Wealth inequality is a major flashpoint issue today, dividing our nation.
But what does “wealth” really mean? For most investors, the answer is some version of “net worth.” But today’s Digest from CEO, Brian Hunt, offers a unique definition that reveals how “rich” investors think.
Regular Digest readers recognize Brian as an accomplished investor and teacher, having penned a series of classic wealth-building essays in the InvestorPlace Education Center. Today’s Digest is sure to find a place there as well, as it reveals a much more useful way to think about wealth — one that factors in something else we all want … freedom.
As Brian notes below, it’s a controversial perspective … but one that can make a true difference in your life.
Have a good evening,
Stop Investing Like a Poor Person … and Start Focusing on Regular Cash Flow
By Brian Hunt
In today’s Digest …
A controversial take on wealth that many people are sure to hate.
But for a small group of smart people, the message below will provide a “Eureka” idea that completely changes their lives for the better.
That’s a BIG promise.
But what we’ll cover is a BIG idea … one that could allow you to achieve your wildest financial dreams … while also being one of the defining differences between the rich and the poor.
Oops. I gave its controversial nature away.
Here it goes …
***Over the past decade, the issue of “wealth inequality” has dominated political debates and the mainstream media
Every, year, it seems like a greater portion of America’s national income is being earned by a shrinking group of people.
For some folks, the American system is working beautifully. For some, it’s a disaster. You can barely make a move these days without hearing somebody complain about wealth inequality.
At InvestorPlace, we believe a big cause of wealth inequality is the blistering pace of technological innovation. Advanced software and robotics are displacing more and more jobs … while allowing tech executives and their shareholders to become fabulously rich.
However, we aren’t politicians or lobbyists at InvestorPlace. Our beat is money and investment. We devote our time and energy to helping our members manage their own affairs … to helping members build wealth inside a system that still rewards hustle, creativity, and courage.
And part of succeeding in this system is adopting a wealthy mindset … a way of thinking that is almost never taught in school.
Below, we’ll cover a HUGE component of that wealthy mindset.
As we mentioned above, the way a person thinks about today’s subject is one of the defining differences between the rich and the poor.
I’ll start this conversation by asking a question …
How rich are you?
Of course, it’s bad manners to ask such a thing.
But for a few seconds, think to yourself about exactly how rich you are.
If you’re like most people, you’ll go straight to the idea of “net worth.”
That’s the value of all your real estate, cash, stocks, gold, and possessions (minus debt). Net worth is a rough dollar estimate of how rich you are.
But truly rich people will tell you there’s a much more useful way to think about wealth. It’s not in terms of net worth or dollars. And I’m not talking about cliches like “rich in friends” or “rich in happiness.”
The truly rich, truly financially free person thinks of wealth in terms of “regular passive income.”
Instead of asking themselves or their financial advisors, “What’s my net worth?” the truly rich person asks “How much regular passive income do I have coming in?”
“How much passive income is flowing into my accounts in the form of rent checks, dividends, interest payments, and the like? How much money am I earning while I sleep?”
Real, hold in your hand cash … flowing your way every month, every quarter, every year.
That’s what the truly rich person focuses on.
You see, it’s one thing to own an asset that sits there and looks pretty or is fun to play with.
In this category, we place things like cars, furniture, electronics, boats, and art.
It’s an entirely different thing to own an asset that kicks off regular cash flow.
In this category, we place things like businesses, real estate, and bonds.
If you want to be wealthy and financially free, you will make sure you own a LOT more of the latter than the former.
***Less Net Worth, but More Well Off
To put a point on this concept, let’s take two hypothetical people. Robert and Donna.
Robert and Donna are both 50 years old.
Both are successful professionals that earn $180,000 annual incomes.
Robert owns an $800,000 house, plus three cars, a nice boat, a nice golf cart, other “stuff,” and a little bit of cash adding up to a value of $300,000.
He thinks of himself as “rich.”
From time to time, Robert reviews his financial situation and thinks with satisfaction that he is “worth more than a million dollars.”
However, since Robert’s wealth is tied up in assets that don’t produce income, he has no money coming in other than his paycheck.
Then there’s Donna …
Donna owns a $400,000 house and $50,000 worth of cars, cash, and other “stuff.”
But instead of using her income to accumulate a lot of expensive stuff like luxury cars, electronics, furniture, and boats over the years, she saved her income and used it to accumulate a small four-unit apartment building and shares of a dozen quality dividend-paying public companies.
