America Runs On Cash Flow. 3 Reasons Why You Should Too!
For a good part of the first year when I came to the US I rode a bicycle. I rode it everywhere—to college, to work, home, to the grocery store, to the movies. I rode it through the Michigan winter, through sunshine, rain, sleet and snow. It was my only means of getting around. People kept asking me when I would buy a car. I looked at them as though they were crazy: I could not afford to buy a car. I did not have the money!
My first memories were of living in Ukraine and taking public transportation everywhere. It was so ubiquitous, efficient and inexpensive. You took the trolley-bus, tram, bus or the sub-way train (“the metro”) everywhere. Nobody owned a car because you didn’t really need one. Oh, also it was a communist command economy. Nobody really earned enough to buy a car.
When we moved to Sierra Leone the only public transportation there were the vestiges of train tracks put down during colonial times by the British. All transportation was private, mostly people using personal vehicles and minivans as taxis. Everyone walked a lot. Nobody owned a brand new car. Everyone imported used cars from Europe. Interestingly, most cars in service were Japanese brands—Toyota, Mazda, Nissan, etc. These cars went forever. Locals and business people bought them at a big discount to the sticker price with thousands and often, hundreds of thousands of miles on the odometer. Cars never die or get totaled in Africa. Original parts get replaced with make shift parts made in Nigeria or India, and cars get re-painted and repaired ad nauseam. Labor is cheap in Africa.
So you can only imagine my first impressions when I came to the US and saw teenagers, adults, the elderly, all driving brand new, latest model cars. I felt like everyone was rich. Everyone had a car! College kids drove their own cars. The factory workers getting off their shifts and pulling up at the Detroit gas station where I worked to buy the lottery and fill up their tanks, had these really nice pickup trucks. Retirees would park their shiny Cadillacs and Buicks and tell me a story about the muscle cars they drove when they were younger. I was so impressed!
Purchasing Power, Cheap Credit and Credit Bureaus—Foundational for Consumer Spending
It was not till much later that I understood that the American economy, unlike that of Ukraine or Sierra Leone, was driven by consumer spending (purchasing power), cheap access to capital (credit) and strong systems to track creditworthiness (the credit bureaus). In the former Soviet Union the average person did not earn enough to buy more than the basics. The concept of credit was mostly non-existent. Some banks were toying around with nascent ideas of lending, but there simply was no customer base to serve. In the 1980s the majority of the Soviet population was earning less than the equivalent of $150 per month. As a result there was no need for a credit bureau. It was a cash economy.
In Sierra Leone the situation was not much different then and has not really changed much to date. The average Sierra Leonean today earns just about $500 per year according to the World Bank. People use cash for most major purchases. Banks have few credit products as most of the population does not have a high enough level of stable income to justify the risk. While some fin-tech and micro lending companies are slowly stepping in, it is a long road. Most of the foreign-born readers will relate to the fact that if you want to buy anything in our countries of origin you plan to pay in cash. There are few credit options. Cash is king.
What’s my Payment?
It took me even longer to understand that the US economy runs on cash flow. The reason that everyone can afford to drive a shiny new car and live in a mansion in the suburbs is not because they paid cash for it. No. The reason that Bobby, the teenager, can drive a new Ford Mustang and have the latest iPhone, with an unlimited data plan, is because he works at Starbucks part-time and makes about $1,000/month after taxes. With a sub 3% interest rate (aka “cheap credit” unavailable in Ukraine or Sierra Leone) Bobby’s car payment monthly is about $500. Bobby still lives with his parents which leaves him with more than enough spending money for the month.
A variation of this is true for the factory worker, the white collar worker, and the majority of the US population. Few have had formal instruction about cash flow. Everyone understands what their various monthly payments are—what’s my house payment, my car payment, my student loan payment, my phone payment, my health insurance payment?
