What are the three personal cash flow patters of money?

The Three Personal Cash Flow Patterns

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Where is your personal cash flow pattern leading us?

Cash three cash flow patterns

I introduce three cash flow patterns: one for the poor, one for the middle-class, and one for the rich. Understanding the differences between the three types of cash flow patterns will help us know where our money flows.

In order to understand the different types of personal cash flow patterns, however, it's important to first understand the personal cash flow statement. We call the personal cash flow statement our personal financial statement.

The personal financial statement consists of two parts: the income statement and balance sheet. The top part is called the income statement which consists of your income and expenses. The bottom part is called the balance sheet which displays your assets and liabilities.

It's the relationship between the income statement and balance sheet of your personal cash flow statement that ultimately determines your personal cash flow pattern.

Cash flow pattern of the poor

The first cash flow pattern we need to discuss is that of the poor. You'll often hear those who struggle with their finances say things like, "I'm living paycheck to paycheck." They then tell their children to "Stay in school and study hard." The unfortunate reality for those who follow that advice is that they barely make enough money to pay their monthly expenses.

The cash flow pattern of the poor looks like this:

They are hard workers, often doing two jobs just to make ends meet, but they have a hard time getting ahead because they are treading water simply trying to stay afloat.

They often think more money will solve all their problems. But money rarely solves the problem, rather it accentuates their spending habits.

But poor spending habits aren't exclusive to the poor.

Cash flow pattern of the middle-class

Most of the middle-class also lives paycheck to paycheck, but for different reasons and through different means. The following is the cash flow pattern of the middle-class:

The cash flow pattern of the middle-class is considered typical and even smart. People who follow this cash flow pattern probably have high-paying jobs which afford them nice doodads like big homes, fast cars, and any number modern-day comforts. And what they don't buy with cash, they gladly charge with their credit cards. This is what we called the "working-class dream."

A doodad, if we are unfamiliar with the term, is another name for a liability. The difference between the cash flow pattern of the poor compared to that of the middle-class can be found in the liabilities in their balance sheet.

When we look at the personal financial statements of the poor and middle-class you'll notice they are very similar but also have a very big difference. Both groups of people have jobs that ultimately pay for their expenses. However, where the poor spend all their money on expenses, the middle-class spends their hard earned money on bigger liabilities first.

So while a poor person might spend 30% of their paycheck on rent, someone in the middle-class will spend 30% on the mortgage for their home. In both cases, the money earned from their job covers their expenses. The only difference being how much.

Over time, the middle-class builds a lifestyle that must be maintained by either getting a higher paying job or working longer hours to afford more expense doodads like a bigger house, premium education for their children, or luxury vacations.

The house, the education, and the vacation isn't paid for in cash, however. Why pay in cash when they can use credit and pay for it later?

This is the vicious cycle the middle-class finds itself in. They might make more money than someone who is poor but they will never get rich because of the middle-class cash-flow pattern they follow.

Cash flow pattern of the wealthy

So while the poor work for paychecks that pay for their monthly expenses and the middle-class purchase bigger liabilities with their larger paychecks, what about the rich?

The wealthy shows money going from the asset column of the balance sheet into the income section of the income statement. That is the cash flow pattern of the rich.

The wealthy don't work for money: Do you notice what's missing from the cash flow pattern of the wealthy?

A job!

"The wealthy don't work for money" is the title of the first chapter of How to make money from home?. See, the wealthy don't work for money, instead they work to acquire assets.

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This is true,
Master Investor, LLC