the billionaire's money framework (that you should steal too)

Summary

got this framework from a billionaire I’m fortunate to learn from. I’ve used it for years. it’s simple, which is why it works.

step 1: cash flow. money either works for you or you work for it. either way, the first metric is how much cash is consistently coming in. no cash flow, no game.

step 2: protect the cash flow. insurance is boring. it’s also non-negotiable. life, disability, business protection. one bad event will undo a decade of building if you’re not protected. the rich are aggressively insured.

step 3: with surplus cash flow, you have four choices.

1. spend it. consumption. lifestyle.
2. hold it. cash reserves. dry powder.
3. donate it. give it away. tithe, cause, whatever moves you.
4. invest it. put it to work.

inside investing there are two flavors: lending (you’re the bank, you collect interest) or owning (you own the asset and collect the upside). each one has a passive form and an active form. the active versions return more. the passive versions return less but don’t require your time.

the framework doesn’t make decisions for you. it makes the decision space clear. that’s the entire point.

Transcript

introduction to the billionaire money framework

Let’s go over a simple money framework I stole from a billionaire. I’ve been using it for years to increase my net worth. You can do the same. Follow this. You’ll increase your net worth. You’ll understand money better. Years ago I was at this business conference. It was a very small conference and they had a couple of guest speakers.

It was more like this mastermind event. They had an actual billionaire come and speak in this environment. It was really awesome to get to hear him and get some mentorship and guidance from him. Off the cuff, someone asked him about finances. He kind of just brushed it off like, once you understand money, it’s easy.

There aren’t a lot of options and this is just what you do. He went over the framework. He verbally explained this framework and I was taking notes furiously and then I transformed it into what is ultimately the framework I’m going to show you today. But I thought it was so awesome. His level, his depth of understanding, the level to which he understood money was unparalleled and once he was done, I was like, wow, that’s a phenomenal framework.

I want to follow. I want to understand. I want my kids to understand. So you can know what to do with money and not be so lost or caught up in all of the things that are a possibility out there once you kind of understand the game. So I’m going to dive into it by following a diagram. If you’re watching the video version, you get to watch me unpeel the diagram one section at a time.

If you are listening to the audio version of this podcast, I will make sure that everything makes sense for you. All right, so let’s dive in to this framework. It all starts with cash flow. So we have cash flow like this is your paycheck. This is however you’re getting money into your personal accounts or your business accounts.

the importance of understanding and protecting your cash flow

We all have cash flow, right? But there are two different ways to generate cash flow. The first way is I work for money. So that means you’re working for your paycheck. That could be an actual business, a job, whatever it is, some way, shape or form. You are working for money. Now the second way to generate cash flow will to be having the money work for you.

So this means you are putting your money out in the market. You’re putting your money into an investment. You’re putting your money somewhere else and your money is creating cash flow for you. So this is the basic understanding of you’re putting in your time and for that time, effort and energy, you’re getting money or you’re taking that money and it’s working for you.

In either way, it’s generating cash flow. Those are the two main ways to generate cash flow. Now the next step on there and he hit on this being very important and a lot of people skip it is that you have to protect your cash flow. You have to protect your cash flow. This is insurance and insurance comes in a million different ways.

You can get insurance for almost anything, but his main point was you need to do something. You need to set up something to protect your cash flow. You need to have insurance at the basic level. Yes, we’re going to have car insurance, homeowner’s insurance, but if you’re in business, maybe you need general liability insurance.

Maybe you need, you know, have a riskier business and you need different malpractice insurance, whatever the different insurances are. You need to protect yourself, your cash flow, and you do that through different insurances like disability insurance is another example. If you were to get injured or hurt and your cash flow was to get cut off, the I work for money and you don’t have enough money working for you, disability insurance would continue to provide that cash flow.

