Building assets is something every adult should be familiar with yet very few are. Understanding assets versus liabilities and how the  poor and middle class differ from the wealthy comes down to one simple aspect. The wealthy know building assets is essential to a long-term investment strategy and creating a path toward financial freedom.  But  let’s first look at how the different classes handle money.

How the Poor Handle Money

The first basic cash flow pattern is the poor cash flow pattern. Before most people even learn about money they want things, and so they learn first to work FOR money. As their income is earned it is just as quickly spent on their list of wanted items. This cash flow pattern has earned income flowing in and entirely back out to expenses. Oftentimes this type of person may even justify the purchase by responding about how they “got a great deal” or the item or service was “so cheap.”

If you follow  this type of earning and spending it does not matter if you have a sizable income, because money does not make you rich. Money is just a tool. It is how you are managing it (money) that determines whether you become rich. Even with a substantial income you can still have this pattern as long as your focus is only on earning more income and paying your expenses.

You might make $250,000 a year, and have enough income to cover all of your expenses, but if something were to impede or disrupt your regular income stream you would quickly realize that you are following this pattern like so many others but really only “ one step ahead of the bullet” as they say.

Middle Class Cash Flow Management

Most people end up when they try to better their positions in life. It is like the poor cash flow pattern, with just a couple differences.

Eventually, people in the poor cash flow pattern get tired of their routine and begin to gain better understanding and control over their expenses. They have spent lots of time working for money, but none to educate themselves financially.

As a result, most people in this situation believe, in order to improve their situations financially, they need to focus even harder on their earned income. (Like getting a raise.)  Enough focus in this area on working for more money may bear fruit  in the way of a raise or a promotion but as you will see, it is not a solid  long term plan.

Furthermore, if one is stuck in this type of cash flow management already-adding more income will not fix the real problem.

Most people still have not spent significant time to educate themselves financially, so they don’t know what to do with the increase in funds when it does come. They don’t have any ideas of their own about how to finance their own retirement, either. The extra money is usually used to buy a newer car, a bigger house, and anything left over is usually put into savings (at least in the beginning). Either way none of is really put into assets and the majority is still placed in liabilities.

Most people are full-time spenders and part-time earners, which means they only receive income when they are working, yet the interest they’ve accumulated, the loans on all their cars, houses, furniture et al, does not stop:  indeed it constantly increases.  Thus this is why it is very difficult for the middle class to truly get ahead.  Most work for earned income and pull from only this category while purchasing liabilities just as the poor do.

Now, a difference here is the middle class person knows enough that they should be investing their money so they often decide to purchase a  portfolio for their retirement, usually consisting of mutual funds.

“Who has 2 thumbs and outperformed S&P 500? This guy !”

These purchases make life more comfortable, and so feel like assets…but they create an expense every month for a very long period of time. The misunderstanding is worsened by bankers who ask you to list your cars and home as assets against loans. By definition, these purchases are liabilities. So you’ve been told even by the bank that’s what is truly a liability is in fact an asset. It’s no wonder if you’re confused.

Thus the middle class work for money and, because they don’t know what else to do, they flow their cash into long-term liabilities that really improve their short term situations. The debt  created from these spending habits often become the very reason they cannot escape the slavery of working for money.

The middle class cash flow pattern has earned income flowing in, than back out to liabilities (which they think are assets). Left over income is used to fund a portfolio for retirement. We saw earlier how well the portfolio road often goes as well.

Building Assets :

Cash Flow Pattern Of the Wealthy

Wealthy individuals first of all understand the importance of financial education; they build assets and manage systems that produce their income for them.  All of these systems are assets. Expenses and liabilities are controlled, and excess cash is then  used for building additional assets.

The smaller systems figured out and used in the beginning are improved upon and used to finance the next, bigger deals. In this way people with a wealthy pattern have money work for them and aggressively increase their wealth.

This is the reason understanding these patterns is so important. They demonstrate how you can become financially independent working at a seven dollar an hour job. Your biggest obstacle in the beginning is controlling your expenses and changing your pattern. The first step to controlling your expenses is to work out AND follow a personal expense budget. Why? Because before you can think about building assets or businesses you first need to learn self-control over your money. And to do that we need to measure it accurately.

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The above is an excerpt from my new book ” How To Get A Raise This Week-With Or Without Your Boss’ Permission”- you can find it on Amazon or  simply by going here.

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