This is the vicious cycle the middle-class finds itself in. Why pay in cash when you can use credit and pay for it later? The house, the education, and the vacation isn't paid for in cash, however. Over time, the middle-class builds a lifestyle that must be maintained by either getting a higher paying job or working longer hours to afford more expense doodads like a bigger house, premium education for their children, or luxury vacations. In both cases, the money earned from their job covers their expenses. So while a poor person might spend 30% of their paycheck on rent, someone in the middle-class will spend 30% on the mortgage for their home. However, where the poor spend all their money on expenses, the middle-class spends their hard earned money on bigger liabilities first. Both groups of people have jobs that ultimately pay for their expenses. If you look at the personal financial statements of the poor and middle-class you'll notice they are very similar but also have a very big difference. The difference between the cash flow pattern of the poor compared to that of the middle-class can be found in the liabilities in their balance sheet. This is what my rich dad called the "working-class dream."Ī doodad, if you are unfamiliar with the term, is another name for a liability. And what they don't buy with cash, they gladly charge with their credit cards.
People who follow this cash flow pattern probably have high-paying jobs which afford them nice doodads like big homes, fast cars, and any number modern-day comforts. The cash flow pattern of the middle-class is considered typical and even smart. The following is the cash flow pattern of the middle-class: Most of the middle-class also lives paycheck to paycheck, but for different reasons and through different means. But money rarely solves the problem, rather it accentuates their spending habits.īut poor spending habits aren't exclusive to the poor. They often think more money will solve all their problems. They are hard workers, often doing two jobs just to make ends meet, but they have a hard time getting ahead because they are treading water simply trying to stay afloat. The cash flow pattern of the poor looks like this: You'll often hear those who struggle with their finances say things like, "I'm living paycheck to paycheck." They then tell their children to "Stay in school and study hard." The unfortunate reality for those who follow that advice is that they barely make enough money to pay their monthly expenses. The first cash flow pattern we need to discuss is that of the poor. It's the relationship between the income statement and balance sheet of your personal cash flow statement that ultimately determines your personal cash flow pattern. The bottom part is called the balance sheet which displays your assets and liabilities. The top part is called the income statement which consists of your income and expenses. The personal financial statement consists of two parts: the income statement and balance sheet. At Rich Dad, we call the personal cash flow statement your personal financial statement. In order to understand the different types of personal cash flow patterns, however, it's important to first understand the personal cash flow statement. Understanding the differences between the three types of cash flow patterns will help you know where your money flows. In Rich Dad Poor Dad, I introduce three cash flow patterns: one for the poor, one for the middle-class, and one for the rich. They don't know where their money is going because they don't control the cash flow pattern of their money, their money controls them. But the reason they don't know where their money goes isn't because they lost it or forgot the pin number to their bank card.
Where is your personal cash flow pattern leading you?Ī common question people ask is, "Where does all my money go?" Though they mean it as a joke, it's said with a sense of sadness.
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