He hit on this for a while and talked about its importance. So sometimes we don’t want insurance. We don’t talk about insurance, not super sexy, but ultimately you need insurance and another big part of that is life insurance for your family. If you are the main breadwinner and you, uh, you know, were to die unexpectedly or whatever, you are now cutting off that cash flow.

how to effectively utilize your cash flow for spending, saving, investing, and donating

I think most people understand that, but life insurance was a very big part of this as well. So this is the top piece of cash flow. Then he said, okay, there are only four things that you can do with your cash flow. The first thing was spend. You can spend your money, you can spend it on whatever you want.

You can spend it on making a better life. You can spend it on a new car or new house, whatever the case is. You can spend your money. We all know that, right? Then he talked about holding your money. You can save your money and typically for most people you should try and save about three to six months worth of your living expenses and that’s what you want to hold.

Beyond that, you probably want to start going to the investment route. After the emergency fund is funded, you have that in reserves. You probably don’t have to save as much money. You can start investing that. The fourth thing he said you can do with your money is you can donate it. This is a great way to help other people.

I think increase your impact without only doing that through your business, but at the same time just donating money to donate money to help people. Find an organization that you really believe in and that you think that your dollars are moving another group forward, they’re making an impact, they are really doing something of value in your mind.

I think you should donate your money. Yeah, there are tax implications, write-offs, things like that, but that shouldn’t be the main reason you donate your money. You should be donating your money to help. He said that is one of the things that you can do with your cash flow. Now the one everyone wants to talk about is investing.

You absolutely can invest your money. This is the one everyone is sexy, there’s crypto, there’s real estate, there’s ETFs, all these different things that we could invest our money in, but he said once you understand the basic principles of how you can invest your money, you just decide which bucket you are most comfortable with.

detailed strategies for maximizing investment returns

Once I understood this, it made things very easy and helped me understand where I’m at in this equation. He said that there are two types of investment. The first one is you can lend your money to someone and you can lend passively or you can lend actively. I’m going to talk more about that in a minute.

That’s the first thing that you can do with your money. You can lend it out and when you lend it out, you’re getting paid some sort of return on your money for having lent it out. The second thing that you can do is you can own things. You can own things and be passive or you can own things and be active and this also will dictate your rate of return.

So in the investment category, just so we’re very clear, you can, there are only two things that you can do. You can lend your money to someone else, an institution, whatever, and you can do that passively or actively or you can own something and you can be passive or active in that ownership and that is going to dictate your rate of return, which is the final bucket down here at the bottom.

And it looks like this. So rate of return is how much you’re earning on your money. Like a low rate of return might be 3, 4, 5%. A high rate of return might be 8, 9, 10%. Or if you’re in business, it could be 20, 30, 40, 50, 100, 1000%. And that is the upside in business, but ultimately that is how rate of return works.

So starting on the low end, low rate of return, you can lend and be passive. So when you lend your money and you’re passive, meaning you’re not doing anything, this is something like a CD, a certificate of deposit. When you lend and you’re passive, there’s almost no risk for you and so you put your money in, you wait a certain amount of time, you get it back, you’re not doing anything, you’re still lending your money out, but the rate of return is very, very low.

Now moving up the rate of return scale, you can then own something and be passive. So a good example of this would be real estate. So I’ve talked about single family homes, how I really enjoy doing those for my investment strategy. I own those and I’m somewhat passive. It’s going up in how passive it is.

how different investment approaches affect your rate of return

I still have some things I need to do, but it’s by far not something I have to focus on each and every single day, each and every single week. It’s way easier than that. So own and be passive or semi-passive. I don’t believe there’s anything that’s truly passive out there, maybe a CD, but really owning real estate is semi-passive and the rate of return is slightly higher than a CD.

So we can be looking at 6, 7, 5, 6, 7, 8 percent, something like that, depending on you’re looking at appreciation or cashflow. And that is how you can own something passively and get a rate of return. Now you go up one stage from that, you’re getting an even higher rate of return. This would be to lend money, but to do it actively.

