It is challenging to develop wealth without a steady cash flow.

A high salary does not guarantee wealth.

My clients would hand over their financial lives to me while I was a financial advisor. We would examine their investments. The goal was always the same: to help individuals develop a financial plan. But then something unexpected happened. I started to see patterns. In addition, I noticed families earning at or below the median income (about $60,000 per year) who had significant savings and investments.

For example, families earning $10,000 per month (after taxes) would face losing their homes if they missed only one payment. Other families earning $3,000 per month had a big emergency reserve, some assets, and, surprise, less stress about money in their lives.

The fundamental reason those high-income families were suffering was that they equated cash flow with wealth. This epiphany led to one of the essential financial realizations of my life:



• What is Wealth?


Wealth, also known as Net Worth, is what you would have left if you added up everything you own. Wealth is measured in the present. By the end of 2020, Mark Zuckerberg, for example, had a net worth of about $100 billion. 

Each of us has a net worth. For some, it is advantageous; for others, it is damaging. You can figure out yours. Add up all you have and subtract what you owe. The critical thing to remember is that wealth is a single number at a certain point in time.

Wealth is immutable since it is a certain quantity at a specific time. It is a jumble of assets (or debt) (or debt).


• What is Cash Flow?

On the other hand, cash flow is fluid (just as the name suggests) (just like the name implies). Cash flow is measured across time rather than at a certain point in time, as wealth is. Cash flow is your income minus your expenses over a certain period.

If your income exceeds your expenses, your cash flow is positive, which increases your wealth.

If your revenue is less than your expenses, your cash flow is negative, which reduces your value.

Let's look at an example to see whether we can distinguish between cash flow and wealth:

Assume you started 2020 with a net worth of $10,000.

In 2020, you earned $60,000;

You spent $55,000 in 2020.

As a result, your net worth increased by $5,000 at the end of 2020; and

Your net worth at the end of 2020 was $15,000.

The money poured in. Money flowed forth.







• Progressive Cash and Flow Is the Foundation of Wealth

It is difficult to build wealth if there is no positive cash flow. In addition, negative cash flow eats away at wealth. The size of your bankroll does not measure the power of money. The power of money is in how it flows through your life.

If you spend $50,000 every year, you will be broke in 20 years. So, you'd better hope you don't survive beyond the age of 85. If you put your $1 million fortune in a money bin and allowed your negative cash flow to eat away at it, it would ultimately vanish.

However, if you invested your $1 million, building a portfolio that generates 5% of your annual income is possible. That indicates that the $1 million would generate $50,000 each year.

So, if you retire at 65 with $1 million in wealth and $50,000 in income, and you spend $50,000 every year, you will still have the million dollars at the age of 85! (Plus or minus any changes in share prices.)

If your expenses exceed your income, you will ultimately run out of money, no matter how enormous your wealth is. However, if your costs are less than your income, you will never run out of money, and you will most likely have more wealth after retirement than you had before.


• Personal Finance's Four Cornerstones

If you want to quit living paycheck to paycheck and start making money, you must first build a solid financial foundation. That is why I created the Four Pillars of Personal Finance.

Spend less than you earn.

Have emergency funds on hand.

Have diversified your investments

Rebalance

As you can see, the first pillar is a healthy cash flow. And there's a good reason for it: if you don't have the first pillar, you can't build the second, third, or fourth.

If you want to be financially successful, you must spend less than you make. There are no exceptions, no shortcuts, and no workarounds.

I've heard every argument in the book about why something doesn't apply to someone. "I live in a high-cost-of-living neighborhood." "Our youngsters just do not understand the meaning of the word 'no.'" "My parents never taught me about money."

It makes no difference what your reasoning is; it does not affect the math.

You cannot produce money if you spend more than you make, regardless of your situation. If you spend more than you create, you will constantly run out of resources. Forever. 

There are no exceptions...