in fact, it is the most dangerous and unpredictable cash flow. You can easily burn out, lose everything and end up with nothing. Neither on the stock market nor elsewhere, I do not recommend this option.
Many of my clients open accounts, buy stocks, expect a slight upside and sell the profits. But after a few transactions, luck turns, prices reverse and the leverage very quickly bankrupts the speculator. In general, this method should be used with caution and only in connection with goods that, if not sold, will be useful to oneself.
A friend of mine buys socks on aliexpress and then sells them to friends. He charges a little, but still has a stable income, because it is more convenient and profitable for friends to buy from him. The product is necessary and if necessary, you can wear it yourself.
There should be multiple sources of income. If the salary is good, it is quite reasonable to start buying assets for passive income. When they are at least 5 to 6 and each is able to cover their living expenses, we can speak of financial independence.
It is better to have 10 assets that earn $5000 per month than one that earns $1000ff. This is a completely logical conclusion, but in reality, few people think about it. I regularly meet people who speak negatively about investments. This, they say, is for fools who can’t work.