3. CHAPTER THREE
Lesson Two:Why Teach Financial Literacy?
In 1990, my best friend, Mike, took over his father's empire and is, in
fact, doing a better job than his dad did. We see each other once or twice a
year on the golf course. He and his wife are wealthier than you could imagine.
Rich dad's empire is in great hands, and Mike is now grooming his son to take
his place, as his dad had groomed us.
who controls the past controls the future, who controls the present controls the past.
In 1994, I retired at the age of 47, and my wife, Kim, was 37. Retirement
does not mean not working. To my wife and me, it means that barring unforeseen
cataclysmic changes, we can work or not work, and our wealth grows automatically,
staying way ahead of inflation. I guess it means freedom. The assets are large
enough to grow by themselves. It's like planting a tree. You water it for years
and then one day it doesn't need you anymore. It's roots have gone down deep
enough. Then, the tree provides shade for your enjoyment.
Mike chose to run the empire and I chose to retire.
Whenever I speak to groups of people, they often ask what I would
recommend or what could they do? "How do they get started?" "Is there a good
book I would recommend?" "What should they do to prepare their children?" "What
is the secret to success?" "How do I make millions?" I am always reminded of
this article I was once given. It goes as follows.
THE RICHEST BUSINESSMEN
In 1923 a group of our greatest leaders and richest businessmen held a
meeting at the Edgewater Beach hotel in Chicago. Among them were Charles Schwab,
head of the largest independent steel company; Samuel Instill, president of the
world's largest utility; Howard Hopson, head of the largest gas company; Ivar
Kreuger president of the International Match Co., one of the world's largest
companies at that time; Leon Frazier, president of the Bank of International
Settlements; Richard Whitney, president of the New York Stock Exchange; Arthur
Cotton and Jesse Livermore, two of the biggest stock speculators; and Albert
Fall, a member of President Harding's cabinet. Twenty five years later nine of
them (those listed above) ended as follows. Schwab died penniless after living
for five years on borrowed money. Instill died broke living in a foreign land.
Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall
were just released from prison. Fraser and Livermore committed suicide.
I doubt if anyone can say what really happened to these men. If you look
at the date, 1923, it was just before the 1929 market crash and the Great
Depression, which I suspect had a great impact on these men and their lives. The
point is this: Today we live in times of greater and faster change than these
men did. I suspect there will be many booms and busts in the next 25 years that
will parallel the ups and downs these men faced. I am concerned that too many
people are focused too much on money and not their greatest wealth, which is
their education. If people are prepared to be flexible, keep an open mind and
who controls the past controls the future, who controls the present controls the past.
learn, they will grow richer and richer through the changes. If they think money
will solve problems, I am afraid those people will have a rough ride.
Intelligence solves problems and produces money. Money without financial
intelligence is money soon gone.
Most people fail to realize that in life, it's not how much money you make,
it's how much money you keep. We have all heard stories of lottery winners who
are poor, then suddenly rich, then poor again. They win millions and are soon
back to where they started. Or stories of professional athletes, who, at the age
of 24, are earning millions of dollars a year, and are sleeping under a bridge
by age 34. In the paper this morning, as I write this, there is a story of a
young basketball player who a year ago had millions. Today, he claims his
friends, attorney and accountant took his money, and now he works at a car wash
for minimum wage.
He is only 29. He was fired from the car wash because he refused to take
off his championship ring as he was wiping off the cars, so his story made the
newspaper. He is appealing his termination, claiming hardship and discrimination
and that the ring is all he has left. He claims that if you take that away,
he'll crumble.
In 1997, I know so many people who are becoming instant millionaires. It's
the Roaring '20s one more time. And while I am glad people have been getting
richer and richer, I only caution that in the long run, it's not how much you
make, it's how much you keep, and how many generations you keep it.
So when people ask, "Where do I get started?" or "Tell me how to get rich
quick," they often are greatly disappointed with my answer. I simply say to them
what my rich dad said back to me when I was a little kid. "If you want to be
rich, you need to be financially literate."
That idea was drummed into my head every time we were together. As I said,
my educated dad stressed the importance of reading books, while my rich dad
stressed the need to master financial literacy.
If you are going to build the Empire State Building, the first thing you
need to do is dig a deep hole and pour a strong foundation. If you are going to
build a home in the suburbs, all you need to do is pour a 6-inch slab of
who controls the past controls the future, who controls the present controls the past.
concrete. Most people, in their drive to get rich, are trying to build an Empire
State Building on a 6-inch slab.
Our school system, having been created in the Agrarian Age, still believes
in homes with no foundation. Dirt floors are still the rage. So kids graduate
from school with virtually no financial foundation. One day, sleepless and deep
in debt in suburbia, living the American Dream, they decide that the answer to
their financial problems is to find a way to get rich quick.
Construction on the skyscraper begins. It goes up quickly, and soon,
instead of the Empire State Building, we have the Leaning Tower of Suburbia. The
sleepless nights return.
As for Mike and me in our adult years, both of our choices were possible
because we were taught to pour a strong financial foundation when we were just
kids.
