#5: The Two Most Important Words in Personal Finance

Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, everyone. How are you doing today? I hope you're having a great day. I definitely am. I'm excited for this episode because we're going to be talking about two of my favorite words. I mean, as you might have guessed, passive income are two of my favorite words. But when it comes to personal finance, I actually think the two most important words are cash and flow. And when you put it together, it says cash flow. Now, I think it's important because at the end of the day, all the investing that we're doing, all the hard work that we're putting into our jobs, everything comes down to cash flow, doesn't it? Meaning how much cash comes into your life and how much is left over at the end of the day. Let's talk about that a little bit. Now, cash usually comes in by either your day job. You get your income, whether you're an employee or you are running your own business. You get investment money, you know, that comes in in the form of either distributions or returns, possibly if you do some angel investing and potentially and one of these investments actually hits and you get some returns and money comes back. Let's say you own some rental property and the money comes in in the form of rent. That's all cash that comes in. But then there's also something called expenses, right? I mean, those are your obligations, whether those are debt obligations or just obligations that you have to pay through to live your normal life. For example, your mortgage is a big expense for basic food costs, that's an expense. Childcare, schooling, insurances. I mean, there's just a huge list, laundry list of expenses. But what's left over from your cash and taking out from expenses, that is what's called cash flow. At the end of the day, once you have your cash flow, that really helps determine what kind of life you get to live, right? Are you going to use those for fun expenses? Are you going to use that to invest? And what are you going to be able to do with it? The good thing is it's after all your expenses are taken out, so essentially you're free to do with it whatever you wish. Now, we all know that positive cash flow is a good thing. I mean, it seems easy. Just make sure the amount that's coming in is greater than the amount going out in the form of expenses. So there are a couple ways that you can think about it, right, in terms of how to actually create this positive cash flow. Really there's two ways to do it. Either you increase the amount of money that comes in, increase the cash in, or we decrease our expenses. And on my site I talk about both, but primarily I like to talk about increasing cash in. That's kind of the whole abundance mindset which you might have heard, which says that the ceiling in terms of creating more income, really, to me it's limitless, decreasing your expenses. There's only so much you could decrease because that kind of depends on what your expenses are. You can minimize that. But to me, your upside potential in terms of creating cash, essentially it's just really limited to how much effort, energy and time that you're really willing to put in. And so what are some ways to increase that cash flow? Now we talk a lot about working more, right? I mean, in terms of putting more time in. But honestly that's probably not the most sustainable way. I mean, you're probably working a ton of hours right now as a physician or high income professional, and you're also trying to juggle that with your family, with whatever hobbies you might have with your time left over. The last thing you want to do is put in more time. But sometimes that's what you have to do because those are your only options. The other thing is that you could potentially pick up a little bit of a side hustle. Now I have a list of a whole bunch of side hustles that I know of physicians actually doing and enjoying doing. I mean, maybe they might not be as profitable in the beginning as your day job, but they might be a whole lot more fun. And it's something that you might be able to do on your own time and on your own terms. Now, if it's something that's actually creates passive income, as we've talked about, maybe it starts a little bit lower in terms of the income that it produces, but over time it will grow and grow and grow and it'll continue to scale and be actually worth the effort of having done it. Right? And yes, so we like to talk about those passive income sources that can increase your cash flow significantly, your investments that you make and that those investments that actually create cash flow for you, whether it's investing in real estate, maybe these other stocks that you're doing, and especially if they have dividends, right, that increases your cash flow. Now how do we decrease Our expenses. Well, you can do things like you can decrease your debt obligations. You could probably refinance some of that debt to make it a lower payment. Over time, you will pay those off, and eventually, hopefully, those debt payments will go away. You can decrease your expenses by decreasing some of the waste spending maybe on some of these luxury items that you're not really particularly into. That's one way to do it. And for me, one of the big things that I've been working on in terms of actually decreasing expenses is to minimize the memberships that I don't use. I mean, I don't know about you, but memberships, I've got a ton of them, whether they're to kids, amusement parks, whether it's gyms, of course, there's tons of movie or streaming TV services. But some of those, you know, I want to keep those, right? But some of the ones that I find myself not using at all, I just sometimes cut those out. And if you can do a pay per use basis, sometimes you'll come out ahead. But that's