Donna did these things because financial security and freedom has always been more important to her than wearing flashy jewelry and driving flashy cars.
The estimated value of Donna’s investment portfolio of real estate and stocks is $500,000. It throws off $55,000 in annual income in the form of rent checks and dividend checks.
From time to time, Donna reviews her financial situation and thinks with satisfaction that she has a lot of passive income flowing in. She knows that even if she stopped working for a year, her passive income is large enough to pay most of her bills.
Donna doesn’t drive around in a new Mercedes, but no boss, no client, no bank, no employee, and no customer can make her do something she really doesn’t want to do. She has the power to say “no” or “yes” to just about anyone.
On paper, Robert is worth $1.1 million.
Donna is worth $950,000.
Who “has it better” when it comes to wealth and financial freedom?
Who is More Well Off?
Going by terms of conventional “net worth,” Robert is wealthier than Donna.
That’s how most people size up someone’s financial success and security.
Most poor people, anyway.
However, the truly rich person sees Donna as more financially free and successful than Robert.
That’s because a large portion of Donna’s assets throw off passive income.
Thanks to the cash generated by her investment portfolio, Donna’s overall annual income ($235,000) is 30.5% greater than Robert’s income ($180,000).
And importantly, Robert has a large percentage of his net worth tied up in depreciating assets, many of which require costly upkeep and insurance to own.
Rather than being real, wealth-boosting assets, Robert’s cars, boat, and, golf cart are actually money-eating consumer items.
They are more like liabilities than assets.
Plus, let’s face it: Robert is probably vastly overestimating the actual resale value of his “toys.”
They are good for Robert’s enjoyment, but terrible for wealth building.
Donna on other hand, has a lot less of her net worth tied up in depreciating consumer items that are expensive to maintain.
Every day, the assets on Donna’s personal balance sheet make her richer.
Every day, the assets on Robert’s personal balance sheet make him poorer.
This simple example shows you why someone with a high net worth can be less “well off” than someone with a lower net worth.
It also shows you why instead of thinking about your wealth in terms of “net worth,” it’s smarter and more useful to think in terms of “regular cash flow.”
Instead of having a conventional “net worth” goal of something like $5 million, consider having an unconventional “passive annual income goal” of $500,000.
Instead of thinking in terms of passive income, the person with a poor mindset thinks if they just have enough “stuff” like luxury cars and jewelry, they’ll be rich.
They don’t realize most of the supposed “assets” you can own are actually liabilities that cost money to own and make you a little poorer each day.
The poor mindset also leads people to essentially gamble with their investment portfolios.
Instead of focusing on earning safe, regular cash flow from income-producing assets, the poor investor makes lots of risky bets in the pursuit of big capital gains and increasing their net worth.
While investing for capital gains can work for some people, the average poor investor turns it into a debacle by making big, risky, emotional bets on companies they know little about.
The rich investor instead focuses on earning regular monthly cash flow from assets like real estate, bonds, and businesses.
This intelligent investor most likely can’t tell you what his net worth is, but he can tell you down to the penny how much monthly income he has flowing in … money that flows even while he sleeps.
If you’ve been struggling to get ahead in life — or if you’d like to accelerate your journey to financial freedom — think about chucking the term “net worth” in a dusty closet.
Instead, start thinking of your financial situation in terms of regular cash flow. Write your current monthly cash flow on a piece of paper.
Then, on that same paper, write down your target monthly cash flow … and start accumulating the kinds of assets that will help you get there. InvestorPlace can help you find them and buy them for a good price.
For the record, I’m NOT encouraging you to never invest in growth stocks, venture capital deals, short-term trading opportunities, and the like. These endeavors can earn the skilled investor a lot of money. We proudly publish excellent products with those goals. And many people have achieved phenomenal success over the years by investing exclusively for capital gains. Many will do so in the future.
However, I am encouraging you to seriously think about “tilting” your portfolio allocation, personal time, and mental energy towards endeavors that produce regular cash flow. I believe it will greatly increase your odds of success in life, investments, and business.
For example, instead of focusing 25% of your time, energy, and capital on investment and business endeavors that produce regular cash flow, focus 60% – 90% of your time, energy, and capital on them.
You’ll be amazed at how this mindset — a “rich” mindset that focuses on getting paid early and often — will make you more successful in business, more successful as an investor, and more successful in life.