What Is Cashflow?
The three kinds of income (Active, Passive & Portfolio) and why recurring income is so important.
There’s a real lack of education at school around finance and how to manage your money. At University, even though I was studying business there was still a huge gap. As soon as I realised and started to understand the concept of cashflow and diversifying my income streams it all clicked., and it’s a game changer.
Once I started to understand cashflow, it changed the way I thought about time - let me break down an example for you:
My biggest form of active income historically has been my music shows. I would get booked to travel and perform on stage at a show or festival. I would perform and get paid somewhere between £500-£1,000 for an hours performance, depending on the size of the event. I remember thinking I had it made because I was calculating my income based on the amount of time I was performing for.
I decided one day to calculate how much I was paid for the hours I was away for an average show. If I use a European example, let’s look at the show I did in Budapest. Including travelling there and back, time waiting for the show, the performance and the journey home it totalled around 36 hours. If I divide the total time by my earnings of £500 this would total £14 an hour.
That’s a huge amount of time I have just exchanged. That’s the dangerous thing about Active Income, you need it but you need to make sure you have other forms of income also. If you lose your job or demand decreases for your product or services, a perfect example being with COVID now, my active income has been completely wiped out. I’m not expected to perform another show this year.
That’s why its so important to diversify your income and types of income.
Today I want to discuss the three types of income; active, passive and portfolio and why it’s so important to establish a source of recurring income.
In this episode you will learn
What is cashflow and why is it so important.
Active income vs passive income.
Why it’s important to outsource.
How to make your money work harder for you.
To learn more listen to my new podcast and subscribe! Available on iTunes, Google, Spotify and others or click “play” on the player below!
Podcast Transcript↓
[00:00:04] I'm Simon, and a few years ago, I decided I wanted to make a change. I wanted to create a passive reoccurring income to support me and my family today and a legacy for the future.
[00:00:18] Fast forward two years, and I've managed to generate over ten thousand pounds worth of monthly passive income. I've set up the business, scaled the business, and now systemised the business to free up my time.
[00:00:33] So join me to find out how I've done it. How others are doing it every day and how you can do it to.
[00:00:56] Hey, what's going on? Welcome to the podcast, where we talk about all things property, Creative Cashflow and how to become financially independent today. Not in 25 years. And I dunno about you, but I want to live my life today. I do want to have to wait till one day. You know, one day I'll get that call. One day I'll be able to afford this. I'm like, no, I want it now. So I'm going to work my ass off. I'm going to put all these little secrets into action.
[00:01:25] And I'm going to make sure that I change my family's financial future so that we're good.
[00:01:32] Because, you know, they didn't teach it me at school. Nobody taught it me at university, even though I was doing business. And as soon as I realized and I stood in and I started overstanding these concepts, it all clicked. And it's a game changer. And we're going to cover all those concepts right here. So if that sounds good to you, you've come to the right place. Please subscribe. We're gonna drop these every single Monday. So into it today. What we're gonna be talking about. Well, before we go any further, we need to just break down cashflow. What is cashflow? Why is it so important and what you can do today to increase your cashflow? Okay, so that's what we're going to focus on. And I'll be honest with you, when I really start to overstand this, it completely changed the way I thought about things, the way I thought about my time, and more importantly, that, well, to be honest with you, time is everything. But more importantly, it allowed me to do a bit of sort of an audit of my time and the work I'm doing and to weed out the ones that weren't the most effective and to focus on the ones that I knew had more longevity and could provide more leverage. So a great place to start is the three forms of income. So you've got active income, passive income, and then you've got what's called portfolio income, which in some cases can be passive. But there are some differences. So active income first, all active income is is basically when you exchange time for money, that means you have to do stuff.