Now, accounting is possibly the most boring subject in the world. It also
could be the most confusing. But if you want to be rich, long term, it could be
the most important subject. The question is, how do you take a boring and
confusing subject and teach it to kids? The answer is, make it simple. Teach it
first in pictures.
My rich dad poured a strong financial foundation for Mike and me. Since we
were just kids, he created a simple way to teach us. For years he only drew
pictures and used words. Mike and I understood the simple drawings, the jargon,
the movement of money, and then in later years, rich dad began adding numbers.
Today, Mike has gone on to master much more complex and sophisticated accounting
analysis because he has had to. He has a billion-dollar empire to run. I am not
as sophisticated because my empire is smaller, yet we come from the same simple
foundation. In the following pages, I offer to you the same simple line drawings
Mike's dad created for us. Though simple, those drawings helped guide two little
boys in building great sums of wealth on a solid and deep foundation.
Rule One. You must know the difference between an asset and a liability,
and buy assets. If you want to be rich, this is all you need to know. It is Rule
No. 1. It is the only rule. This may sound absurdly simple, but most people have
no idea how profound this rule is. Most people struggle financially because they
do not know the difference between an asset and a liability.
who controls the past controls the future, who controls the present controls the past.
"Rich people acquire assets. The poor and middle class acquire liabilities,
but they think they are assets"
When rich dad explained this to Mike and me, we thought he was kidding.
Here we were, nearly teenagers and waiting for the secret to getting rich, and
this was his answer. It was so simple that we had to stop for a long time to
think about it.
"What is an asset?" asked Mike.
"Don't worry right now," said rich dad. "Just let the idea sink in. If you
can comprehend the simplicity, your life will have a plan and be financially
easy. It is simple; that is why the idea is missed."
"You mean all we need to know is what an asset is, acquire them and we'll
be rich?" I asked.
Rich dad nodded his head. "It's that simple."
"If it's that simple, how come everyone is not rich?" I asked.
Rich dad smiled. "Because people do not know the difference
between an asset and a liability."
I remember asking, "How could adults be so silly. If it is that simple, if
it is that important, why would everyone not want to find out?"
It took our rich dad only a few minutes to explain what assets and
liabilities were.
As an adult, I have difficulty explaining it to other adults. Why? Because
adults are smarter. In most cases, the simplicity of the idea escapes most
adults because they have been educated differently. They have been educated by
other educated professionals, such as bankers, accountants, real estate agents,
financial planners, and so forth. The difficulty comes in asking adults to
unlearn, or become children again. An intelligent adult often feels it is
demeaning to pay attention to simplistic definitions.
Rich dad believed in the KISS principle-"Keep It Simple Stupid"-so he kept
it simple for two young boys, and that made the financial foundation strong.
So what causes the confusion? Or how could something so simple be so
screwed up? Why would someone buy an asset that was really a liability. The
answer is found in basic education.
We focus on the word "literacy" and not "financial literacy." What defines
something to be an asset, or something to be a liability are not words. In fact,
if you really want to be confused, look up the words "asset" and "liability" in
the dictionary. I know the definition may sound good to a trained accountant,
but for the average person it makes no sense. But we adults are often too proud
to admit that something does not make sense.
who controls the past controls the future, who controls the present controls the past.
As young boys, rich dad said, "What defines an asset is not words but
numbers. And if you cannot read the numbers, you cannot tell an asset from a
hole in the ground."
"In accounting," rich dad would say, "it's not the numbers, but what the
numbers are telling you. It's just like words. It's not the words, but the story
the words are telling you.
Many people read, but do not understand much. It's called reading
comprehension. And we all have different abilities when it comes to reading
comprehension. For example, I recently bought a new VCR. It came with an
instruction book that explained how to program the VCR. All I wanted to do was
record my favorite TV show on Friday night. I nearly went crazy trying to read
the manual. Nothing in my world is more complex than learning how to program my
VCR. I could read the words, but I understood nothing. I get an "A" for
recognizing the words. I get an "F" for comprehension. And so it is with
financial statements for most people.
"If you want to be rich, you've got to read and understand numbers." If I
heard that once, I heard it a thousand times from my rich dad. And I also heard,
"The rich acquire assets and the poor and middle class acquire liabilities."
Here is how to tell the difference between an asset and a liability. Most
accountants and financial professionals do net agree with the definitions, but
these simple drawings were the start of strong financial foundations for two
young boys.
To teach pre?teen boys, rich dad kept everything simple, using as many
pictures as possible, as few words as possible, and no numbers for years.
"This is the Cash Flow pattern of an asset."
+------------------------+
--------------->|Income
|
|
|
|
|
|-------------------------
| Expense |
+------------------------+
-----------------------------------+
| Assets | Liabilities |
| |
|_________|____________|
|
who controls the past controls the future, who controls the present controls the past.
The above box is an Income Statement, often called a Profit and Loss
Statement. It measures income and expenses. Money in and money out. The bottom
diagram is the Balance Sheet. It is called that because it is
supposed to balance assets against liabilities. Many financial novices
don't know the relationship between the Income Statement and the Balance Sheet.
