The Wealth Game: Cashflow
How Does Cash Fit In?
Many people mistake cash flow for wealth and confuse the two. They think that having cash makes them wealthy, and they behave accordingly.
The problem is that when they spend their cash, it is swapped for something else. If they buy an appreciator, wealth is preserved and should grow, but if they opt for a depreciator, the value will waste away over time, and for a consumable, value is lost immediately.
You might think it self-evident that spending choices affect wealth, but this simple truism is widely overlooked or forgotten, as you can see from consumer debt, which continues to balloon.
Plenty of ordinary people have a high net cash flow for a phase of their lives. They can live well, consuming and pleasing themselves without financial care in the world. This cash may be a new experience, novel and exciting, and perhaps follows years of doing without.
They may treat being asset-light as a virtue and enjoy freedom from responsibility. This is no way to prosper in the wealth game. Pleasure, such as it may be, is sustained only by the cash fuelling it, and at some point, for the ordinary person, this cash flow will stop; the job or career will end.
Without the porridge pot of wealth, the only course is to downscale and live simply on whatever money can be eked out from earnings or state benefits. This may be exactly what the player always wanted and foresaw, but on the other hand, it may not. The point is they won’t have any choice in the matter.
At the same time, some people have wealth but struggle to manage, because they are short of cash. This situation is often mistakenly used to justify the superiority of cash relative to wealth.
The Way Forward
You should be clear as to the nature of cash flow. It is like the element of water, fluid and moving. It is the fuel for wealth creation since, without it, you cannot buy or develop assets. At the first sight of it, you should put as much of it to work as you can.
Second, it is a by-product of wealth, because assets, whether productive appreciators or productive depreciators, generate income, and all assets deliver cash on sale.
Cash flow is not wealth itself but a measure of solvency, and it is not the same as cash, the asset that can be exchanged for something else. It is measured over a period of time, rather than at a moment in time, like net worth.
A person’s net cash flow is £x over a week, £y over a month, and £z over a year. Measured weekly or monthly, it may dip into negative territory, as the timing of income receipts and payments vary, but over a period of time, it should be positive. A negative cash flow is unsustainable and, if uncorrected, leads to insolvency.
It follows that to succeed in the game, you need to keep a close grip on cash flow and take care not to trade wealth for a short-term lifestyle.
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