Okay, so you’re ready to begin the advanced stages of the game we call Winning Financial Freedom. Level VI of this game is about building multiple streams of income. In this level, the goal is to create investments and businesses that generate streams of cash flow. There are many ways to go about this. In this post, we’ll talk about some of the general goals and themes to consider.
Cash Flow — Learn from Rich Dad
I want to start by giving a shout out to Robert Kiyosaki and his whole the Rich Dad, Poor Dad (RDPD) team. If you haven’t read any of Rich Dad, Poor Dad books, I recommend to stop reading this post and go get a couple of those books immediately! If you’re a total novice, you can start with the beginning book, Rich Dad, Poor Dad. If you have some experience, I think the best book to start with might be Rich Dad’s Cashflow Quadrant.
I’m going to reference some of the knowledge and definitions that come out of RDPD. One aspect we need to talk about is Rich Dad’s Cashflow Quadrant. This is an explanation of the four ways to generate income. E/S/B/I stands for Employee, Self-Employed, Business Owner and Investor income. Most of us start with our income percentages like this — 100/0/0/0. Then, over time, we might add some small amounts of “I” income. When we do, our income mix might look like this — 95/0/0/5. There are many reasons to start shifting your income to the B and I quadrants of income. There are tax advantages for sure, plus the improved ability to control your time and capital. I’ll bring this full circle, but I first just want to mention this concept as it’ll be an important concept to win at this level.
Personally, I started learning about Rich Dad’s Cashflow Quadrant in about 2001. My income looked like this — 99/0/0/1. I started thinking about everything I learned in the RDPD books and decided to start a consulting business. In the beginning, it was really just me, so I was basically considered self-employed. That moved my income to 0/99/0/1. A good litmus test for income between S and B is, “Can the business thrive/survive if you were to leave for six months?” Soon I brought in partners and employees and the consulting business was a real business. I was able to move my income to 0/45/50/5.
At that point, I started looking to invest in cash flow assets. I bought a four-plex in Arizona and I rented out a “granny flat” that was behind my garage. So, in about five years I went from 99/0/0/1 to 0/40/50/10. Now, there are always ups and downs. I sold the four-plex for a good profit but then lost pretty big in the real estate bubble of 2007. I also lost much of the business in the Great Recession. However, I’ve continued to follow the path to get to financial freedom and I’m back on track towards my goal. My goal is to get to 0/30/50/20 in the next five years, so I think it’s a great strategy to track some of your progress toward creating multiple streams of income and what kind of income you are actually creating.
With that knowledge, let’s talk about what it will take to achieve Level VI. The overall goal of this level of the game is to begin generating income via the I quadrant. At this level, you would be starting to move a portion of your net worth from liquid paper assets (e.g. stocks in an investing account), into businesses, real estate and commodities, including precious metals.
In my opinion, a good goal for this level is to be able to produce 10% of your total income from the I quadrant. That means moving money into more active, direct investing. For example, if you generate $10,000 per month in Employment income, then the goal is to be able to produce $1,000 per month in Investor income. In general, there are four basics methods to generate Investor income.
Real Estate, direct investing
One is to look at cash flow real estate. Buying an investor property is one of the easiest and smartest ways to start generating investor cash flow. You can buy a single family residence, a duplex or perhaps a four-plex. You’ll be able to use leverage in this investment because you’ll be able to get a mortgage on the investment property. You will also get some great tax benefits like depreciation. One final, great benefit of an investment property is that the rental income you bring in will increase over time with inflation. After a few years, you’re investment will improve it’s overall cash flow.
Real Estate, via Limited Partnerships (LPs)
Another option that still falls under real estate might be to invest in a limited partnership (LP) that’s going to invest in real estate. This gives you a little more control than investing in a general real estate investment trust (REIT). This allows you to basically invest in real estate and generate cash flows, in a bigger property than what you could invest on your own and leverage other people’s money along side yours to improve cash flow and improve consistency. Investing in real estate projects with a group is a good way to start generating good cash flow as I income.
Cash Flow Business
Another option to generate investment cash flow is to create a new business that focuses on royalties or other similar income streams. This could be a new book or publication. This could be song writing. This could be a YouTube channel. This could be some subscription model business. The great benefit of this type of business is that you can do some work one time and then get paid over a long period of time. You can also leverage other people’s time or other people’s money to scale the business. And finally, you get all the benefits from owning a business.
Personally, I have started a blog and I’m in the middle of completing a book. I’m hoping to build an empire of published content and build the distribution channels through social media. So I am personally focusing on this aspect to create recurring cash flow.
Equity Income Investing
Another option is to create an investing account with a brokerage firm (e.g. TDAmeritrade or Fidelity), and invest solely in income and cash flow assets. You can build a diversified portfolio of income assets like REITs, business development companies (BDCs), energy infrastructure master limited partnerships (MLPs) and other dividend yielding companies to generate income. This would allow you to build a stream of income that could provide consistent cash flow returns.
With this approach, an investor will not be leveraging other people’s time or other people’s money to produce returns. This one takes the least amount of time to produce, but may not be the highest producing option. However, it’s an effective option that could be considered as a partial component in an overall portfolio of investments to produce multiple streams of income.
Putting It All Together
Again, the goal is to generate multiple streams of income by creating businesses and direct investments that produce cash flow. The goal is to be able to produce 10% of your monthly income via income investing. Generating cash flow is tough, but it’s the key to getting out of the rat race. If you can generate passive streams of income that are higher than your expenses, you can exit the rat race and win the Game of Financial Freedom.
I’m going to post a lot more about this in future emails, but this article forms the basis of what people should focus on in these advanced strategies. It’s about generating cash flow over capital appreciation. Once you’ve been able to produce 10% of your income via cash flow assets, you’ve completed Level VI. Then you’re on to the final level!