That relationship is vital to understand.
The primary cause of financial struggle is simply not knowing the
difference between an asset and a liability. The cause of the confusion is found
in the definition of the two words. If you want a lesson in confusion, simply
look up the words "asset" and "liability" in the dictionary.
Now it may make sense to trained accountants, but to the average person,
it may as well be written in Mandarin. You read the words in the definition, but
true comprehension is difficult.
So as I said earlier, my rich dad simply told two young boys that "assets
put money in your pocket." Nice, simple and usable.
"This is Cash Flow pattern of a liability."
+------------------------+
|Income
|
|-------------------------
| Expense |
+-----|\-------------------+
| \------------------------------>
---------------------------|--------+
| Assets | Liabilities |
| |
|_________|____________|
|
Now that assets and liabilities have been defined through pictures, it may
be easier to understand my definitions in words.
An asset is something that puts money in my pocket.
A liability is something that takes money out of my pocket.
This is really all you need to know. If you want to be rich, simply spend
your life buying assets. If you want to be poor or middle class, spend your life
buying liabilities. It's not knowing the difference that causes most of the
financial struggle in the real world.
who controls the past controls the future, who controls the present controls the past.
Illiteracy, both in words and numbers, is the foundation of financial
struggle. If people are having difficulties financially, there is something that
they cannot read, either in numbers or words. Something is misunderstood. The
rich are rich because they are more literate in different areas than people who
struggle financially. So if you want to be rich and maintain your wealth, it's
important to be financially literate, in words as well as numbers.
The arrows in the diagrams represent the flow of cash, or "cash flow."
Numbers alone really mean little. Just as words alone mean little. It's the
story that counts. In financial reporting, reading numbers is looking for the
plot, the story. The story of where the cash is flowing. In 80 percent of most
families, the financial story is a story of working hard in an effort to get
ahead. Not because they don't make money. But because they spend their lives
buying liabilities instead of assets.
For instance, this is the cash flow pattern of a poor person, or a young
person still at home:
Job (provides income)-> Expenses(Taxes Food Rent Clothes Fun
Transportation)
Asset (none)
Liability (none)
This is the cash flow pattern of a person in the middle class:
Job (provides income)-> Expenses(Taxes Food Mortgage Clothes Fun
Transportation)
Asset (none)
Liability (Mortgage Consumer loans Credit Cards)
This is the cash flow pattern of a wealthy person:
Assets(stocks bonds notes real estate intellectual property)->income
(dividends interest rental income royalties)
Liabilities (none)
All of these diagrams were obviously oversimplified. Everyone has living
expenses, the need for food, shelter and clothing.
The diagrams show the flow of cash through a poor, middle class or wealthy
person's life. It is the cash flow that tells the story. It is the story of how
who controls the past controls the future, who controls the present controls the past.
a person handles their money, what they do after they get the money in their
hand.
The reason I started with the story of the richest men in America is to
illustrate the flaw in the thinking of so many people. The flaw is that money
will solve all problems. That is why I cringe whenever 1 hear people ask me how
to get rich quicker. Or where do they start? I often hear, "I'm in debt so I
need lo make more money."
But more money will often not solve the problem; in fact, it may actually
accelerate the problem. Money often makes obvious our tragic human flaws. Money
often puts a spotlight on what we do not know. That is why, all too often, a
person who comes into a sudden windfall of cash-let's say an inheritance, a pay
raise or lottery winnings-soon returns to the same financial mess, if not worse
than the mess they were in before they received the money. Money only
accentuates the cash flow pattern running in your head. If your pattern is to
spend everything you get, most likely an increase in cash will just result in an
increase in spending. Thus, the saying, "A fool and his money is one big party,"
I have said many times that we go to school to gain scholastic skills and
professional skills, both important. We learn to make money with our
professional skills. In the 1960s, when I was in high school, if someone did
well in school academically, almost immediately people assumed this bright
student would go on to be a medical doctor. Often no one asked the child if
they wanted to be a doctor. It was assumed. It was the profession with the
promise of the greatest financial reward.
Today, doctors are facing financial challenges I would not wish on my
worst enemy; insurance companies taking control of the business, managed health
care, government intervention, and malpractice suits, to name a few. Today, kids
want to be basketball stars, golfers like Tiger Woods, computer nerds, movie
stare, rock stars, beauty queens, or traders on Wall Street. Simply because
that is where the fame, money and prestige is. That is the reason it is so hard
to motivate kids in school today. They know that professional success is no
longer solely linked to academic success, as it once was.
Because students leave school without financial skills, millions of
educated people pursue their profession successfully, but later find themselves
struggling financially. They work harder, but don't get ahead. What is missing
from their education is not how to make money, but how to spend money-what to do
after you make it. It's called financial aptitude-what you do with the money
once you make it, how to keep people from taking it from you, how long you keep
it, and how hard that money works for you. Most people cannot tell why they
who controls the past controls the future, who controls the present controls the past.
struggle financially because they don't understand cash flow. A person can be
highly educated, professionally successful and financially illiterate. These
people often work harder than they need to because they learned how to work hard,
but not how to have their money work for them.