[00:03:11] So if you've got a nine to five and you work in 35 to 40 hours a week, that's your active income. You know, you've got to go to work, do the hours, get your attendance right, perform, you'll get the income. If you're a shift worker, work in, you know, days, nights, whatever it is. Four on, four off, you know, two weeks on, two weeks off. You know, you've got to do the work to get paid. And to be honest with you, even if you're a sports person, you know, let's say you're a footballer, you got to be at training every day, you got to do the matches you got to keep yourself in shape. You got to do the workouts. You know, your time isn't always your own. You've got these commitments and you've got to actively keep them to get that payment. Okay. Now, my sort of biggest form of active income has always been my shows. So, you know, that would be when I'd go on the road. I'll do a club show or a festival or sometimes a concert hall or whatever. I'd go out perform. And I think, you know, I remember thinking I had it made because I'd make 500 quid or 700 quid or a grand or whatever it would be for one show. In theory, one hour you think, yeah, I'm getting, you know, five hundred quid for an hour.
[00:04:24] And then one time I decided to calculate how much it actually worked, how if I calculate it, the hours I was away, so, you know, an average show for me. Let's take a European one; would be like Budapest. So I'd say wake up in the morning, maybe got an early flight. I'd wake up at five a.m. I'd get to Heathrow or whatever, Stansted or Luton, or wherever we was flying. Let's say it took me two, three hours, I had to get there two hours before. So, you know, leave five a.m. and maybe go over to Heathrow, get there at eight, wait around for two hours, catch the flight, get picked up from the airport and driven to, say, the hotel. Chill, waste time in the hotel all day. Have hotel food, you know, spend money, spend money on food or whatever, or keep, you know, doing something. And then I probably have a siesta in the evening. Do my show at, say, 1:00, 2:00 am, one till two, common time, get back, sleep, early flight back out. You know, sometimes I wouldn't get back the next day till 4:00, 5:00 pm. So what are you looking at 24, 36 hours later. So my 500 quid that I thought was so good. Yeah, you're looking at, well, 14 quid an hour and I remember thinking.
[00:05:41] Wow.
[00:05:44] That's a lot of time I've just exchanged. And time, as I've said, you can't get back. And that's the dangerous thing about active income. You need it, but you need to make sure you've got other forms of income to supplement it. Because if you lose your job or, you know, if the demand decreases or if there's any issues like Covid, for example, was completely wiped out, all my music, my passive, sorry, active income, I mean, I'm not expecting to do another show this year. It's gone. Forget about it. So that's why it's so important to have over forms of income, multiple income streams and other forms of income that are not active. OK. And by the way, it doesn't matter how much money you're making. So, you know, you're a dentist is on 200 grand a year. You have to go and do 50, 60 hour weeks is active income. And if something happens and you know, you can't do that job no more, the income stops. Your money runs out. You're going to be broke. You're going to struggle. So I don't want you to do that. So you can't rely on active income. Don't overly rely on it. So the next form of income you've got is passive. And. I've been doing passive income for years because one great example of it is songwriting royalties.
[00:07:04] So when I write a song or perform a song, a recording of it, and it gets played on the radio or it gets a sale, every time that happens. I get paid. So I do the work once, do the song once, and then I get paid every week, every quarter or every whatever. And you know, people that write books, people that do courses, online courses or, you know, sort of course packages, you only do the work once and then people buy them and you get paid again and again and again. Netflix, you know, once they've got all the flipping, once it got all the content online, they've done the work. Then they just get subscriptions that just pay them, pay them, pay them, pay them, pay them. So, I mean, passive income has many different forms, but property is probably my favourite because you buy the property or you control the property, should I say. And once you've got it and you've set it up, you can get the reoccurring income every single month. The tenant will pay you. You don't have to do anything. You know, there might be some maintenance issues, but you don't have to actively do anything. The money just comes. And when I got my first property and I could see that five, six hundred pounds coming in my bank every single month, I was like, wow.
