3 Basic Things YOU Need To Invest In
“Robert, what should I invest in?” I am asked this often, and it’s a question I can’t answer.
Because your goals of financial freedom are very personal, and they depend on what you want to accomplish in life. While what you invest in is a personal decision, I can describe the difference between what the rich invest in versus what the poor or middle class invests in.
The most important words in business and investing are cash flow. It’s what separates the rich from the poor or middle class.
Today, many people are in financial trouble because they have too much cash flowing out of their pockets and very little money flowing into their pockets. If you’re going to be financially secure, however, you need to learn to have more cash flow into your pockets.
What is Cash Flow?
When I’m investing, my first and primary focus is cash flow. Cash flow is simply the income you receive from an asset each month, quarter, or year, minus the expenses required to maintain the asset.
It’s money that flows right into your pocket.
In the world of investing, there are primarily two things people invest for: capital gains and cash flow. What’s the difference?
- Capital gains: Capital gains is the one-time profit you make on the sale of an investment. For example, you buy 5 shares of a stock for a total of $100. Those shares go up in value to $150. You decide to sell your shares. The $50 profit you make from the sale of your shares is capital gains. The same applies to real estate. You buy a house for $100,000. You fix it up and sell it for $140,000. Your $40,000 profit when you sell the house is capital gains. Now, here’s the kicker: In order to realize capital gains, you must sell the asset. You can also have a capital loss if you lose money on the sale of the asset. A capital gains strategy assumes an appreciating, or up-trending, market. In order for you to make a profit the asset has to go up in value. Someone must pay you more than what you paid for it.
- Cash flow: Cash Flow is an ongoing stream of income you receive from an investment. You may receive this money on a monthly, quarterly or annual basis, depending on the investment. The strategy behind cash flow is to buy and hold, whereas the strategy behind capital gains is to buy and sell. So, let’s say you buy a stock that pays you a dividend every year. That dividend is cash flow. You loan money to a new start-up business. Each month the business pays you interest on your loan. That interest is cash flow.
Why Is Cash Flow Important?
Cash flow means one thing to me: FREEDOM. When I’m financially free, I’m free to do what I want, whether it’s to have a life of leisure or pursue a new business adventure. I am free to be with the people I choose. I’m free to set the schedule I want. My time is truly my time.
Freedom also means I have more choices. And I like choices.
If you had a choice between flying coach or flying first class, which would you choose? Most people don’t have that choice. They fly coach because that’s all they can afford.
The point is that with financial freedom, you have the choice!
Cash flow investing is what most buy-and-hold real estate investors are after. For example, you buy a six-unit apartment building and you rent out each of the units. Every month you collect the rent, pay the operating expenses and the mortgage, and, if you’ve managed the property well, you end up with positive cash flow. Is it possible to have negative cash flow? Absolutely. That’s why having a strong financial foundation is so important so that the investments you make generate positive cash flow.
So why does cash flow investing get me so excited? Because it has numerous advantages, including creating:
- Financial Freedom
The reality is that financial freedom is not about how much money you have. Rather, it’s about a change in your mindset.
My rich dad said, “There are two kinds of money problems. Not enough money, and too much money. Which type of money problem do you want?”
What he meant is that many people see a world that is scarce. They think there is not enough to go around, so they operate out of fear. Fear clouds their decision making and keeps them back from doing great things. Fear makes them treat others poorly and look at everyone as a potential enemy who can take what they have. That kind of mindset is a prison.
Other people see the world as one of abundance. They don’t think there’s not enough to go around. In fact, they think that there’s enough for everyone to prosper. And when there’s not, they find ways to create enough. These are the people who start businesses, make winning investments, and live life to the fullest. They are often the nicest and most generous people you’ll ever meet. They are living a truly free life.
When you realize that the world is one of abundance, you stop operating out of fear and instead you start asking, “How can I tap into that abundance?” Once you start asking that, you start seeing the world and how you interact with it in an entirely different way. Then you’re ready for financial freedom. Why? Because the fear of losing money doesn’t control you. You’re free to learn and grow. You’re free to obtain your wealth, not just financially, but also physically, emotionally, and spiritually.
- Carefree retirement
It’s not easy—in fact, I would say it’s almost impossible—to save the amount of money you will need to retire. Unfortunately, too many hardworking people who were planning on retiring in the next few years are finding out that they cannot afford to do so. Too many people will be forced to work until the day they die.
A better focus would be to acquire the amount of positive cash flow you want per month that will last as long as you own the investment.
For example, when Kim and I retired back in 1994, we did not have a huge amount of money in savings. As a matter of fact, we had very little in savings. Our stock portfolio was almost nonexistent, and we did not have mutual funds or a 401(k).
What we did have was $10,000 per month in positive cash flow coming in every month from our investments, primarily real estate at the time. Our living expenses, on the other hand, were only $3,000 per month. At that point, we were financially free. Our passive income was greater than our living expenses. It wasn’t millions. It was $10,000 per month. That, and more, is very doable for you.
I don’t like to invest in things where I have no control, especially when it comes to my money. I am not a stock trader or a flipper. I am not good at timing the highs and lows of the stock market or the real estate market. I’m just not that smart.
I can’t control the markets, but I can control my rental properties and my businesses. The majority of stock shares that Kim and I own are shares of companies we own. Most of my cash flow from my investments is not dictated by the daily fluctuations of the market. And although I may not be able to control the oil production of our cash-flowing oil wells, I can pick up the phone and talk with the owners of the company at any time.
One of the great things about having financial intelligence gained through financial education is that you have the knowledge and confidence needed to invest in assets over which you have control. You know the right questions to ask and the right things to look for. In short, you’re comfortable being in control.
Editor, Rich Dad Poor Dad Daily