What is ‘Cash Flow’
Cash flow is defined as the net quantity of cash or it’s equivalents moving into a business and out of it. Positive cash flow is an indicator that a business’s properties and resources are increasing, enabling it in turn to reinvest that money, settle on going debts, or even return money back to shareholders, pay expenses and offer a shield against imminent financial challenges. While a negative cash flow indicates that a business’s liquid assets are diminishing. Net cash flow is not the same as net income, which includes items for which payment has not actually been received. Cash flow is used to measure the quality of a corporation’s income, that means, to which degree it is liquid, which in turn can indicate whether the business is well positioned to remain active and competitive.
Active vs. Passive Income
You may already notice that there is a difference and you possibly will know what that difference is, but it’s to be expected that you don’t truly comprehend the implications of any of those differences. And by the way, there is nothing inherently wrong with either of them. But if you want to maximize your earnings later down the road, you do want to make sure you certainly do have a rock-hard understanding for how these two differ from each other.
By Using the authority website Investopedia.com , which should absolutely be in every investor’s “must have” tool list, the meanings of active income and passive income respectively are along these lines:
Active Income: is defined as Income for which services have been completed. This comprises salaries, tips, wages, charges and income from trades in which there is physical participation.
Passive Income: Incomes person derives from a rental asset, limited corporation or other projects in which he or she is not directly involved.
Investopedia.com explains that passive income does not comprise earnings coming from “active business involvement”. To give you my take on defining these two terms I’ll tell you my own understandings of them:
Active income entails the fact that you are doing something directly in order to obtain that income. Some sort of work. Or some sort of effort. You are not entirely laid back. You have to exercise some kind of effort and time in order to earn that income. Passive income means that you are making constant income flow with minimum to no energy required to keep it going. You are mainly hands-off.
Source of Income vs. Your Goals
So Why does it matter which one you are earning?
Oh yes, it does matters. It’s important, since accomplishing your goals depends a lot on understanding these terms very plainly. What is the most common motive investors give as to why they are involved into real estate or why they are already invested in it? It is the financial freedom. people who want financial freedom define that goal in a clear manner as being able to use real estate as a means to eventually break free of their existing career and not have to work constantly for their income. Okay, great, a goal! And an astounding goal at that. So, it’s the financial freedom, let’s discuss it.
Basically, financial freedom means in theory that you have to do no active work in order to obtain income. Which means that once you are financially free, you won’t have to worry anymore about money. What does that look like to you? Maybe you plan to do a lot of traveling, start new hobbies, take various college courses to learn new things (just for my enjoyment, and not because I have to), spend epic moments snowboarding and exploring the woods. Or you may even be the total opposite and plan to wake up early in the morning and hang out with friends on your couch all day and watch Netflix.
both of these plans fall under what is called “lifestyle design”. You get to plan your life exactly the way you envisage it to be.
Isn’t that the end goal of financial liberty?
If you are not concerned about lifestyle design at all, you can just stay at your present job, right? But With financial freedom, you can do anything you want. You can essentially start forming lifestyle design even before you are financially free, just like I have. Even though I spend a lot of my time working on my business, I have situated myself to be entirely on my own timetable, I work whenever I want to and for as much time as I desire, I sleep in a lot of days, I live at the seashore, and I can suddenly stop working any time of the day to go have lunch with a friend, go to do some exercising, walk my dog or, relax, stop working entirely for the day and do whatever I set my mind to instead! Hiking in the mountain, snowboarding, sky-surfing, pizzas, whatever I want.
I desired these freedoms so I started following a means to have those, which in my situation ended up being opening my own corporation that I could work from anywhere and with no deadlines whatsoever. The revenue from that business is planned to continue purchasing additional passive income investments so ultimately, I hit full financial freedom where I can keep living my existing lifestyle without the work part. All of this is falls under “lifestyle design.”
Subsequently, let me outline the circle I just made here:
Investing – directs you to – Financial Freedom – directs you to – Lifestyle Design
Are you completely persuaded that I have completely deviated from talking about active vs. passive income? It’s not your fault. I could have forgotten about those by now too. But let’s discuss them again now. So, how do those connect to lifestyle design? Well, I’m supposing we have recognized that your personal lifestyle design excludes working, correct? Do you recall which kind of income requires you to work directly for it? It is Active income. So then for comprehensive lifestyle design, do you want to have to depend on any active income? The answer is No. You only want passive income because it doesn’t require a lot of work, if any, effort on your part. Then you are able to travel or play or watch Netflix all you wish.
By Now you recognize you don’t want to deal with any active income, but what investing means are considered active?
Active vs. Passive Investment Devices
Active Income Investments: wholesaling or the act of flipping for example. But of course, You have to do some work in order to see money flowing from these. You have to be directly involved. P.s: I do still hold my stance that wholesaling is not really an investment at all, but on behalf of so many people thinking it is, I am counting it. Additional note: It is conceivable, if you are really smooth and good, that you could be in some ways hands-off for a flip. But that is in the distant future of being an innovative flipper so for now, I’m leaving it at this point.
Passive Income Investments: Rental properties and cash. When done correctly, together they will offer you earnings irrespective of whether you are hands-on or off.
The Actual Difference
Active income investing is, though it still may be a concrete investment. It is a JOB. So countless people don’t see it in this way, but that is what it is. Flipping homes is definitely job. Wholesaling is too a job. even, land lording a rental property is work. I say it again work.
This is imperative to understand this because it is a difference of how you devote your time. Large investors make cash in their sleep without investing in any effort because they invest in passive income sources. If you are putting in energy, while you might be making money and doing great at it, you are working. You are making a lot of income because you are doing a JOB. The big investors, if you’ll notice, also put in a lot of effort but their energy is not on what is , at present, making them income, it is on discovering the next thing that will provide them additional income!
If you love the “job” of wholesaling or overturning or even land lording, or whatever it is you may be doing directly to earn income, go on with it. Particularly if you are using the income from that job to purchase passive investments with, and that is how one really turn out to be successful- find ways to fund purchasing passive investments that will get you a step closer to financial freedom. On that memo too though, you can work any profession or start a business to earn revenue that you can use to invest in passive investments. It doesn’t even have to be wholesaling or land lording, even though you do learn a lot about participating in those jobs, but it can be any job you want totally separate of real estate if you want it to be. Real estate is just a good way to earn some large cash, and that is why so many people stick with it. And if you do that, you are still great, as long as you comprehend you are working a job.
It all comes down to your ambitions. There is nothing mistaken with wholesaling or land lording, as long as you are grasping the fact, and fine with it, that you are working for your money. I for my part have no yearning to work in those capacities, so I stay with passive income investments. I did, though, begin a business so as to fund those investments. I started a business in lieu of using wholesaling to make capital. You can do anything you want but be clear on what it is you are really doing, i.e. working for your hard-earned cash vs investing your money.