Rich Dad Poor Dad – Part 8
Email this article to a friend
[Continued from "Rich Dad Poor Dad - Part 7"]
Some of the visible differences between Kiyosaki’s Rich Dad and Poor Dad were that Rich Dad lived and worked in a tiny old creaky house in the poor side of town filled with old ratty furniture and drove an old pickup truck, while Poor Dad lived in the richer side of town in a much bigger, newer, and better looking house and drove a newer, nicer, and better looking automobile.
But, the invisible differences were in their Income Statements and Balance Sheets. Poor Dad’s Income statement looked almost perfectly balanced with all of his income going to expenses every month and hardly anything left over for savings or investments. Therefore, in his Balance Sheet, he had a tiny asset column compared to a huge liability column, mostly made up of his home, automobile, and all other excessively expensive purchases. (By “excessive,” I mean “unnecessary.” We all need a safe place to live, but it should never be more than we can afford or more than we need.)
Rich Dad, on the other had a much different financial picture. The income side of his Income Statement was huge compared to his expense side. And, the asset column of his Balance sheet was also huge compared to his liability column. These 2 statements were interrelated in this way: Because he kept his expenses down by not buying an expensive house, furniture, or car to begin with, and by not upgrading every few years like most people with any money do, he had excess income to purchase true assets, such as investing in his own businesses (convenient stores, construction companies, etc.), which in turn generated more income, increasing the relative size of the income side of his Income Statement, which he again reinvested into buying more real assets, and so on.
The middle class finds itself in a constant state of financial struggle. Their primary income is through wages; and, as their wages increase, so do their taxes. Their expenses tend to increase in equal increments as their wages increase; hence, the phrase “the rat race.” They treat their home as their primary asset, instead of investing in income-producing assets.
This pattern of treating your home as an investment and the philosophy that a pay raise means you can buy a larger home or spend more is the foundation of today’s debt-ridden society. This process of increased spending throws families into greater debt and into more financial uncertainty, even though they may be advancing in their jobs and receiving pay raises on a regular basis. This is high risk living caused by weak financial education.
…
Mutual funds are popular because they represent safety. Average mutual fund buyers are too busy working to pay taxes and mortgages, save for their children’s college and pay off credit cards. They do not have time to study to learn how to invest, so they rely on the expertise of the manager of a mutual fund. Also, because the mutual fund includes many different types of investments, they feel their money is safer because it is “diversified.”
This group of educated middle class subscribes to the “diversify” dogma put out by mutual fund brokers and financial planners. Play it safe. Avoid risk.
The real tragedy is that the lack of early financial education is what creates the risk faced by average middle class people. The reason they have to play it safe is because their financial positions are tenuous at best. Their balance sheets are not balanced. They are loaded with liabilities, with no real assets that generate income. Typically, their only source of income is their paycheck. Their livelihood becomes entirely dependent on their employer.
So when genuine “deals of a lifetime” come along, those same people cannot take advantage of the opportunity. They must play it safe, simply because they are working so hard, are taxed to the max, and are loaded with debt.
As I said at the start of this section, the most important rule is to know the difference between an asset and a liability. Once you understand the difference, concentrate your efforts on only buying income-generating assets. That’s the best way to get started on a path to becoming rich. Keep doing that, and your asset column will grow. Focus on keeping liabilities and expenses down. This will make more money available to continue pouring into the asset column. Soon, the asset base will be so deep that you can afford to look at more speculative investments. Investments that may have returns of 100 percent to infinity. Investments that the middle class calls “too risky.” The investment is not risky. It’s the lack of simple financial intelligence, beginning with financial literacy, that causes the individual to be “too risky.”
If you do what most everyone else who is an employee and owns a house does, you will end up working more for 3 other entities than yourself or your own family:
1. You work for your employer, making them rich. The harder you work, the more rich you make them.
2. You work for the government by having taxes withheld from your paychecks. The harder you work, more money is withheld from your paychecks. 15% of your paycheck is like turning over your entire paycheck from January to May every year.
3. You work for the bank, making them rich off your mortgage and credit card payments. The harder you work, the more house and stuff you usually end up buying; and, ultimately, the more the banks get rich off of your hard work.
