Sometimes you learn a lesson but don't really internalize it. I have been grappling with the question of whether to use my limited income to continue buying shares of ETFs with high distributions or to pay off debt. The answer was always there, hidden in the lessons from the CashFlow game by Robert Kiyosaki, author of Rich Dad, Poor Dad. The primary lesson of the game, as its name suggests, is Cash Flow. The main goal in the game is to escape the 'rat race'. This happens when your passive income exceeds your monthly expenses. Once you reach this goal, you no longer have to work as your investments cover all your bills. It's a seemingly simple lesson, yet it's quite profound.
The Challenge
What makes understanding and applying the lessons of the CashFlow game difficult is traditional financial education. Traditional finance uses math to convince you to make extremely conservative decisions that hamper you. Where CashFlow differs from traditional personal finance education is that debt repayment is rarely ever necessary for getting out of the rat race. Yet, most of the personal finance lore teaches you to pay down debt before investing because any profits you make will be eaten up by the interest paid. It's a good argument, but it's wrong.
The Game Is Rigged Against You
Whatever your real financial situation is, your financial situation in the CashFlow game is harsher. For example, credit card interest rates within the game range between 24% and 60%. Car loan interest rates range between 18.95% and 40%. Mortgage interest rates are between 10.21% and 13.33%. And, finally, for those game professions that have student loans, interest rates are 4.62% to 20%. Moreover, your loan balances never decrease. The only way to reduce your debt is to pay it off in full. So, if you have a $3000 car loan, you need to pay off the entire $3000 to eliminate the $100 monthly payment. And if you ever have a cash flow crunch that requires you to borrow from the bank, your monthly payment is 10% of the balance; that's 120% annual interest. Fortunately, you can at least pay down bank loans in $1000 increments. Even by today's economy standards, the CashFlow game is a much tougher environment. And we haven't even discussed the burdens of having children and buying doodads within the game.
The good news is that despite the odds being stacked against you in CashFlow, it is possible to get out of the rat race. Furthermore, you can accomplish this without paying off any of the excessive debt. In fact, when you exit the rat race, you will be in much higher debt than when you started.
Hidden In Plain Sight
The main lesson in the CashFlow game could not be more evident. As the name suggests, the game's primary lesson is cash flow. Everything in the game is designed to teach you how to analyze your balance sheet and income statement so that you can figure out how to meaningfully increase your cash flow. The game provides opportunities to buy stocks, gold, an MLM business, and properties. Unlike real life, where you have to search for business opportunities, the game presents opportunities at almost every turn. Then, the decision of where to invest is up to you.
The game does not teach you to save money. If you manage to accumulate any money, life, represented by rolls of the dice in the game, might throw obstacles your way. However, in some cases, you could also end up with a windfall profit. The best strategy to protect your cash balance in this game is to invest in assets. Accumulating a large cash balance won't help you win the game; instead, you must invest.
The game does not encourage you to pay off debt. On the contrary, when you purchase an investment property or a business, you accrue additional debt. Your balance sheet will reflect the amount of debt you're carrying. The lesson here is to utilize debt to acquire assets that generate a higher return than their cost. Essentially, use debt to buy positive cash flow.
The only way to win CashFlow is to purchase investments with positive cash flow. However, it's also possible to buy investments that don't currently generate cash flow, provided you understand that they can appreciate in value for a profitable sale later. This strategy is a lesson in knowing your market. With a large profit, you can subsequently buy more properties that do generate cash flow.
There are other lessons to learn. First, don't increase your living expenses. Having a child, buying a boat, or taking on more consumer debt will increase your monthly living expenses. If you start spending more after increasing your passive income, it nullifies the benefit of your investments. Your one and only metric is cash flow. Your focus should be on increasing that cash flow.
Applying The Lesson To The Dilemma
The game provides an answer to the dilemma of whether to use your cash to pay down your debt or to invest. If you don't start investing, you'll never begin to increase your passive income. Without passive income, you'll always be in the rat race. The lesson is to use debt intelligently to buy passive income rather than to purchase material goods. Whether it's a mortgage for an investment property or margin to buy stocks, leverage is beneficial when it increases your cash flow.
Mathematically, paying off a credit card with a 25% interest rate, which is higher than an 8% return on investment, makes sense. However, this logic only applies if the principal amounts are equal. For instance, if my credit card balance is $5000 and I'm making a $200 minimum payment each month, it doesn't compare to a $50000 portfolio that is generating $333 monthly in dividends. By making minimum payments for a sufficient duration, the principal balance eventually becomes manageable enough to pay off in full, thereby increasing your cash flow. While your debt balance will slowly decrease on its own, you can cover the payments from your investment income. Therefore, it's better to concentrate on boosting your investment income.
The outcome of enhancing investment income in real life is an increase in your cash flow. This increase stems from two sources: the growth of your passive income and the slight decrease in your debt as a result of making minimum payments.
The answer to my question about whether to buy more shares or pay extra towards my debts is to buy more shares to increase my monthly cash flow. Later on, when I have accumulated spare cash from my passive income, I could turn around and pay off a debt. Alternatively, I could compound my investments by buying more shares. As my income increases, the 25% interest becomes less significant. However, this is a choice I would not have if I had never invested in cash-flowing assets.
The point is, according to traditional finance, it doesn't make sense to invest when your interest costs are higher than your investment income. However, according to CashFlow game theory, your focus should be on building passive income that exceeds your monthly debt payments. Inherent in this lesson is the idea that you actually end up using good debt to pay off bad debt.
Conclusion
In conclusion, Robert Kiyosaki's CashFlow game teaches an approach that is alternative to traditional financial wisdom. Instead of prioritizing debt repayment, the game emphasizes the importance of increasing passive income through smart investments with leverage. As demonstrated by my current exploration of leveraging strategies in dividend investing, this approach can provide a viable path to financial independence. Please note that this is not financial advice but my personal experience and research. What are your thoughts on the subject?
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