Financial freedom means something different to everyone.
Some people want to quit their job and have the freedom to sit around in their underwear playing video games all day.
Others want to keep their job, but have the flexibility to fly to Vegas for the weekend and drop a g in da club.
Some want to be able to somehow pay for their kid’s college so they won’t be saddled with debt like so many in this country.
Whatever financial freedom means to you, the way to get there is cash flow. A lot of people neglect to find more info on cash flow and what it means to be financially independent but without it, financial freedom is hard to achieve.
What is Cash Flow?
It is the money that comes in to your bank account. And out for that matter.
This is very different than your bank account balance or net worth. The cash flow is the rate of change, the velocity. It determines whether you are getting richer or poorer each month.
Let’s Visualize It
Imagine a huge above-ground empty swimming pool made to enjoy your backyard living. This empty pool signifies your net worth when you start out. You pull out your small garden hose and start filling up the pool. This garden hose is your income from your job.
If you are wise, you might do a calculation and figure out how many decades will it take to fill up the pool all the way. Your pool is your asset to your house. You may have remodeled it with stylish white pool fencing supplies and other required features. But, how about maintaining it constantly? It is, therefore, better to figure this out now than ignorantly daydream about using the pool this summer. At least now you can do something about it.
There are also some minor leaks in the pool. Those are your expenses. If they get out of hand, you will never be able to fill up the pool. But even with constant attention, you can never stop the pool from leaking a little bit.
How do you spend your time?
Are you someone that keeps trying to plug leaks with little success? This is the person trying to spend less at Starbucks.
Do you constantly shop for a bigger hose? This is analogous to someone looking for a better paying job.
How about connecting more hoses? This is finding additional income streams beyond your day job.
Want to Fill Up the Millionaire Pool?
It’s widely quoted that the average millionaire has 7 sources of income. This means they have 7 hoses flowing into their pool. Some might be small, but when you add them all up, the total amount of water flowing into the pool is impressive.
Most people head to Home Depot and compete over the one firehose for sale. The firehose is the high paying CEO job – everyone wants it and it is incredibly hard to get. You might have to wait in line at Home Depot for years and miss a good chunk of your life just for the shot at that impressive hose.
But the average millionaire does something different. He connects as many hoses as possible and has them all fill up the pool at once.
It might not quite equal the power of the firehose, but you are able to get started much earlier. You’ll have such a head start that you’ll be able to start enjoying your pool while the suckers are still in line at Home Depot.
I Thought This Was a Blog About Rental Property Investing…
Whoa, I really went off on a tangent there. But we’ve come this far, so let’s keep going with the hose analogy!
Investing in a rental property is the easiest way you can get an additional hose. It produces real cash flow every month that contributes to filling up your pool. Even better, this is the type of hose that works automatically.
Some hoses require constant attention for them to keep flow: you have to hand pump the water through the hose. Your job – think that money is going to keep flowing into your bank account if you stop showing up to work?
Rental properties are passive cash flow. You just have to walk over to the side of the house to make sure the hose is still connected and flowing as it should. Barely takes a couple minutes a day.
What Do You Want – A Big Pool or a Bunch of Easy Hoses?
Money is meant to be spent. You aren’t just filling up this pool for no reason you want to enjoy it.
So you move the portable pool to the sun and jump in. All those Chicken Fights and games of Sharks and Minnows splash some water out of the pool. The warmth of the sun is also evaporating the water. That’s ok, you aren’t trying to die with a full pool!
The classic view of retirement is to fill up the pool as much as possible, then stop hand pumping the job hose. Since you didn’t set up any passive hoses, you don’t have any more money coming in. But you calculated you will be ok as long as you only lose 4% of the water per year.
The cash flow view is to set up some easy to maintain hoses. Most days you can sit around enjoying the pool with the peace of mind that any water you are losing is offset by the hoses still flowing. Every once in a while you just have to make sure the hoses are still connected to the house.
Now, let’s define these hoses. There can be various methods of maintaining your cash flow during regular days and after retirement as well. One, you can create an additional income line by diversifying your investment portfolio with high and low investment risk plans like cryptocurrency, estate planning, fixed deposits, bonds, etc. These may or may not require your attention regularly, but they can become one of the biggest hoses besides job salary.
Other than that, you can look into options like blogging, vlogging, starting a small side business, babysitting, pet sitting, etc. You could also play games for real money if you are into online gaming and want to convert it into a passive income source. Such opportunities can become your smaller hoses, which you can tap into when the leaks (expenses) increases, or else they can always stay available as an alternative.
The important thing is understanding which hoses can work better for you in a long run and adopting them instead of trying everything and not getting any profits out of it.
Flip Your Mindset
With the right mindset, you can set yourself up for financial freedom. It’s not about running around constantly plugging the leaks that are your expenses. It’s not about getting the biggest pool of net worth.
Get started now by adding a hose of passive income. Done right, a rental property is the easiest and surest way to do it.
Photo: jensmith826
You’re absolutely right. I wish this was a lesson I learned years ago. After college, I worked 6 years at a comfy decent paying job. I didn’t search for other cashflow streams. Instead, my main focus was to move up in position at the company. I quit this job to pursue my own business about a year ago without any incoming cashflow. I’ve been working to set up different streams during this time and I have a couple side hustles that help but it would have been a lot easier if I had accumulated multiple “hoses” during the 6 years at my prior job.
