Posts Tagged ‘Cash flow’

Who or What is ROI?

ROI is not the name of a person. ROI stands for Return on Investment. The ROI is the second thing you should look for when buying or creating assets. The first thing we needed to do was to make sure we knew what an asset was, and that it met the definition of an asset.

We further determined that the asset, in order to be truly an asset, must put money in your pocket. Now we learn that the more money this asset puts in your pocket the better. That is why we look for what the return on our cost, or investment will be. In other words how hard this asset is working for us.

The kind of asset we want is a hard-working asset that keeps on going and growing putting more money in our pocket each time. A lazy asset that put less money in our pocket as time goes by, or worse, starts taking money out of our pocket, is one that we would like to avoid.

Now there are many ways to calculate cash flow. The differences in how to calculate this cash flow comes from the fact that there are many different things that we could calculate for. These variables, for the most part can be ignored, and we should try to keep it simple.

In this case, anything that gives us a return on our money greater than what we could make if left it in the bank, is a good ROI. This means that our money works harder for us out in this investment, whatever it may be, than lying around in the bank doing nothing, or very little.

An example of this method of calculating ROI would be if we went out and bought a small condo for $100,000. Furthermore, let’s say all-in-all it cost us $20,000 in down payment, closing costs, etc., to get into this condo. Once we have it on our possession, we rent it out, and every month we have $200 left over each month. This $200 is our cash flow coming into our pocket each month. This $200 each month equals to a $2400 amount per year, and represents a 12% cash-on-cash ROI. You take your $2400 (monthly cash flow) and divide it by $20000 (the amount of cash you invested). The result is 12%. 12% is definitely better than whatever amount the bank is giving out nowadays. In fact, it is way better than anything the bank could ever do. SO in this case is my money working harder for me? It is indeed..

The formula is not complicated. There are only two things to look at: How much cash you are investing? How much cash are you’re getting in return for your investment? That’s it. It is that simple. Keeping it simple let you concentrate on gauging just one thing: How hard is your money working for you?

Creating Income from Assets

As we discussed in a previous article, our goal is to buy or create assets instead of liabilities to stay ahead financially. To figure out what is an asset, and what is not, we need to gauge how well it does what an asset is supposed to do – put money in your pocket. If it does put money in your pocket, it’s an asset, if it does not, then it is not an asset. Simple enough, right?

Once we have figured out what an asset is, then we must look at the cash flow it generates. This cash flow is the money that goes in our pockets. The assets that we need to focus on in order to create this cash flow can be in any form, but the most common forms of assets are things like properties, financial investments like stocks or businesses or creative endeavors that generate royalties like songs or books.

If an asset does not generate cash flow, it can also generate capital gains. Capital gains are a form of cash flow, except that in comes in a one-time lump sum. Cash flow generally comes in ongoing income, such as a monthly payment that comes in regularly. Capital gains are just as good, especially if the lump sum amount is sufficiently big enough to carry you over for some period of time.

The on thing that you should look for, as someone who wishes to buy or create assets that bring in income, is to look for assets that work hard for you at creating this income. Whether it’s an investment in a business, or a property to rent out, or resell, the basic process is the same – look for assets that will put the most money in your pocket.

Having more money in your pocket will mean more options for you, and that is the definition of freedom for most of us – options to choose what we want to do with our time, with our money and with our lives.