Understand the Path of Money

A hand fans out several hundred dollar bills

Did you ever play pirates as a kid? Carry around a drawing of a faraway island, sepia-colored to look ancient, with a big X to mark buried treasure? For those on a wealth-building adventure, there’s just as much excitement in finding a good ROI as there is in taking a spade to the sand of a deserted island.

Lucky us that Gary and Jay have provided us with a map to these potential treasures. We just need to understand how to read it. Getting purposeful about your finances meaning being able to think about them in the greater context of how money works.

The Path of Money describes the ways money flows in and out of your life. Some people let their money wander wherever it wants to go, but that’s not what millionaires do. They direct their money to the places that will bring them the greatest financial growth and the most substantial net worth,” Gary and Jay write in The Millionaire Real Estate Investor.

The Path of Money as originally seen in The Millionaire Real Estate Investor, p. 128-131.

Making the Map

The Path of Money model exists because Gary realized no one had ever laid out the different choices and opportunities that a financially savvy person encounters. What kind of cash flow they have, what the investment choices are, and ultimately the financial returns gained from these variables were never quite mapped out.

Gary told the story on Think Like a CEO. He said, “I [was] reading the books, and they’re all different, and they’re all written by really smart people. And when I set the book down, I still wasn’t clear what I should do. 

“One day, I just sat down with a blank sheet of paper and … I put this together.”

Once Gary drew out the Path of Money, thinking about how he should treat money became very, very obvious. The Path of Money became a mental map. Gary says, “I see it in my head, and it guides me every day.”

Follow the Path

The journey that money takes as it goes down the Path of Money turns it from potential capital into financial returns. If you start at the top, you can see that there are two basic types of financial leverage: human capital (money that comes from your work) and capital assets (ways that your money works for you).

You can work as many hours as you want, but your human capital will likely top out at some point—and when it does, your cash flow will stop.

If you peek ahead to the end of the Path of Money, you’ll notice that financial returns lead back to capital assets. The goal of the Path of Money is to make sure that your money is working so that you don’t have to.

If you don’t have any capital assets yet, then you’ll need to pay attention to the Four Choices for Cash Flow. This decision point gives four options for what to do with your cash.

The Four Choices for Cash Flow

  1. You can consume it by spending it.
  2. You can save it by holding it.
  3. You can share it by donating it.
  4. You can grow it by investing it.

On the path to building financial returns, you’ll need to focus on your spending and make sure that you have cash left over after your expenses are met. If you have cash left, you’ll likely hold or save it so that you can invest.

The Basic Investing Choice: Loan or Own

When it’s time to invest, there are two basic investment choices: to loan or to own. As Gary and Jay explain in The Millionaire Real Estate Investor, this is an interesting decision point that will be influenced by the season of life you are in.

If you are looking to accumulate more wealth, you are likely going to invest to own. This means you’ll buy an asset that goes up in value, generates income, or both. If you’re in a stage of life where you’re looking to protect the wealth you’ve already grown, you’ll invest to loan.

In each of these choices, own or loan, you’ll be deciding whether you want to be actively or passively involved in managing your investments.

How Noisy? Passive v. Active

When KW Wealth Community Leader Brett Tanner talks about the level of activity you want in an investment, he describes it in terms of sound. Active investments can be noisy; you’ll always be aware of them and sometimes they may feel like they are distracting you. Passive investments are quieter, sometimes even downright silent, as they chug along without much direct involvement.

The preference for the level of activity you’ll have in your investment can be personal. Some people are into a “set it and forget it” investment where they log into a dashboard a few times a year and check in on growth and returns, like stock investing. Others want to be more in-touch with their investments, watching through activities like attending board meetings of a business as its investor. Either way, a well-placed and managed investment should bring you financial returns.

These returns, if you choose, can be invested in capital assets. These assets eventually can grow to match or replace your human capital, making your money its own growth driver. Now, that’s a treasure chest.

But, X doesn’t really mark the spot in the investing journey. Rather, the adventure is like sailing the ocean itself—you can be your own version of Jack Sparrow and just keep chasing the horizon on the SS Crimson Permanent Assurance

“Here is the best news for investors on the Path of Money,” Gary and Jay write, “the path never has to end. As money flows from your investments, you’ll have more money to path—to reinvest and build more wealth.” 

Where are you in your investment journey? How has the path of money helped you navigate the financial seas? Let us know. Keep reading our newsletter and blog and tell your friends to subscribe for more exciting nautical metaphors. And let us know your favorite pirate slang on our KellerINK Facebook page.

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