Tuesday, October 17, 2017

Cash Flow Basics

This Image belongs to Rich Dad company

Ever played Cash Flow game by RichDad? 

I love it. It covers all the cash flow and investment fundamentals and it's fun! "Investment and cash flow fundamentals is fun???" you'd ask.

Well, yeah... The reason I play the game so much is because my 7 year-old loves playing it and thinks it's fun.

He gives me two choices "Minecraft" or "Cash Flow". I am really bad at Minecraft... so we play cash flow.

After a while, you start following the game rules in real life making better money decisions with real life deals. Let me give you an example.



Assets


One of the key definitions in the game is that of an Asset.

Asset is something that puts money in your pocket. In the game, you come across various examples of assets in three main categories: Small business, Stocks and Real estate.


Stocks


One of my early mentors retired early, at about 45. His retirement strategy was based primarily on dividend paying stocks. 

Stocks represent pieces of corporations. So, if you own a stock, you own a small piece of a corporation (aka a business). In Canada, there are many great corporations that pay dividends regularly and consistently. This means that for every stock you own, you get paid every quarter. 

Speaking in cash flow game terms, buy a dividend paying stock and you got yourself an asset that will put money in your pocket.

Key Benefits


Low Risk 


For example, each of Canada's top 5 banks has been paying dividends for over 100 years. Shares of these banks are very reliable and low risk assets. There's a great article about it on dividend.com.

Each RBC share currently pays $3.64 per year in total. So 100 shares would pay you $364. 


Tax Free



If you open a TFSA account (Tax Free Savings Account) to hold your stocks, your dividend income will be tax free. In our example, if you made $364 at work and your average tax rate is 30%, you'd only have a net of $254 in your pocket. With TFSA, you'd keep all of the profit, 100%.


Growing Like a Weed



In addition, you can set up an automatic re-investment of your dividend payment. This service is free and has no commission or transaction cost. Meaning your $364 would automatically turn into two more RBC stocks plus change. This way your wealth will be growing on its own. You can stop this process whenever you like. But it's really awesome to have this option, especially for busy people.



Bonus for Real Estate Investors 



Suppose real estate is the primary asset of your choice. As you continue to invest in real estate and look for financing for new deals, some lenders will ask you to show a certain level of liquidity in addition to down payment. For example, a bank can have a liquidity requirement of 100K plus down payment.  

Lenders consider funds on a TFSA account liquid. This is because you can quickly turn your TFSA into cash, if you need. So the bank will accept your TFSA account statement as a proof of required liquidity. 

At the same time, your money is not just sitting. It's working very hard for you, with great returns.