The story of bow the quest for a Financial Dream turns into a financial
nightmare. The moving-picture show of hard-working people has a set pattern.
Recently married, the happy, highly educated young couple move in together, in
one of their cramped rented apartments. Immediately, they realize that they
are saving money because two can live as cheaply as
one.
The problem is, the apartment is cramped. They decide to save money to
buy their dream home so they can have kids. They now have two incomes, and they
begin to focus on their careers.
Their incomes begin to increase.
As their incomes go up...their expenses go up as well.
The No. 1 expense for most people is taxes. Many people think it's income
tax, but for most Americans their highest tax is Social Security. As an employee,
it appears as if the Social Security tax combined with the Medicare tax rate is
roughly 7.5 percent, but it's really 15 percent since the employer must match
the Social Security amount. In essence, it is money the employer cannot pay you.
On top of that, you still have to pay income tax on the amount deducted from
your wages for Social Security tax, income you never receive because it went
directly to Social Security through withholding. Then, their liabilities go up.
This is best demonstrated by going back to the young couple. As a result
of their incomes going up, they decide to go out and buy the house of their
dreams. Once in their house, they have a new tax, called property tax. Then,
they buy a new car, new furniture and new appliances to match [heir new house.
Ail of a sudden, they wake up and their liabilities column is full of mortgage
debt and credit-card debt.
They're now trapped in the rat race. A child comes along. They work harder.
The process repeats itself. More money and higher taxes, also called bracket
creep, A credit card comes in the mail. They use it. It maxes out. A loan
company calls and says their greatest "asset," their home, has appreciated in
value. The company offers a "bill consolidation" loan, because their credit is
so good, and tells them the intelligent thing to do is clear off the high-
interest consumer debt by paying off their credit card. And besides, interest on
their home is a tax deduction. They go for it, and pay off those high-interest
credit cards. They breathe a sigh of relief. Their credit cards are paid off.
who controls the past controls the future, who controls the present controls the past.
They've now folded their consumer debt into their home mortgage. Their payments
go down because they extend their debt over 30 years. It is the smart thing to
do.
Their neighbor calls to invite them to go shopping-the Memorial Day sale
is on. A chance to save some money. They say to themselves, "I won't buy
anything. I'll just go look." But just in case they find something, they tuck
that clean credit card inside their wallet.
I run into this young couple all the time. Their names change, but their
financial dilemma is the same. They come to one of my talks to hear what I have
to say. They ask me, "Can you tell us how to make more money?" Their spending
habits have caused them to seek more income.
They don't even know that the trouble is really how they choose to spend
the money they do have, and that is the real cause of their financial struggle.
It is caused by financial illiteracy and not understanding the difference
between an asset and a liability.
More money seldom solves someone's money problems. Intelligence solves
problems, There is a saying a friend of mine says over and over to people in
debt.
"If you find you have dug yourself into a hole... stop digging."
As a child, my dad often told us that the Japanese were aware of three
powers; "The power of the sword, the jewel and the mirror."
The sword symbolizes the power of weapons. America has spent trillions of
dollars on weapons and, because of this, is the supreme military presence in the
world.
The jewel symbolizes the power of money. There is some degree of truth to
the saying, "Remember the golden rule. He who has the gold makes the rules."
The mirror symbolizes the power of self-knowledge. This self-knowledge,
according to Japanese legend, was the most treasured of the three.
The poor and middle class all loo often allow the power of money to
control them. By simply getting up and working harder, failing to ask themselves
if what they do makes sense, they shoot themselves in the foot as they leave for
work every morning. By not fully understanding nioney, the vast majority of
people allow the awesome power of money to control them. The power of money is
used against them.
If they used the power of the mirror, they would have asked themselves,
"Does this make sense?" All too often, instead of trusting their inner wisdom,
that genius inside of them, most people go along with the crowd. They do things
because everybody else does it. They conform rather than question. Often, they
who controls the past controls the future, who controls the present controls the past.
mindlessly repeat what they have been told. Ideas such as "diversify" or "your
home is an asset." "Your home is your biggest investment." "You get a tax break
for going into greater debt." "Get a safe job." "Don't make mistakes." "Don't
take risks."
It is said that the fear of public speaking is a fear greater than death
for most people. According to psychiatrists, the fear of public speaking is
caused by the fear of ostracism, the fear of standing out, the fear of criticism,
the fear of ridicule, the fear of being an outcast. The fear of being different
prevents most people from seeking new ways to solve their problems.
That is why my educated dad said the Japanese valued the power of the
mirror the most, for it is only when we as humans look into the mirror do we
find truth. And the main reason that most people say "Play it safe1' is out of
fear. That goes for anything, be it sports, relationships, career, money.
It is that same fear, the fear of ostracism that causes people to conform
and not question commonly accepted opinions or popular trends. "Your home is an
asset." "Get a bill consolidation loan and get out of debt." "Work harder."
