Let’s start with some basics first. What is wealth? How do you determine whether one is wealthy or not? If you earn $200k per year, does it mean you are wealthy?
1. Cash flow is the Key
If you earn $200k per year, it does NOT mean you are wealthy. Let’s look at this example, John made $200k per year but he is a big spender. He buys a fancy car, expensive gadgets, and goes fine-dining all the time. He probably spent $180k in a year. Now, Paul only makes $100k per year, but he is a saver. His annual expense is $40k. Who will be wealthier? John or Paul? You can do the math.
That’s why “cash flow” is one of the key thing determining whether we are wealthy or whether we will be wealthy or not. It’s a simple math.
Cash flow = income - expense.
From the example above, you can see that John has an annual cashflow of $20k while Paul actually has a positive cashflow of $60k.
Cash flow can be much more complicated in the world of business and corporations. In personal finance, it can be as simple as your annual income minus your annual expenses.
2. Importance of Portfolio and Passive Income
You may have a high-paying job and enjoying a nice positive cash flow. So, you thought you are doing a good job in accumulating wealth. Well, that is partially true. What if one day you lose your job? It may be because your company is not doing well and is laying of its employee, or maybe it’s because of your health conditions that do not allow you to work. That is why portfolio and passive income become important.
Portfolio income generally refers to the capital gains you made from your investment. It can come from investing in stocks, real estate, or any other types of investment.
Passive income generally refers to an income stream that comes in a regular basis. Examples are interests from your savings, dividends from stocks, or rental income if you own any rental properties.
Majority of your annual income may come your nine-to-five job. Increasing your portfolio and passive income is the key to become financial independent. Ever dream of receiving over six-figure passive income by simply investing in stocks and rental properties? That’s the difference between wealthy people and middle-class.
Portfolio and Passive incomes are the main sources of income for wealthy people. Salary Income is the main source of income for the middle-class and the poor.
Each year I am setting a goal for how much passive income I can make. In 2006, I made $7500 from bank interests and stock dividends. I set a goal of $10,000 for year 2007. I started to invest more on some dividend-paying stocks. I ended up making $12,000 in year 2007.
”Don’t work for money. Let the money work for you!!!”
great post!
i know a few friends who make twice what I make. But after taxes, mortgages on their enormous and depreciating homes, lease payments on their luxury cars, I’m sure they’re worse off than me.