Wealth Creation Step Three: Eliminate Debt - Control YOUR Cashflow.

What does it mean "Eliminate Debt - Control your Cashflow"?

I have put a couple of drawings below to demonstrate the differences between the ways people handle their money. This isn't an easy thing to grasp. There is NO criticism of you intended.

Cashflow of a Poor Person.


	Job -> Income -> Expense -> 

Net Result = No Savings or Secure Income.
This is a surefire way not to Eliminate Debt. It also happens to be the way most of us live our lives and handle our money. We live a hand-to-mouth type of existance. Any pay rises get swallowed up in trying to catch up, which we never do.

Cashflow of a Professional or Middle Manager.


	Job -> Income -> Liabilities -> Expense ->

Net Result = No Savings or Secure Income.
Liabilities in this case are things like, nice home, nice car, nice clothes, private education for the kids, boat, even a holiday home. This is also surefire way not to Eliminate Debt. In fact, this is a guaranteed way to increase your debt levels.

So how do we change the pattern to the one we want? Firstly we need to identify the pattern of money usage that best suits the Elimination of Debt.

Cashflow of a Wealthy Person.


	Job + Assets -> Income -> Buy Assets -> Expenses ->

| |
| |
----<-----<-----<-----
Net Result = Savings and Secure Income.

Which way does your Cash Flow?

If you Want to be Wealthy you have to Build up Your Assets and change the way you Think about Your Income. You need to concentrate on ways to Eliminate Debt. You can only do that by Controlling your Cashflow.

For most of us who are employed or even in a small business, income is in the form of salary and expenses are those things we choose to spend it on. Most salary earners struggle to keep their financial affairs in order.

This is not Your Fault.

No-one has shown You How to Manage Your Money. We all tend to spend more than we earn by using Credit Cards and Loans to support the lifestyle we would like. This is How the Banks have taught us to Manage our Income.

While we keep earning we can stay afloat even though we need regular increases in salary to help. If we stop earning income our liabilities will send us bankrupt within 6 weeks, in most cases, unless you make some drastic changes like sell the car, house, TV, VCR, computer etc.

You can begin to

Eliminate Debt by beginning a Budget.

Rich people get their main income from their investments and they keep their liabilities well below that income. Incidentally, the Rich people always keep their liabilities below their income, even before they get Rich. If they stop working, the money keeps on flowing in.

Robert T. Kiyosaki's book "Rich Dad Poor Dad" has a very good explanation of this procedure and his book "The Cashflow Quadrant" expands on this idea to fully explain it.

Summary of the differences between Rich and Poor.

The Poor person's income is eaten up by Liabilities and Expenses and they don't put any money into Assets for themselves.

The Rich person's income funds their Asset growth First and their Liabilities and Expenses last. Their income is supplemented by or entirely generated by their Assets.

George S Clasen, in his book "The Richest Man in Babylon", says that money flows towards the person who is skilled in it's management and away from the person who is unskilled. The Message here is "you better get skilled fast".