Now, do you want to work harder to make your employer, the government, and the banks more rich? Or, do you want to turn your hard work to directly benefit you and your family?
The first step is to minimize or eliminate as many of your expenses and liabilities as you can while maintaining or increasing your income as much as possible.
The second step is saving enough cash to start acquiring true income-generating assets. [Almost all income-generating assets are taxed at a lower rate than typical wages or salaries. Get educated about the different types of income-generating assets. It could be something as simple as renting out space in your home or starting a low-cost start-up part-time business out of your own home.]
My next goal would be to have the excess cash flow from my assets reinvested into the asset column. The more money that goes into my asset column, the more my asset column grows. The more my assets grow, the more my cash flow grows. And, as long as I keep my expenses less than the cash flow from these assets, I will grow richer, with more and more income from sources other than my physical labor.
As this reinvestment process continues, I am well on my way to being rich. The actual definition of rich is in the eye of the beholder. You can never be too rich.
Just remember this simple observation:
The rich buy assets.
The poor only have expenses.
The middle class buys liabilities they think are assets.
No matter what the sales staff (including real estate agents and bankers) tell you, these are not assets: houses that you live in don’t get any rental income from; any remodeling or landscaping on your home unless you are going to sell it immediately at a much higher price than if you didn’t pay for any of that extra work; jewelry, including diamonds, unless you are going to sell them immediately for a profit; automobiles, unless you are going to sell them or rent them for profit; and so on.
Time to Review the Lessons So Far:
1. The Rich Do Not Work for Money; They Make Money Work for Them
The poor and middle class are only interested in getting a big paycheck because they fall into the dual traps of fear and greed. Instead, the rich use their brains to find ways of making money work for them, thinking outside the box, seeing the opportunities that others don’t see and acting on them, educating themselves about how money works all along the way.
2. Why Is Financial Literacy Important? To Make More of It and Keep It
Remember Rule No. 1: Know the difference between an asset and a liability. (Hint: a house is not usually an asset — unless you are renting it out at a profit.) Then, buy up as many true income-earning assets as you can. Know how your cash flows between your Income Statement and your Balance Sheet. Understand why most of the middle class struggle financially based on their typical cash flow pattern.
Now, we move on to Lesson No. 3: Mind Your Own Business
No matter what you do to earn your paycheck, that work is not your business. That’s just your job or profession. So, what is your business? If you want to be rich, your business is to build and keep your asset column strong. While at work for your boss, you mind your boss’s business. But, when you’re home, you mind your own business. The business of acquiring true assets requires you to do work for it, starting with using your brain to look for and think about and finally put into practice the opportunities that most others don’t see. And, always continuing and broadening your financial education as you go. This is focusing on the asset column of your Balance Sheet more than the income side of your Income Statement.
To become financially secure, a person needs to mind their own business. Your business revolves around your asset column, as opposed to your income column. As stated earlier, the No. 1 rule is to know the difference between an asset and a liability, and to buy assets. The rich focus on their asset columns while everyone else focuses on their paychecks.
That is why we hear so often: “I need a raise.” “If only I had a promotion.” “I am going to go back to school to get more training so I can get a better job.” “I am going to work overtime.” “Maybe I can get a second job.” “I’m quitting in two weeks. I found a job that pays more.”
…
These ideas all still focus on the income column and will only help a person become more financially secure if the additional money is used to purchase income-generating assets.
…
When I say mind your own business, I mean to build and keep your asset column strong. Once a dollar goes into it, never let it come out. Think of it it this way, once a dollar goes into your asset column, it becomes your employee. The best thing about money is that it works 24 hours a day and can work for generations. Keep your daytime job, be a great hard-working employee, but keep building that asset column.
…
After you’ve taken the time and invested in and built your own business, you are now ready to add the magic touch — the biggest secret of the rich. The secret that puts the rich way ahead of the pack. The reward at the end of the road for diligently taking the time to mind your own business.
[To continue with Rich Dad - Part 9, click here.]
[For your own copy of Rich Dad Poor Dad, click here
Be sure to get the latest articles as soon as they’re posted by signing up here!