"It's a promotion." "Someday I'll be a vice president." "Save money." "When !
get a raise, I'll buy us a bigger house." "Mutual funds are safe." "Tickle Me
Elmo dolls are out of stock, but I just happen to have one in back that another
customer has not come by for yet."
Many great financial problems are caused by going along with the crowd and
trying to keep up with the Joneses. Occasionally, we all need to look in the
mirror and be true to our inner wisdom rather than our fears.
By the time Mike and I were 16 years old, we began to have problems in
school. We were not bad kids. We just began to separate from the crowd. We
worked for Mike's dad after school and on the weekends. Mike and I often spent
hours after work just sitting at a table with his dad while he held meetings
with his bankers, attorneys, accountants, brokers, investors, managers and
employees. Here was a man who had left school at the age of 13, now directing,
instructing, ordering and asking questions of educated people. They came at his
beck and call, and cringed when he did not approve of them.
Here was a man who had not gone along with the crowd. He was a man who
did his own thinking and detested the words, "We have to do it this way because
that's the way everyone else does it." He also hated the word "can't." If you
wanted him to do something, just say, "I don't think
you can do it."
Mike and I learned more sitting at his meetings than we did in all our
years of school, college included. Mike's dad was not school educated, but he
who controls the past controls the future, who controls the present controls the past.
was financially educated and successful as a result. He use to tell us over and
over again. "An intelligent person hires people who are more intelligent than
they are." So Mike and I had the benefit of spending hours listening to and, in
the process, learning From
intelligent people.
But because of this, both Mike and I just could not go along with the
standard dogma that our teachers preached, And that caused the problems.
Whenever the teacher said, "If you don't get good grades, you won't do well in
the real world," Mike and I just raised our eyebrows. When we were told to
follow set procedures and not deviate from the rules, we could see how this
schooling process actually discouraged creativity. We started to understand why
our rich dad told us that schools were designed to produce good employees
instead of employers.
Occasionally Mike or I would ask our teachers how what we studied was
applicable, or we asked why we never studied money and how it worked. To the
later question, we often got the answer that money was not important, that if we
excelled in our education, the money would follow.
The more we knew about the power of money, the more distant we grew from
the teachers and our classmates.
My highly educated dad never pressured me about my grades. I often
wondered why. But we did begin to argue about money. By the time I was 16, I
probably had a far better foundation with money than both my mom and dad. I
could keep books, I listened to tax accountants, corporate attorneys, bankers,
real estate brokers, investors and so forth. My dad talked to teachers.
One day, my dad was telling me why our home was his greatest investment. A
not-too-pleasant argument took place when I showed him why I thought a house was
not a good investment.
The following diagram illustrates the difference in perception between my
rich dad and my poor dad when it came to their homes. One dad thought his house
was an asset, and the other dad thought it was a liability.
I remember when I drew a diagram for my dad showing him the direction of
cash flow. I also showed him the ancillary expenses that went along with owning
the home. A bigger home meant bigger expenses, and the cash flow kept going out
through the expense column.
Today, I am still challenged on the idea of a house not being an asset.
And 1 know that for many people, it is their dream as well as their largest
investment. And owning your own home is better than nothing. I simply offer an
alternate way of looking at this popular dogma. If my wife and I were to buy a
who controls the past controls the future, who controls the present controls the past.
bigger, more flashy house we realize it would not be an asset, it would be a
liability, since it would take money out of
our pocket.
So here is the argument I put forth. I really do not expect most people to
agree with it because a nice home is an emotional thing. And when it comes to
money, high emotions tend to lower financial intelligence. 1 know from personal
experience that money has a way of making every decision emotional.
1. When it comes to houses, I point out that most people work all their
lives paying for a home they never own. In other words, most people buy a new
house every so many years, each time incurring a new 30-year loan to pay off the
previous one.
2. Even though people receive a tax deduction for interest on mortgage
payments, they pay for all their other expenses with after-tax dollars. Even
after they pay off their mortgage.
3. Property taxes. My wife's parents were shocked when the property taxes
on their home went to $1,000 a month. This was after they had retired, so the
increase put a strain on their retirement budget, and they felt forced to move.
4 Houses do not always go up in value. In 1997, I still have friends who
owe a million dollars for a home that will today sell for only $700,000.
5. The greatest losses of all are those from missed opportunities. If all
your money is tied up in your house, you may be forced to work harder because
your money continues blowing out of the expense column, instead of adding to the
asset column, the classic middle class cash flow pattern. If a young couple
would put more money into their asset column early on, their later years would
get easier, especially as they prepared to send their children to college. Their
assets would have grown and would be available to help cover expenses. All too
often, a house only serves as a vehicle for incurring a home-equity loan to pay
for mounting expenses. In summary, the end result in making a decision to own a
house that is too expensive in lieu of starting an investment portfolio early on
impacts an individual in at least the following three ways:
1. Loss of time, during which other assets could have grown in value.
2. Loss of additional capital, which could have been invested instead of
paying for high-maintenance expenses related directly to the home.
