The following is a conversation that took place online between me and a visitor to my website. I feel compelled to provide all of the Cash Flow Freedom Builders with this transcript, as what was discussed gets to the heart of financial freedom.
This is the email I received:
Ben,
I listened to the two video seminars that you added to your site dealing with cash flow and income. For the most part your presentation is good, but I disagree with some of the things that you mentioned.
The first youtube video I watched was dealing with the subject of income and you suggested that there are three different kinds of income, which is correct. What I didn’t like was that you emphasized that Earned income (W2 income) is riskier then investment income. While I would agree with your assertion that if something happens that disables you to perform work, then you do not get paid, I think that notion needs to apply to investment income as well. If a person chooses to be a full time investor, they need to perform work – it may be different work, but it’s a lot of work non-the-less. As such, the risk of loss of income is still present; may be more so. A good investor will work more then the person who gets the paycheck.
The second video I watched dealt with Cash Flow. Income is cash flow. Savings is money saved for future possibilities. Revenue minus expenses equals net income (NI). If a company has a positive NI, it has some choices. First, it can pay a cash dividend; second, it can use the earnings for improvements of the corporation, or it can put it in Retained Earnings (savings) for later use. In personal finance the same rule applies, but savings is for Long term and does not deal with cash flow. At least in my opinion.
My answer to this email:
Thank you for your thoughts. Allow me to further crystallize my thinking on the subject.
First of all, please understand that when I use the term INVESTOR, what I mean is a person who builds systems which will control multiple long-term revenue streams. What I do NOT mean is any person involved in activities which can be classified as trading of any asset class, be it stocks, futures, real estate, or anything else. Trading requires continues work, and therefore the income generated through these activities is not passive in its nature. I want passive income!
Contrary to the work-intensive process of trading, investing is a process of building and acquisition of long-term revenue streams. Here is an analogy. When you buy a car, you have acquired a system. While it does need periodic maintenance, and you also need to put gas into the tank, you do not to daily rebuild the engine. The car, with some limited oversight, will take you wherever you need to go – you job is to hit the gas pedal and to steer!
In my brand of investing, systems control investments, while the investor controls the systems – just like steering the car. The reason for my assertion that generating income via long-term, positive cash flow investments is safer then earned income relative to income-stability is because as an investor, I can control numerous revenue streams via the systems that I put in place, not just one. On the other hand, how many jobs can you, or anyone else, hold at one time? And if you only have one job, which is the source of all of your money, what happens to your finances if for any reason you lose the job?
While an employee may get one paycheck for $5,000 a month, I get 10 paychecks for $500 each. We make the same amount, but wouldn’t you agree that the probability of all 10 of my sources going bad at the same time is a lot lower than the probability of an employee getting fired from the one and only job he has, especially in today’s market. This diversification of income sources, which is a built-in characteristic of investment income, is why in my opinion making money on the investment side is safer! Please refer to my e-book Money Fundamentals, as I cover all of this material in detail.
Relative to your comments regarding the video on cash flow, you sound like a classically trained financial professional. We basically agree as to the content, but refer to it in different terms. My point is this – income does not matter; what’s left of it after expenses is what matters. I call it cash flow; you can call it NI.
In real estate there is actually a term called Net Operating Income (NOI), which refers to income minus expenses not including debt service coverage (I will cover this in future videos and webinars). You can call it whatever you want, just make sure that you spend less than you bring in.
Feel free to comment everyone…
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