There’s a lot to learn about money.
However, according to Robert Kiyosaki, author of best-selling personal finance book “Rich Dad, Poor Dad,” some things are more important than others.
In his upcoming book, “Second Chance: For Your Money, Your Life, And Our World,” Kiyosaki highlights three financial concepts in particular that serve as the basis for wealth.
If you understand the meaning of the words cash flow, asset, and liability, your chances for a richer life are greatly improved. The reason most people struggle financially is because they have lots of cash flowing out — and very little flowing in.
Here’s a quick rundown:
Asset: Kiyosaki defines an asset as something that “has value, produces income or appreciates, and has a ready market. Assets put money in your pocket.” For example, the three assets he focuses on are business, real estate, and paper (meaning stocks, bonds, and mutual funds).
Liability: A liability is something that absorbs money instead of producing it. The test Kiyosaki suggests to distinguish between assets and liabilities is to ask yourself, “If you stopped working, what brings money in and what pulls money out?”
Cash flow: Cash flow is simply the direction your money goes: into or out of an account, business or investment. “Cash flow determines whether something is an asset or a liability,” Kiyosaki writes.
Just like an “asset” is the opposite of a “liability,” Kiyosaki points out that the opposite of “cash flow” is a “paycheck.”
How could that be? While cash flows from your assets, he explains, paychecks are limited infusions of cash that punctuate the cycle rather than continue it. With a paycheck, there’s only so much you can earn.
Kiyosaki writes that traditional education doesn’t set up people to become wealthy, because schools focus on concepts like “paycheck,” “saver,” and “employee,” while adults who become rich focus not on simply getting their hands on some cash, but perfecting their cash flow.