This is the Cash Flow Pattern of a Liability

  • Thread starter LukeLewis
  • Start date


Aug 3, 2020
  • #1
I find this section of Robert's book very interesting. He talks about how assets are things that put money in your pocket and liabilities are things that take money out. It's pretty simple, really. So if you buy a house to live in, it's a liability. If you buy a house for others to live in and they pay you rent (more than your expenses), it's an asset. He then goes on to talk about how understanding definitions and numbers as they pertain to financial knowledge is critical. He says that by not understanding these things, you're essentially limiting your wealth potential and will stay in either the lower or middle class your entire life.

Here's what I say. You can teach someone about money until you're blue in the face and they'll still want to go out and spend it. If you give a shop-a-holic a credit card that's got no limit and then attempt to educate them about how to make more money throughout their life, the minute you turn around, they'll disappear and will be on their way to the mall. You just can't stop some people. Unfortunately, more and more people here on earth are just as I describe them. The world is full of people who don't care about making money. All they want to do is spend it. They would love to receive a gigantic inheritance or win the lottery. All they want to do is go shopping. They don't have the love of work like others have. The old school folk. Most of my friends are financially lazy and don't want to learn about how to make and keep money. I do have other friends, though, who are like me, who love to work for the joy of it. And they also love to make money, just to count it. These are the people I'm assuming this book was written for.

Okay, back to Robert's section. Before I continue on though, let's just agree that, yes, being financially literate is important. Even for those people who are only interested in spending any money they get their hands on. We'll assume that one day they'll come around a grow up.

What's the cash flow pattern of a liability?

Liabilities ---> Expense

So, in the simplest terms, if you buy a liability, such as a car, house, or land, you'll be paying for it and it won't make you any money.

Have you ever wondered why people who seemingly make so much money end up having very little of it? If you ever get the chance to look at someone's books, someone who you think is well off, I think you'll be surprised. We would assume they've got tons of money in the bank and invested. Surprisingly, many "well off" people have neither. Why is that? I'll tell you why it is. It's because these types have spent their lives purchasing liabilities instead of assets. According to Robert, examples of common liabilities are:


Let's think of it this way. If a teenager buys a lawnmower just to have or maybe to ride around for fun, he just bought a liability. He's got less money in his pocket than he had before and that money is never going to come back. If he bought it to mow his neighbor's lawns though and will make a profit doing so, he just bought himself an asset. Knowing this, ask yourself which one of these things makes a person who earns a lot of money more wealthy:

Big house
Brand new Porsche
Dinner out at restaurants
Private schools
Loans (mortgages, car loans, home equity loans)

If you guessed none, you'd be correct. Now just imagine someone who earns a lot of money spending on these types of things over his or her entire life. These kids of liabilities and expenses accumulate until one day a blip in the income stream finds its way to the surface and the money stops flowing. The only place to go from there is bankruptcy. It's remarkable how a small disruption in someone's income stream and cause grave issues. Just look around. Since COVID began, people have gone belly up by missing just one paycheck. That's not good.

Let's take a look at a few cash flow patterns.

Poor Person

Job > Income > Expenses (Taxes, Food, Rent, Clothes, Fun, Transportation)

Middle Class Person

Job > Income > Liability (Mortgage, Loans, Credit Cards) > Expense (Taxes, Mortgage, Fixed Expenses, Food, Clothing, Fun)

Wealthy Person

Asset (Stocks, Bonds, Notes, Real Estate, Intellectual Property) > Income (Dividends, Interest, Rental Income, Royalties)

Now, we obviously all need to spend money to live, so take the above cash flow patterns with a grain of salt. Take a bird's eye view, if you will. It's obvious that wealthy people behave very differently than poor people do after they receive money in their hands. It's what they do with it once they get it that matters. The wealthy invest and the middle class and poor spend. And they spend like it's going out of style.

Let's analyze the above cash flow patterns for a moment to see if we can learn anything. Most poor people work to earn money. It's not much money, so they can't purchase large ticket items, such as houses and cars. Instead, they'll rent apartments and take public transportation to get around. Either way, it's money in and money out. They never seem to get ahead.