decreasing expenses. And those are kind of something you can do probably by sitting down over two hours taking a look at your expenses and figuring out where you can cut that fat. Now, when it comes to increasing cash flow, man, that's where I spend most of my time and energy, because again, I feel like there is no ceiling. And honestly, it's a lot of fun for me, and hopefully you'll find it a lot of fun too, as you find some passions that you can pursue. Now, there are some things about cash flow that I really think you need to know about. And in particular, there are 10 things that I think you should know about cash flow. Number one, cash flow really helps you determine how you live your life. I mean, isn't this true? The amount of cash flow that comes in allows you to make choices in life. I mean, do you want to buy that car? Do you want to buy that house? Do you want to take that trip? Do you want to make that particular investment? Do you meet the minimums? Yes, those are all based on how much cash flow you have at the end of the day. And that can dictate a whole lot. So, yes, if cash flow increases, to me, that increases the choices that you possibly have. Number two, cash flow puts food on the table. I mean, honestly, the cash that you have really allows you to literally feed your family. You can pay for the basic necessities in life. Go out to restaurants, pay for your groceries, put a roof over your head. These are basic things that Cash flow really allows for and why it's so important to know and be able to quantify how much cash is coming in on a daily basis. The last thing you want to do is actually put yourself in a situation where that cash flow depletes every single month, which means ultimately you are living paycheck to paycheck. And honestly, there are a lot of physicians, other high income professionals that I know are doing this. There are many athletes doing this. You've heard of many celebrities. How could they go bankrupt? They make so much money. But how could these things happen? Unfortunately, they weren't able to manage their cash flow well. And a lot of them were put in situations where honestly, once the cash flow stopped or a little bit or reduced, they weren't able to pay their obligations. And, and so that's really, really important for us to understand that cash flow is paying for the essentials. Number three, cash flow allows you to invest. Now, I don't know about you, but it seems like the rich tend to get richer, isn't that right? I don't know if you consider yourself one of those or not, but the way they do this is by taking the cash flow that they make and invest it wisely and smartly to create more cash flow. They're doing that to basically it's like a stacking effect where they use their money that's kind of on top of all their expenses and all that stuff. And they create passive income streams and they invest for the future. A little bit of delayed gratification sometimes for them, but sometimes at a certain point they have too much cash flow. They don't know what to do. They just put it into different avenues or vehicles to create more cash flow. And so it allows you really to invest. I don't know about you, but some of these investments that I look at, they're minimum 25, 50, a hundred thousand dollars. Sometimes if you're trying to buy a rental property that can easily be in the six figures. How do you have that? I mean, the only way to do is really to save the cash flow that you have. Number four, cash flow allows you to retire early or retire gradually. Now, we've talked about the different ways to think about retiring. Some people like to retire early. It's just a big sudden stop and then they go sail off to where they want to sail off or hang out on the beach. For me personally, I have always thought that the idea of retiring gradually was more appealing. Meaning that over time, as cash flow starts to come in from other sources of income, you can slowly decrease the amount of work that you do at your day job until you find a really good, fun, sustainable place. Now, at that point, it just becomes a hobby. And that's what my focus has been. And the only way that really happens is if you start having that steady passive income cash flow that comes in aside from your primary job. Number five, steady cash flow allows you to weather an economic downturn and really helps keep the lights on. Now, I don't know about many of you, but how many of you remember the big recession or the Great Recession of 2007 and 2008? Now, a lot of businesses, a lot of real estate investments. A lot of people, unfortunately, had a lot of financial hardship during that time. But you know the people who did really well with the people who had constant steady cash flow. Now, I know that, for example, I know some people who are real estate investors, and maybe they weren't playing for the big, big wins, but they invested for small amounts of cash flow, steady cash flow over time through their rental properties. And to be honest, when I talked to them, they said that even during the economic downturn, because that steady cash flow was coming in, their investments were doing just fine, and they're able to live off of it. So having that steady cash flow can really, really help you weather the storms and really minimize your stress and worry during times of volatility. Six, cash flow allows you to take out a loan. I mean, when you're trying to take a loan, I don't know if you've gotten a mortgage or gotten a car loan. The bank will ask you for all your statements. They'll ask for every. Every single piece of information that they can get from you. And really, all they're trying to do at the end of the day is assess your cash flow, because they know that on a monthly basis, if you have plenty of cash flow to cover your obligations, then