The most powerful model for understanding the use of money and the building of financial wealth is the Money Matrix. It tells the story of how the rich get richer and the poor get poorer. It helps people identify whether they are investors or consumers and whether their money works for them or they work for money.
The Four roles of money:
- Capital - money invested in anything expected to grow in value
- Cash Flow - money generated from those investments
- Cash - money held in reserve for security or future investments
- Consumption - money spent on anything not expected to grow in value
Investors understand that your first financial priority has a cascading effect on your financial life. In other words, what you do with your money in the beginning will dictate what you’re able to do in the end. It is about your financial priorities- what you actually do when you receive money.
When you invest in Capital first, an amazing thing happens: Slowly but surely your money starts to work for you. Amazingly, your money is now making you even more money. And each year, as you invest more of your income in Capital, the Cash Flow it creates grows in significance. Suddenly you find that you’re well along the financial wealth-building path of Passive Income and an increasing percentage of your income is being earned by your money, not by you.
This is the Game Millionaire Real Estate Investors play is to see how much unearned income they can generate from their investments.
In the end it all comes down to a person’s ability to prioritize investing over spending, to value Capital more than Consumption. Reinvesting Cash Flow in addition to Capital accelerates the financial wealth building process, creating a wealth building machine that feeds itself and has the potential to grow exponentially over time. It’s like compound interest with a turbocharger. |