3. Loss of education. Too often, people count their house, savings and
retirement plan as all they have in their asset column. Because they have no
money to invest, they simply do not invest. This costs them investment
who controls the past controls the future, who controls the present controls the past.
experience. Most never become what the investment world calls a "sophisticated
investor." And the best investments are usually first sold to "sophisticated
investors," who then turn around and sell them to the people playing it safe. I
am not saying don't buy a house. I am saying, understand the difference between
an asset and a liability. When I want a bigger house, I first buy assets that
will generate the cash flow to pay for the house.
My educated dad's personal financial statement best demonstrates the life
of someone in the rat race. His expenses seem to always keep up with his income,
never allowing him to invest in assets. As a result, his liabilities, such as
his mortgage and credit card debts are larger than his assets. The following
picture is worth a thousand words:
Educated Dad's Financial Statement
Income=Expense
Asset < Liability
My rich dad's personal financial statement, on the other hand, reflects
the results of a life dedicated to investing and minimizing liabilities:
Rich Dad's Financial Statement
Income > Expense
Asset > Liability
A review of my rich dad's financial statement is why the rich get richer.
The asset column generates more than enough income to cover expenses, with the
balance reinvested into the asset column. The asset column continues to grow and,
therefore, the income it produces grows with it.
The result being: The rich get richer!
Why the Rich Get Richer
Income -> Assets -> More Income
Expenses are low, Liabilities are low
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
who controls the past controls the future, who controls the present controls the past.
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 on investing in income-producing assets.
Why the Middle Class Struggle
Income goes up, Expenses go up
Assets do not increase, Liabilities do increase
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.
The massive loss of jobs in the 1990s-the downsizing of businesses-has
brought to light how shaky the middle class really is financially. Suddenly,
company pension plans are being replaced by 401k plans. Social Security is
obviously in trouble and cannot be looked at as a source for retirement. Panic
has sei in for the middle class. The good thing today is that many of these
people have recognized these issues and have begun buying mutual funds. This
increase in investing is largely responsible for the huge rally we have seen in
the stock market. Today, there are more and more mutual funds being created to
answer the demand by the middle class.
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 ii 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.
who controls the past controls the future, who controls the present controls the past.
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 for $5,000 are soon turned into $1 million or more.
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 the masses do, you get the following picture.
Income = Work for Owner
Expense = Work for Government
Asset = (none)
Liability = Work for Bank
As an employee who is also a homeowner, your working efforts are generally
as follows:
1. You work for someone else. Most people, working for a paycheck, are
making the owner, or the shareholders richer. Your efforts and success will help
provide for the owner's success and retirement.
2. You work for the government. The government takes its share from your
paycheck before you even see it. By working harder, you simply increase the
amount of taxes taken by the government - most people work from January to May
just for the government.
3. You work for the bank. After taxes, your next largest expense is
usually your mortgage and credit card debt.
The problem with simply working harder is that each of these three levels
takes a greater share of your increased efforts. You need to learn how to have
your increased efforts benefit you and your family directly.
who controls the past controls the future, who controls the present controls the past.
Once you have decided to concentrate on minding your own business, how do
you set your goals? For most people, they must keep their profession and rely
on their wages to fund their acquisition of assets.
As their assets grow, how do they measure the extent of their success?
When does someone realize that they are rich, that they have wealth? As well as
having my own definitions for assets and liabilities, I also have my own
definition for wealth. Actually I borrowed it from a man named Buckminster
Fuller. Some call him a quack, and others call him a living genius. Years ago
he got all the architects buzzing because he applied for a patent in 1961 for
something called a geodesic dome. But in the application, Fuller also said
something about wealth. It was pretty confusing at first, but after reading it
for awhile, it began to make some sense: Wealth is a person's ability to survive
so many number of days forward... or if I stopped working today, how long could
I survive?
Unlike net worth-the difference between your assets and liabilities, which
is often filled with a person's expensive junk and opinions of what things are
worth-this definition creates the possibility for developing a truly accurate
measurement. I could now measure and really know where I was in terms of my
goal to become financially independent.
Although net worth often includes these non-cash-producing assets, like
stuff you bought that now sits in your garage, wealth measures how much money
your money is making and, therefore, your financial survivability.
Wealth is the measure of the cash flow from the asset column compared with
the expense column.
Let's use an example. Let's say I have cash flow from my asset column of
S"J,000 a month. And I have monthly expenses of 52,000. What is my wealth?
Let's go back to Buckminster Fuller's definition. Using his definition,
how many days forward can I survive? And let's assume a 30-day month. By that
definition, I have enough cash flow for half a month.
When I have achieved $2,000 a month cash flow from my assets, then I will
be wealthy.
So I am not yet rich, but I am wealthy. I now have income generated from
assets each month that fully cover my monthly expenses. If I want to increase my
expenses, I first must increase my cash flow from assets to maintain this level
of wealth. Take notice that it is at this point that I no longer am dependent on
my wages. I have focused on and been successful in building an asset column
that has made me financially independent. If I quit my job today, I would be
able to cover my monthly expenses with the cash flow from my assets.
who controls the past controls the future, who controls the present controls the past.