you're a good bet. And that's all they're trying to do. When they look at your statements, they look at your investments, these kind of things, they're really looking at your cash flow. And of course, some of your collateral, which you might have, but really it's all about that. And so, honestly, the more cash flow you have, the easier it is for you to be able to take out a loan, whether that's for a house, whether that's for an investment property. Yeah. So that's an important thing to know. All right, we're already at number seven. Only a few more to go. Now, this one's really important. Because number seven, I said the cash flow allows you to give. Now, at the end of the day, if you have nothing after your expenses, you have nothing left to give to others. And why I think this is important is that you in life, I truly believe that fulfillment, or at least a part of fulfillment is being able to give and to contribute to others doesn't always have to be monetary. It can be of your time and effort and that sort of thing. But honestly, if you're struggling financially, you don't have the cash flow. Not only can you not give of your finances, but you definitely can't give your time and energy because you're stressed and you're probably thinking about other ways to create more cash flow. Number eight, retirement funds. The whole point is about cash flow. Now we talk about a lot of different strategies to set up your retirement, your nest egg. Some people use a 401ks or Roth IRAs, taxable accounts in terms of creating a nest egg. Some people use real estate and real estate investments, whether it's active or passive. To be honest, all of it comes down to the exact same thing. When you retire, whenever that might be, whether it's fully retired or or gradually retire, you want to make sure you have enough cash flow coming in from whatever sources that you can live comfortably in your life without having to work or work less. Now, they all come down to the same thing and they use different calculations for it. Now remember, they're all different vehicles to really get to the same point. Understanding your cash flow, whether it's coming from, again you're the market or from real estate, or a combination of both, which I do. It's vital to know what that cash flow looks like to know where you're at financially. Number nine, cash flow is more important than net worth. I mean, net worth is a great indicator of where you're at. It's like a scorecard. You total up all your assets and then you subtract all your debts. And at the end of the day you have something called net worth. Now, that might be important for something called accredited investor status, meaning that for some investments you need to have a certain income requirement. But if you don't meet the income requirement, you have to have at least a certain net worth requirement. So do people do care about it, they care about the scorecard. But to be honest with you, the net worth is just for me, it doesn't really determine how you live. At the end of the day, it's all cash flow. What money coming in and out. It's absolutely Possible for you to be in a situation where you have a good net worth, but a poor cash flow situation based on the type of investments that you have. Number 10. Cash flow allows you to take risks. I'm sure you know that reward and risk go hand in hand. As risk increases, typically reward increases. The thing is, you can't take these risks if you don't have enough cash flow coming in. You're probably just struggling to pay your basic necessities. You're struggling to make any investments. And so you cannot take risk because without that income or with that loss of capital, you're not going to be stuck with very much. What I like about cash flow is it allows you to try some other investments, it allows you to spread those seeds and diversify and hopefully allow you to have awesome results when it comes to investing. So really, cash flow allows you to take a lot of those risks. So the question is, how much cash flow do you have? I wonder if you know, for some of you who budget really, really closely, I'm sure you know, for someone like me who doesn't budget all that closely, it takes a little bit of work to figure out exactly what that cash flow is. I mean, I've done it several times in the last year and I continue to do it every couple months just to make sure I'm on the good path. Meaning that I have plenty of income coming in that exceeds the amount of expenses that I have. One way I do that is by using something like a management tool like personal capital or something like that, where you're able to put in your income that comes in, you're able to see the expenses coming out. But again, I don't use that on a full time basis. I use it once in a while to just log in and see if I can see an overall picture of my net worth and assets as well as my basic cash flow. But it is important for you to know and I want you to think about it whenever you're looking at investments. Whether it's real estate, the market, but hopefully it's primarily real estate. Well, I hope you're thinking about it when you actually are looking at your investments. And for me, it's primarily real estate. I'm looking at the income that it provides in the cash flow and making decisions based on that. And as I watch that cash flow increase and increase, I used to just map it and I used to graph it. I knew I was taking steps and getting closer and closer to financial freedom. So hopefully that's your focus as well. And my wish for you is that that cash flow continues to increase over time, and hopefully you guys have an amazing 2020. So take care guys. Have a great week. We'll see you in the next episode. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs, and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.