How to use Kiyosaki’s Financial Fast Track to control your cash flow
If you have cash flow problems, more money will not solve the problem but rather increase it.
In the second part of his book – the Cash Flow Quadrant: Guide to Financial Freedom – Robert Kiyosaki explains the importance of monitoring and controlling your Cash Flow. His call to action is: Mind your own business! Become your CFO, fill out your financial statement and control your cash flow. It is the first step to take complete control of your financial life.
If you have cash flow problems, more money will not solve the problem but rather increase it. If you have poor/inefficient financial habits, more money will only increase spending and debt, without any positive effect on savings or investments.
That’s why it is crucial to control your spending by living within your means and control debt. Only on a second stage you can grow and expand your means, investing your savings and building your Assets.
Proper cash flow management requires knowing the difference between an Asset and a Liability. Kiyosaki states that an Asset puts money in your pockets, while a Liability takes money out of your pocket. As such, anything could be an Asset or a Liability, depending on the direction of the Cash Flow. The purchase of Real Estate can be an Asset or a Liability, depending on Cash Flow direction!
For every Liability you have, you are someone else Asset. For example, with any mortgage, loan and credit facility, you are working hard to repay it (to the bank): you literally work for someone else profit for several days a month, for years, until you have repaid the debt.
An important caveat to this rule derives from the difference between good debt and bad debt. In general, bad debt is linked to consumer credit, while good debt is linked to productive credit. Kiyosaki takes this concept further, stating that good debt is the one someone else pays for you (OPM). This is the case of a Real Estate property rented to a tenant, whose monthly rent fully repay for the mortgage. This type of debt is scalable. On the contrary, bad debt is the one you pay with your personal sweat. This type of debt is not scalable and does not help you grow your wealth and financial freedom. Therefore, you need to strive for financial intelligence: the capacity to convert cash or labour into Assets that provide Cash Flow.
As an example, Robert visualizes the trajectory of money (direction of the Cash Flow) between Debtors and Creditors using this canvas:
1) You earn money with your job. You record it in the income statement.
2) If you have bought a car on credit, the car is a Liability. You have monthly expenditures (money out) linked to this Liability. You have to repay the loan to the creditor (the bank).
The creditor (the bank)
1) The value of your Liability is equally recorded as a creditor’s Asset.
2) The monthly expenditures to repay the car are recorded as monthly income in the creditor’s financial statement.
How to apply the fast track into your life
While the model does not fully rely on accounting principles, it provides an intuitive understanding of the productive side (Fast Track) and the unproductive side (Rat Race):
– the fast track transforms income into assets
– the rat race transforms income into expenditures and liabilities
Every time you can invest part of your income into Assets that produce Cash Flow, you reinforce an efficient cycle. When you buy for rent and use the rent to repay the mortgage; when you buy shares in the capital markets and receive dividends.
To a certain extend, try to be a bank and invest; try to be a company and create value.
Sweat Your Assets, and you will fast track your journey to Financial Freedom.
Related articles: the Cash Flow Quadrant, by Robert Kiyosaki