Last Friday, my colleague asked me for some advise as she felt stuck in her situation. She wanted a career opportunity with increment and annual bonus. However, I shared with her this is the riskiest choice as she is risking for a 3% increment each year when the boss is able to give her the golden handshake. I am not saying my boss will do that but he can do that. So why let your boss determine your livelihood? She is interested in how I make money while I am sleeping (according to her theory). This is slightly exaggerated but I tried to explain to her the theory of cash flow.
From the above image, if you can save $500/month which is $6,000/ year, she can generate a 4% return every year, compounded till she is 65 years, her initial capital inject of $168k will double to $324k.
I explained to her on the differences between the Poor, the Middle Class and the Rich.
The Poor – Their income comes in at the end of the month and it will immediately goes into their expenses. They will spend all of them and sometimes spend even more than what they earn using credit cards.
The Middle Class – They use their income to gather more Liabilities. Liabilities are things that take money out of your pocket. For example, when you buy a property, you may perceive it as asset but actually it is considered a Liability as you have monthly loan repayment. Only when you fully pay off your property then it becomes an asset if it generates cashflow via rental income. Other Liabilities can be the likes of a new BMW.
The Rich – They use their income to gather more Assets which create more income (cashflow).