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. So how
do I start minding my own business? What is the answer? Listen to the founder of
McDonald's.
4. CHAPTER FOUR
Lesson Three: Mind Your Own Business
In 1974, Ray Kroc, the founder of McDonald's, was asked to speak to the
MBA class at the University of Texas at Austin. A dear friend of mine, Keith
Cunningham, was a student in that MBA class. After a powerful and inspiring talk,
the class adjourned and the students asked Ray if he would join them at their
favorite hangout to have a few beers. Ray graciously accepted.
"What business am I in?" Ray asked, once the group had all their beers in
hand.
"Everyone laughed," said Keith. "Most of the MBA students thought Ray was
just fooling around."
No one answered, so Ray asked the question again. "What business do you
think I'm in?"
The students laughed again, and finally one brave soul yelled out, "Ray,
who in the world does not know that you're in the hamburger business."
Ray chuckled. "That is what I thought you would say." He paused and then
quickly said, 'ladies and gentlemen, I'm not in the hamburger business. My
business is real estate."
Keith said that Ray spent a good amount of time explaining his viewpoint.
In their business plan, Ray knew that the primary business focus was to sell
hamburger franchises, but what he never lost sight of was the location of each
franchise. He knew that the real estate and its location was the most
who controls the past controls the future, who controls the present controls the past.
significant factor in the success of each franchise. Basically, the person that
bought the franchise was also paying for, buying, the land under the franchise
for Ray Kroc's organization.
McDonald's today is the largest single owner of real estate in the world,
owning even more than the Catholic Church. Today, McDonald's owns some of the
most valuable intersections and street corners in America, as well as in other
parts of the world.
Keith said it was one of the most important lessons in his life. Today,
Keith owns car washes, but his business is the real estate under those car
washes.
The previous chapter ended with the diagrams illustrating that most people
work for everyone else but themselves. They work first for the owners of the
company, then for the government through taxes, and finally for the bank that
owns their mortgage.
As a young boy, we did not have a McDonald's nearby. Yet, my rich dad was
responsible for teaching Mike and me the same lesson that Ray Kroc talked about
at the University of Texas. It is secret No. 3 of the rich.
The secret is: "Mind your own business/' Financial struggle is often
directly the result of people working all their life for someone else. Many
people will have nothing at the end of their working days.
Again, a picture is worth a thousand words. Here is a diagram of the
income statement and balance sheet that best describes Ray Kroc's advice:
Most people
Your Profession -> Your Income
The Rich
Your Assets -> Your Income
Our current educational system focuses on preparing today's youth to get
good jobs by developing scholastic skills. Their lives will revolve around their
wages, or as described earlier, their income column. And after developing
scholastic skills, they go on to higher levels of schooling to enhance their
professional abilities. They study to become engineers, scientists, cooks,
who controls the past controls the future, who controls the present controls the past.
police officers, artists, writers and so on. These professional skills allow
them to enter the workforce and work for money.
There is a big difference between your profession and your business. Often
I ask people, "What is your business?" And they will say, "Oh I'm a banker."
Then I ask them if they own the bank? And they usually respond. "No, I work
there."
In that instance, they have confused their profession with their business.
Their profession may be a banker, but they still need their own business. Ray
Kroc was clear on the difference between his profession and his business. His
profession was always the same. Me was a salesman. At one time he sold mixers
for milkshakes, and soon thereafter he was selling hamburger franchises- But
while his profession was selling hamburger franchises, his business was the
accumulation of income-producing real estate.
A problem with school is that you often become what you study. So if you
study, say, cooking, you become a chef. If you study the law, you become an
attorney, and a study of auto mechanics makes you a mechanic. The mistake in
becoming what you study is that too many people forget to mind their own
business. They spend their lives minding someone else's business and making that
person rich.
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 income statements.
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."
In some circles, these are sensible ideas. Yet, if you listen to Ray Kroc,
you are still not minding your own business. 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.
The primary reason the majority of the poor and middle class are fiscally
conservative-which means. "I can't afford to take risks"-is that they have no
financial foundation. They have to cling to their jobs. They have to play it
safe.
When downsizing became the "in" thing lo do, millions of workers |
found out their largest so-called asset, their home, was eating them alive, j
who controls the past controls the future, who controls the present controls the past.
Their asset, called a house, still cost them money every month. Their car,
another "asset," was eating them alive. The golf clubs in the garage that cost
$1,000 were not worth 51,000 anymore. Without job security, they had nothing to
fall back on. What they thought were assets could not help them survive in a
time of financial crisis.
1 assume most of us have filled out a credit application for a banker to
buy a house or to buy a car. It is always interesting to look at the "net
worth'1 section. It is interesting because of what accepted banking and
accounting practices allow a person to count as assets.
