Many people are in the dark when it comes to money. They live from paycheck to paycheck in a twilight world with only the dim candle of conventional financial thinking to light the way. As a result, they have a kind of financial shortsightedness that prevents them from distinguishing good and bad financial decisions.
“It is time to shed some light on the subject and illuminate the way wealthy people think about money,” says Kevin Mackessy, successful real estate investor and Broker/Owner of Blue Olive Properties, a Highlands Ranch based property management and real estate investment company. “The most powerful model top real estate investors apply in building true wealth is the Money Matrix. It tells the simple story of how the rich get richer and the poor get poorer.”
In his best-selling book, The Millionaire Real Estate Investor, Gary Keller reveals the two pyramids of the Money Matrix–one pointing up and the other pointing down–which reflect the financial priorities of investors and consumers. Area residents can learn about the Money Matrix through a consultation with Mackessy.
The Four Roles of Money
The essential difference between the two pyramids of the Money Matrix is the importance they place on the four roles of money:
- Capital–money invested in anything expected to grow in value.
- Cash Flow–money generated from those investments.
- Cash–money held in reserve for security and future investments.
- Consumption–money spent on anything not expected to grow.
Investors build their financial lives on capital, while consumers build theirs on consumption. Investors understand that the priority they place on capital over consumption in the beginning will dictate what they will be able to ultimately accomplish financially.
“It all comes down to financial priorities–what you actually do when you receive money,” says Mackessy. “Investors see money as an opportunity to invest, while consumers see money primarily as an opportunity to spend, or worse, over-spend and spiral into crippling debt. Later, while investors are setting aside more money for future investments, consumers are trying to wring some return from modest savings. Finally, while investors are free to spend, consumers are struggling to invest the little that is left.”
“When you invest in capital first, amazing happens: Your money starts to work for you,” he explains. “Your money is now making you even more money. And each year as you invest more of your income in capital, the cash flow it generates grows in significance. Suddenly, you find that you are well along the financial wealth-building path.”
Successful investors strive to see how much passive, unearned income they can generate from their real estate holdings. In the end, it all comes down to the ability to prioritize investing over spending.
Avoid “Shadow Wealth”
Most successful real estate investors make short-term sacrifices for long-term gains while they build a solid foundation. Consumers have it backward, and that is why they live for shadow wealth, or the appearance of wealth without any substance. It’s what the authors of The Millionaire Next Door called “all hat–no cattle.”
“When you view your financial decisions through the lens of the Money Matrix, you start to understand where money comes from and where it goes,” explains Mackessy. “Your financial priorities will make the difference between achieving true financial wealth and falling prey to the allure of living in the world of shadow wealth.”