Cash Flow—The Difference Between Paying All Cash and Living on Cheap Credit
Cash flow is simply the concept of subtracting money going out from money coming in. If you have more cash coming in than leaving, you accumulate wealth over time. The problem tends to be that as cash flow grows we inevitably find ways to spend that money on more things. Even more interesting is that the additional expenditure quickly becomes a “necessity” and often does not translate into increased savings. Years later many of us are still working to pay off that larger house we bought, pay for our kids tuition to that fancy school they got into, pay off the cottage on the lake and the car we recently upgraded to.
I certainly support helping pay for your kids’ college and enjoying some of the finer things in life. But what if you could flip the script on how you pay for those things? Why not learn about passive cash flow investing?
Passive Cash Flow—the Reverse Car Payment Without Giving Up Your Car
Would it not be nice to have an income stream, some reliable investment that you made, which passively generates cash and you could tap into when needed? Think of it like a reverse car payment. Instead of you needing to make the car payment, the car is paying you every month. And I am not talking about driving Uber here. This should happen without you doing active work to receive the money.
There are a myriad of investment options out there that generate returns—stock dividend payments, bank dividends, bonds, options, franchises, venture investments, private equity, real estate, currency trading, etc. Many of these offer appreciation of your original investment. Some also offer periodic cash flow. Many are active investments that you have to monitor daily and make adjustments to be successful. Some are passive—set it and forget it. All have varying degrees of risk. The opportunities are vast and that discussion merits its own article. However, the point is to find something that you are comfortable with that generates some predictable passive cash flow.
3 Reasons You Should Create Passive Cash Flow Investing Streams To Fund Your Life
- For the Rainy Day: Let’s be honest. Each of us have had unplanned events pop up that require cash. There is the car repair that we never planned for, the emergency trip to the vet because your cat got bitten by a snake or a bat, the friend who you could have sworn would never settle down but all of a sudden is getting married and you are part of the wedding party and pre-wedding bachelor or bachelorette trips and celebrations. Some of us care for our older parents and despite insurance, expenses pile up quickly if our loved ones experienced a fall or a required procedure. Passive cash flow is wonderful to have for the occasional unforeseen expenses in life.
- To Control Your Time: Too often we make decisions based on money. I speak from personal experience. In my past management consulting life I have spent way too many nights away from home, away from my wife and my kids. That was a career decision but somewhat based on money. I was selling my time for money, precious time that I cannot get back. Many of my friends are esteemed professionals in their respective fields. They love what they do and because of their expertise they are high income earners. The common theme I hear when I speak to them is that while they enjoy their work and take pride in their accomplishments and mission-driven endeavors, they often feel that they are not in sufficient control of their time. Sometimes they have to be in places when there are personal conflicts to be elsewhere. If you learn about passive cash flow investing you have a credible answer to this issue. If you can tell your employer that you are making a personal decision because it is right for you, without fear of losing your position of employment, then your employer is no longer in control of your time. You are.
- To Stop Actively Working For Money Sooner: It costs money to live. Even if you have paid off your house and your car, you still need money to buy food, go places, and so on. Even if we limit cash outflow we still need consistent cash inflow. Having more money coming in passively than you spend on a monthly basis is very powerful. Effectively if you accomplish this you can “retire” to whatever next you want to do in life—care for a loved one full time, volunteer for a cause, start a company or continue doing what you are doing today. The point is, that you now have a choice to do whatever you want to do and not have money dictate what you do and when you do it. How often do we make a decision about whether to do something based on how expensive it is or based on whether we can make the time to be there? Passive income greater than expenses liberates you from that question.
By the time my parents sent me some money to buy a beat-up, clunker car I was quite accustomed to biking through snow and rain. The weather had gotten warmer as summer followed spring and winter. That first car cost me $1,200 cash and I had no debt. I was ecstatic. The rusty body and busted muffler didn’t bother me at all. I had wheels! Unfortunately I learned the real lessons of passive cash flow investing almost two decades later.
At Cape Sierra Capital we educate our clients about passive cash flow investing. We also offer investors opportunities to earn passive income by investing in multifamily real estate with us. The multifamily or apartment asset class has high returns, relatively low risk and even less volatility. The recent global pandemic underlined this fact. To learn more about how cash flow works download a free copy of The Personal Cash Flow Formula.