[00:08:25] This is crazy, I need more of this, I need more of this? That's how the rich get rich. They got a lot of passive cashflow. And every single month, it just keeps on coming in and compounding. The third type of income is what's called portfolio income and it's often mistaken for passive. It's kind of things like stocks and shares. Maybe Bitcoin where you buy a certain rate and then you hope to sell a higher one. Okay. And the capital gains increase is your profit. But I suppose the thing with with portfolio income is it's not a drip. It doesn't come in every month. You only make your money or lose it, by the way, if you sell them. And that's why for me, passive income is just...it's got the edge. So in my five keys of cashflow, I do say that once you've got cashflow, you should diversify and get some more stocks and shares. But you're going to have to check them. You're going to have to research whether you're going to research a fund manager or research the individual stocks and shares, it's not fully passive. You are going to need to be involved and decide when to put your money in, when to pull it out. And nobody can predict what the markets do.
[00:09:40] And it is just worth noting that there is a bit of a crossover between portfolio income and passive income, such as, you know, interest and dividends are considered portfolio income, but they're very passive. So, you know, for the point of this podcast episode, I'm trying to simplify it. But there are forms of portfolio income that can create passive income. But overall, I think it's fair to say that, you know, we want the income that we don't have to work for; that keeps coming in on a regular basis so that we can live the life we want to live.
[00:10:16] So they're the three forms of income and you need a combination because active income can be amazing because you know, you're exchanging a time for money and it's what you do with that money. But the passive income is the holy grail, the more passive income you've got...you know, the more sustainable you'll be. And a great metaphor is lottery winners. Like lottery winners will win fortunes, okay, but if they don't use that money to set up passive income, recurring income, they'll go broke. You know, they'll just go absolutely broke. You hear about celebrities, Johnny Depp, Mike Tyson, massive active earners, huge. But they didn't manage to invest that in a recurring way to create passive income, so that wants to work stops or once you have a couple divorces or once, you know, they retire from a career, money stops. They've over-leveraged, overspent. Money stops. That's it. So what can you do then? What can you do to create more passive income.
[00:11:30] And, guys, you don't need to, like, have huge deposits and stuff, you just need to know some creative cash flow ways to get involved in property or whatever it is that's going to create a little bit of recurring income. Whatever it is, you know, if you're right, you could write a book. You could do, you know, you could do, if you're a creative, there's tons of things you can do.
[00:11:54] But then one of my favourite forms of recurring income, passive income is business. If you manage to set up a business and then no longer needed to run the business, it becomes passive because you just check in every now and then on a board meeting or, you know, just to brief the team once a week or once a month and takes like an hour, two hours, and then the income comes in because you're not actively working in it. So if you've got a business, you want to slowly start to free up your time and outsource as much as possible. Which is scary, by the way, because you're going to see your margins decrease as you outsource more. But the thing is, time is everything. As you can make money or lose money, but you'll never get the time back. You'll never, ever get the time back. So, you know, if I could make 10000 pounds a month active or I could make 5000 pounds a month completely passive to free up my time to do something else, or do, you know, more of the things, you know, I want to do with the people I love. I'll choose the five K every time. Every single time. And similarly, if you've got a little fortune, you've got some great money in the bank or whatever it's doing. This is not financial advice, by the way. Disclaimer, but you should start to think and brainstorm. How you can make that money work for you?
[00:13:18] How can you make that money work harder for you? Because there's ways of doing it so that I mean, years ago there was 10, 20 percent interest rates. So people would put money in bank accounts and they'd live off the interest. Millionaires would live off their interest. It was a thing. Now you get nought point one percent interest. Nobody's living off a bank account. So how can you invest that money so that every single month you get cash flow coming into your bank every single month? And that is the Holy Grail. And that's what we're going to be talking about on this podcast. So make sure you tune in next week. We're going to be going in some other bits and bobs. I'm going to keep the content coming. And what I want to do as well is if you've got any questions, if you've got any things. If any of these ideas are prompting questions in your in your head, I want you to drop me a line. Get in touch and let me know your questions. And I'm going to start featuring them in the show. Just gonna go through some bits, because at the end of the day, this show is here to serve you. So, yeah, guys, that's it for me. Thank you very much for locking in. Please subscribe. Tell a friend. Spread the word. And remember, don't wait 25 years. Get creative.
[00:14:42] Thanks for listening. For more information, check out Simon Smith online dot com. See you next time.