So one thing you can think about for this is active day trading, whether that’s in the stock market or you could do this with crypto. But if the people who make that their job, like they are buying the dip, buy low, sell high. And I’m by no means, I don’t do this. I’m not an expert in it. Just talking about the concept here.

But if you do this, I kind of looked up like what are some of the averages that these active day traders can get, whether that’s in crypto or in the stock market. And they were saying anywhere to 4 to 8 percent. That’s per month. You know, most people are happy with an 8 percent return on investment over the course of a year when they stash their money somewhere.

A good day trader, whether that’s in crypto or the stock market, can typically get that in a month, which is phenomenal. That’s a huge rate of return. It’s a massive rate of return, but it’s very active. It takes you dedicating all your time, effort and energy into being good at this thing. I don’t even know how to be a good day trader.

I would argue that it’s incredibly hard and only top 1 percent of people can ever get good at that. But if you’re able to do that, you want to lend your money out and you want to be very active. Your rate of return greatly increases, but you’re also starting to increase your risk as you go up. This is this ladder as well.

summary and steps to implement the framework in your life

Now, the last one is to own something and to be active in it. And this the best example of this is a business, right? So if you own a business and you are very active in it, you will get the highest rate of return you can anywhere else. And you really can’t argue that fact. Business has the highest rate of return of anywhere else on the planet.

And so if you are, if you own that business and you’re very active in it, you’re going to get significant multiples far surpassing anything you could get in CDs, real estate, active day trading. You are to get phenomenal rate of return when you own something and you are very active in it. So that’s it.

This is the entire simple money framework that you can follow. Now it might seem like, well, how does this help me? This helps you understand what you’re doing with your money. And one of the things it helps me understand is, OK, I work for my money. I’ve done that. It generates cash flow. Now I want more of my money to work for me.

How am I going to do that? Then I look along the rate of return for investing to get my money to work for me, and I pick which one I’m most comfortable in me. It’s these two blue ones, which is own passive and own active. I am big into owning things. I want to own the real estate for my investment and be semi passive.

I also want to own my business and be active. That’s what I want to do day to day. Not so much into lend active, not so much into lend passive, other than maybe putting my emergency funds into a high interest savings account, something like that, but have no interest in being in these categories. I like to own things, be active and be passive.

You might be different. Everybody’s different. But you have to invest and put your money where you feel comfortable. What you know and understand is the best place to put your money. Making sure that I protect my money is something I’ve really checked the box on over the years. And then knowing the other things I can do with my cash flow and my spending it.

Spending is an important part of your money coming in. I know we all do that just naturally. We have to spend to live. But are you spending things that enrich your lives, you know, from experiences or are you spending to, you know, invest in, you know, not just invest in, lend and own, but like invest in yourself, reading books, things of those nature, making yourself better and then making sure I’m holding, saving enough money for that rainy day fund and then donating my money, I think is a big part of it.

So once you understand this, you really understand most of the money framework. So when someone comes at you with a new investment opportunity or a new idea or something you’re getting FOMO on, okay, which, which bucket is that in and where’s the risk? And it’s like, well, you need to buy all of this crypto coin right here.

And it’s like, well, that’s lend, that’s active or that’s lend and passive or lend and active. And ultimately I’m going to get a higher rate of return or lower rate of return based off of which one you feel like it is based off of the coin. So like something like Bitcoin, fairly stable, it’s gone up and down.

That might be lend passive. Now you might be, you know, betting on some other altcoin or whatever, and that’s lend and active because you’re having to day trade that, you know, to try and make any money on it. Like you’re buying low, selling high over and over again. So anyway, this is a simple money framework from a legit billionaire and I have been following it for years.

Really helped me get my financial house in order. I hope it can do the same for you. But to execute on all of these things, you’re going to have to put in the effort, put in the work, make sure you understand yourself and you understand your money. To do that, you have to try harder and live bigger.