So true! Be thankful you figured it out after only 6 years and not 30. You might be worse off the first couple years income-wise, but I bet it works out for the best in the long run.
I like the analogy.
Imagine what is possible when you have multiple houses filling the pool and then you get one of those fire hoses…financial nirvana 🙂
We are currently bringing in about $2,000/month income between our rental condo and the room we rent out in our house. Although it’s cashflow, the net cash flow is only about 25% of that gross number. However, I know with time that the conversion ratio will increase.
That said, this is just another reminder that we need to add that next property to the mix.
In addition to rental real estate, we have passive income from P2P lending, REIT’s, CD’s, Stocks, my Blog.
Once our house is paid in full I would also consider that a stream of income as well, based on the amount of our mortgage we will no longer being paid.
Cheers,
Dom
That’s great to hear you have so many passive income sources! P2P lending is a great example of putting your money to work and your blog is a great example of putting in time/effort instead of money.
For people new to it, I think getting the mindset right first is important, then just getting started building passive income streams. Turnkey rentals are the perfect solution in my mind – not too difficult, but requires some effort to get a pretty significant cash flow. Some of the others like dividend stocks and REITs are easy to get in to, but the return is less and you won’t learn anything useful that will get you to the next level in the future. My hope on this website is to convince people to get started with turnkey real estate, which will then open them up to even bigger passive income opportunities in the future!
I completely agree, too! I can’t imagine feeling secure in retirement with no money coming in other than maybe a little social security (assuming the system is solvent). There’s only so much you can do by cutting back expenses. And I worry about the extremely frugal people who don’t have lots of passive income who have just retired super early and plan to live on peanuts the rest of their lives. I keep thinking “you know how much live-in health care workers cost toward the end of your life?” And Medicare doesn’t cover everything. Somehow they seem to think their expenses won’t ever increase, but it’s not a function of frugality, it’s a function of age.
Absolutely! I think it is an old way of thinking from when people had pensions in retirement. Now times are different, but so many people are still thinking the same way.
It’s never been easier to set up your own income streams, whether passive or not. Hopefully by planning ahead with your rental properties, it can be pretty passive when you are ready to relax!
Another blogger (I’ve forgotten which one) reframed his financial independence in terms of how many income properties he had to own in order to be completely cover his lifestyle. Answer: six. That’s…surprisingly doable.
Really like the pool analogy. Great post and a good ‘starter’ column for people just getting in to this field.
That doesn’t sound so hard does it! Of course before getting to 6 you have to get to 1 … that is the hard part and why I recommend people start with the training wheels of turnkey properties.
Thanks for reading!
Awesome analogy! We are currently working hard to connect as many hoses as possible to help fill up our pool. So far it feels like it’s taken a really long time to get to the (small) passive income streams that we have currently, but with continued hard work we feel we can definitely grow them. Great post!
Getting started is the hardest part! Then it is much easier to increase the cash flow, and you’ll probably start noticing new opportunities all around you.
I love analogies, so you’ve won me over already. I am definitely one trying to connect more hoses (always). Rental properties scare me half to death, because of all the risks associated, but that comes with any side hustle or source of income really.
Looking forward to reading more!
Thanks for reading, always good to have another analogy fan!
Rental properties can definitely be intimidating. I wrote a post getting into who is the right fit: https://rentalmindset.com/are-you-a-fit-for-rental-property-investing-and-who-should-leave-this-website-right-now/
Right on–multiple, diverse income streams not only typically provide more cash flow, but they insulate us a bit from shocks and surprises. Some unforeseen event wallops income stream #1? Not a huge deal–#s 2-7 are still flowing.
What really, really matters though (and which you mention) is NET cash flow. Lots of people have big cash inflows, but the outflow is even bigger. Result: bankruptcy, in time.
Thanks!
Unforeseen event wallops income stream #1 … like someone accidentally stepping on the hose? Great points!
Wow, just found your blog. I can only image the success you have in the past 6 years as the housing market exploded.
I’m one of the proponent of using leverage when you’re young to start on a rental business. Without leverage, I couldn’t get my college education, or the 3-plex I bought 1 year after college, etc.
At the time, I just know about hustling extra income, but the idea of multiple income stream didn’t come to me. I wish I know about a little bit sooner, though. But no regrets!
Best of luck to your future rental empire!
Cheers!
Thanks for reading!
Yes, things definitely went well. Not as well as if I had more money to invest, but definitely a good start!
The leverage is key. Where else can a regular old person get access to such powerful and cheap leverage? It is nuts. And safe over a long time period.
I just read this post. Lots of fun with the pool and just in time for summer …
Another nugget of info you may want to pass along your readers is to keep putting money aside for the yearly accruals …
Home Owner’s insurance, Repairs, Vacancy … (Ohh yes, they will come …),
Management (if you don’t manage yourself, and even then you can pay yourself),
Property Taxes, … and … Improvements …
I take under improvements, those things that last a long time, but you know the life expectancy is coming to an end. For example, appliances, water heaters, A/C and Heating, and of course … a roof. I think those are the big expenses that may catch a newbie by surprise.
Keep posting your progress towards your next property.
Good luck,
Absolutely – have to set money aside for these items. I’m a big believer in a big cash flow cushion to cover the unexpected. If you don’t have enough cash flow, or don’t save enough of it, these surprises will really hurt!