As far as the middle class go, to me, this is the most dangerous class to be in. These people make enough money to borrow and spend lots. Because the salary of the average middle class worker is pretty good, they'll apply for and obtain credit cards. They'll also be given mortgages by banks. They may even start soon to fail businesses. They'll finance vacations and they'll borrow to drive nice cars. In some respects, middle class people are much more poor than poor people are. If you make $100,000 a year, but are in $1,000,000 of debt, are you better or worse off than a poor person who makes $10,000 per year, but has no debt? You tell me.

Wealthy people, somewhere along the lines, began investing their money so that money works for them and bears more money, which they can reinvest and make even more money from there. Wealthy people are generally cheap. They don't drive nice cars and don't live in fancy houses. They do own a lot of things behind the scenes though, such as ETFs, mutual finds, CDs, and businesses. You'd never know it if your neighbor is a millionaire. Their house would be the same as yours and they may even drive a clunker. You might think they're not that well off, but you'd be wrong. They'd have much more money than you and they wouldn't even have to work for it.

I want to interject here for a moment to put the kibosh on those who complain that poor people just can't get ahead. They say that some people live paycheck to paycheck and they don't have any extra money to invest. Let me tell you something - do you want to know who I see out there in the bars? Poor people. Do you know who smokes cigarettes the most? Poor people. Drinks alcohol the most? Poor people. Goes to Dunkin' Donuts the most? Poor people. Has big fabulous smart phones? Poor people. Drugs? Poor people. Lots of kids? Poor people. Likes to turn the heat up nice and hot? Poor people. Air conditioning? Poor people. Subscribes to HBO? Poor people. Goes on vacation? Poor people. You get the idea.

If every time a poor person had the urge to run down into town to grab a coffee at the local coffee house resisted that urge and drank water instead, they'd have the extra cash to transfer into their Charles Schwab account to purchase an investment. Wait - Charles Schwab? That sounds fancy. Poor people can't afford to invest with Charles Schwab! Really? They can't? How much does it cost to open and transfer money into a Schwab account? $0. What's the minimum amount allowed to be transferred in? $1. How much do transactions cost? Commissions? $0. How much does each stock or ETF charge to make a purchase? $0. How much does it cost to do taxes at the end of the year to account for any income that's made? $0. Is there any knowledge necessary to do any of this? If you can read the back of a can of beans, you can figure out how to invest your money online. It ain't rocket surgery.

There are literally no boundaries to becoming wealthier than you are these days. Literally. And I am personally offended by the word "literally."

Okay, back to business. Let's focus on the middle class for a moment. It appears to me that the more money someone in the middle class makes, the more they need to make to maintain their lifestyle. If someone who earns good money buys a big house in a nice neighborhood, the fun doesn't stop there. Once the house is purchased, they've got to maintain and pay for it. So not only do they need to pay the principle on the mortgage, they also need to pay homeowner's insurance, upkeep, mortgage interest, utilities, and improvements. And both you and I know that the minute a couple of average middle class people move into a house, the first thing they need to remodel is the kitchen. That's thousands of dollars. And not only that, they also need to appear as middle class as their neighbors do, so they'll need to entertain, drive nice cars, and pay for Lawn Doctor to come to their homes to fertilize their lawns. As you can see, the more money someone makes in the middle class, the more they'll ultimately spend because human nature is to go to the limits. If a middle class couple inherits a large sum of money, you can't tell me that this couple won't move into a nicer neighborhood and buy nicer cars. We all know they will. And from there, the fall will be even harder if something bad happens, such as one of the primary earners getting laid off or fired.

I'll leave you with this little nugget of wisdom from Robert. This is great.

What is financial aptitude?

It's what you do with your money once you earn it. It's how you keep people from taking it from you and how long you keep it. It's how hard your money works for you.

If you earn a good salary, yet find yourself not able to freely pay your bills, you need to work on your financial aptitude. If you don't make much money, but find that you buy a lot of stuff you don't need and barely make it by each week, you need to work on your financial aptitude. If you have no investments and if your money does nothing for you other than burn a hole in your pocket, you need to work on your financial aptitude.

Okay, until next time!

This post is part of a series: Rich Dad Poor Dad by Robert T. Kiyosaki
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This is the Cash Flow Pattern of a Liability was posted on 06-05-2021 by LukeLewis in the Finance Forum forum.
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