This article is for the hard-working employees. Well-established investors do not need to read.
Three weeks ago, a friend of mine was laid off by his company. Last week, another friend lost his job. He was my classmate and one of the top three smartest students in our class. This morning, I just learned that another friend lost his job. The entire department where he’s been working at gets closed. All three are engineers. One is 56 years old, and the other two are in their early 50s. One of them moved into a bigger house about five years ago. One family moved into a bigger house last year; they have four kids and the oldest daughter is a sophomore in a university. All three of them are hard-working and excellent people. None has rental properties or passive cash-flow.
They are looking for jobs and are under a lot of stress. I wish them all the best.
I hope this article will help some employees pay attention to passive cash-flow.
Money Tree vs. Alligator
By David S. J. Meng
George lives in an expensive neighborhood and he has $3 million assets. His assets are mostly in his big primary residence and his retirement plan. He has no passive cash-flow, so he has to rely on paychecks from his employment to feed money into his house every month.
Linda also has $3 million assets. She likes real estate. Her assets are in rental houses, in addition to her home. Her rentals spit out about $100,000 net positive cash-flow each year after all expenses. She likes her job and is still working, but this passive cash-flow can enable her to quit her job and tour the world, if she wants to. She has financial freedom.
It is not just the net worth that is important. The cash-flow is very important. George and Linda have the same amount of asset value. But Linda has significant passive cash-flow. George does not.
An important question is: How much passive cash-flow do you have?
If your asset spits out cash every month, then you have a “money tree”.
People say: “Money does not grow on trees.”
However, if you have rental properties with positive cash-flow, they are like money trees that grow money for you. Just like your peach trees that grow peaches for you once a year. Or your apple trees that grow apples for you once a year. Except that your rental properties grow money for you every month.
In contrast, if you have to feed money into your asset every month, then you have an “alligator”.
During an economic recession, or a company down-sizing, some people lose their jobs. Those who have alligators that require the feeding of money every month, such as a mortgage and property tax, may lose their houses. They get “eaten” by the “alligator”.
For example, about 10 million Americans lost their homes during the financial crisis of 2008.
Linda has a money tree.
George has an “alligator”.
Some friends who invest in real estate have told George in the past years about real estate investing to obtain passive cash-flow. But George said: “Real estate investing is risky. I do not want the stress.”
This year, George reaches 50 years of age. Now, the company is downsizing and restructuring. Rumors have it that 10% of the workforce will be let go. Often employees age 50 or older are let go. By the time they have reached 50, their salaries have increased over the years. They are more expensive and less energetic, than those with fresh knowledge who are 22 or 25 years old.
George needs his paychecks to feed money into his house. Now he is very worried that he will be let go by the company during the downsizing. That would mean that he would not have money to feed into his house and hence would lose his house. He may have to sell his big house and buy a small house. He may have to move to another part of the country wherever another company may offer him a job. Either way is quite a traumatic experience for the family, and a stressful situation.
Now, for George and Linda, guess who is more stressed out, and whose choice is more risky?
Real estate investing seems risky.
However, as demonstrated in my book “$5 Million in 8 Years”, real estate actually reduces and minimizes your financial risk. By acquiring properties smartly, building a team, negotiating good deals, and expanding through an intelligent use of leverage, an ordinary person like me can grow a money tree for my family. Real estate investing can neutralize the risk from losing a job or from other unexpected events in life. By growing a money tree, it provides financial security to the family.
Once you have substantial cash-flow, you have more choices. You can choose to work. You can choice to fire your boss if your boss is bad. You can choose a less stressful and more pleasant job. You can choose to work part-time, or quit altogether. You can tour the world. You can pursue your passion and your hobby. You have more freedom.
Real estate seems risky, but it actually lowers the risks and yields good financial health.
Medicine is bitter, but it yields healing and good health.
George and Linda have the same amount of $3 million assets. The quantity is the same. But the quality is different.
Therefore, we need to pay attention not only to the quantity of the asset, such as:
“How much net worth or asset does he have?”
More importantly, we should pay attention to the quality and the nature of the asset. Such as:
“Does the asset spit out cash every month?”
“How much passive cash-flow does it produce?”
“Does the asset eat cash?”
“Is the asset an alligator or a money tree?”
Hope this article will help friends think about “money tree” and pay attention to passive cash-flow.
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