The difference between living for now and wealth creation
A positive cash flow is one where the amount of money going in exceeds the amount going out. Understanding your cash flow pattern is critical to generating wealth. See if you can identify with either of these common cash flow patterns.
1. Living for now
Money flows in as salary income and flows out to pay expenses. None of the income is saved or invested.
This lack of savings can cause obvious problems. There is no capital being stored away for a rainy day, no wealth being accumulated and no money set aside to prepare for retirement (other than compulsory superannuation).
This cash flow pattern may support living an enjoyable lifestyle. It won’t, however, lead to an increase in wealth at the end of each year, which may lead to a lower standard of living during retirement.
2. Wealth creation
Under this model, money flows in as salary and flows out to pay expenses and invest in what we call ‘cash-creating’ assets. The key difference between this model and others is that the flow of money from these assets is an additional source of income.
By investing in assets, such as term deposits, shares, investment properties or managed funds, it is possible to create cash to add to your other income. There may be further benefits available from these investments, such as reducing the tax you pay which means more of your money is working to achieve your goals.
At this point, the distinctions between the two cash flow patterns become most obvious. While many people focus only on the short-term, to achieve genuine financial success – and all the lifestyle benefits that go with it – you need to manage your cash so that it grows. This could involve creating positive cash flow by investing in cash-creating assets. These assets are commonly managed through a cash management account which acts as a central hub.
By doing this, you can potentially create an additional source of income over and above the salary you earn. That is what wealth creation is all about.