One day, to get a loan, my financial position did not look too good. So I
added my new golf clubs, my art collection, books, stereo, television, Armani
suits, wristwatches, shoes and other personal effects to boost the number in the
asset column.
But I was turned down for the loan because I had too much investment real
estate. The loan committee did not like that 1 made so much money off of
apartment houses. They wanted to know why I did not have a normal job, with a
salary. They did not question the Armani suits, golf clubs or art collection.
Life is sometimes tough when you do not fit the "standard" profile.
I cringe every time I hear someone say to me that their net worth is a
million dollars or $100,000 dollars or whatever. One of the main reasons net
worth is not accurate is simply because the moment you begin selling your assets,
you are taxed for any gains.
So many people have put themselves in deep financial trouble when they run
short of income. To raise cash, they sell their assets. First, their personal
assets can generally be sold for only a fraction of the value that is listed in
their personal balance sheet. Or if there is a gain on the sale of the assets,
they are taxed on the gain. So again, the government takes its share of the gain,
thus reducing the amount available to help them out
Of debt. That is why I say someone's net worth is often "worth less" than
they think.
Start minding your own business. Keep your daytime job, but start buying
real assets, not liabilities or personal effects that have no real value once
you get them home. A new car loses nearly 25 percent of the price you pay for it
the moment you drive it off the lot. It is not a true asset even if your banker
lets you list it as one. My $400 new titanium driver was worth S150 the moment
I teed off.
For adults, keep your expenses low, reduce your liabilities and diligently
build a base of solid assets. For young people who have not yet left home, it is
who controls the past controls the future, who controls the present controls the past.
important for parents to teach them the difference between an asset and a
liability. Get them to start building a solid asset column before they leave
home, get married, buy a house, have kids and get stuck in a risky financial
position, clinging to a job and buying everything on credit. I see so many
young couples who get married and trap themselves into a lifestyle that will not
let them get out of debt for most of their working years.
For most people, just as the last child leaves home, the parents realize
they have not adequately prepared for retirement and they begin to scramble to
put some money away. Then, their own parents become ill and they find themselves
with new responsibilities.
So what kind of assets am I suggesting that you or your children acquire?
In my world, real assets fall into several different categories:
1. Businesses that do not require my presence. I own them, but they are
managed or run by other people. If I have to work there, it's not a business.
It becomes my job.
2. Stocks.
3. Bonds.
4. Mutual funds.
5. Income-generating real estate.
6. Notes (lOUs).
7. Royalties from intellectual property such as music, scripts, patents.
8. And anything else that has value, produces income or appreciates and
has a ready market.
As a young boy, my educated dad encouraged me to find a safe job. My rich
dad, on the other hand, encouraged me to begin acquiring assets that I loved.
"If you don't love it, you won't take care of it." I collect real estate simply
because I love buildings and land. I love shopping for them. 1 could look at
them all day long. When problems arise, the problems are not so bad that it
changes my love for real estate. For people who hate real estate, they
shouldn't buy it.
I love stocks of small companies, especially startups. The reason is that
I am an entrepreneur, not a corporate person. In my early years. I worked in
large organizations, such as Standard Oil of California, the U.S. Marine Corps,
and Xerox Corp. I enjoyed my time with those organizations and have fond
memories, but I know deep down I am not a company man. I like starting companies,
not running them. So my slock buys are usually of small companies, and
sometimes I even start the company and take it public. Fortunes are made in
new-stock issues, and I love the game. Many people are afraid of small-cap
who controls the past controls the future, who controls the present controls the past.
companies and call them risky, and they are. But risk is always diminished if
you love what the investment is, understand it and know the game. With small
companies, my investment strategy is to be out of the stock in a year. My real
estate strategy, on the other hand, is to start small and keep trading the
properties up for bigger properties and, therefore, delaying paying taxes on the
gain. This allows the value to increase dramatically. I generally hold real
estate less than seven years.
For years, even while I was with the Marine Corps and Xerox, I did what my
rich dad recommended. I kept my daytime job, but I still minded my own business.
I was active in my asset column. I traded real estate and small stocks. Rich
dad always stressed the importance of financial literacy. The better I was at
understanding the accounting and cash management, the better I would be at
analyzing investments and eventually starting and building my own company.
I would not encourage anyone to start a company unless they really want to.
Knowing what I know about running a company, I would not wish that task on
anyone. There are times when people cannot find employment, where starting a
company is a solution for them. The odds are against success: Nine out of 10
companies fail in five years. Of those that survive the first five years, nine
out of every 10 of those eventually fail, as well. So only if you really have
the desire to own your own company do I recommend it. Otherwise, keep your
daytime job and mind your own business. When I say mind your own business, 1
mean to build and keep your asset column strong. Once a dollar goes into it,
never let it come out. Think of 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.
As your cash flow grows, you can buy some luxuries. An important
distinction is that rich people buy luxuries last, while the poor and middle
class tend to buy luxuries first. The poor and the middle class often buy luxury
items such as big houses, diamonds, furs, jewelry or boats because they want to
look rich. They look rich, but in reality they just get deeper in debt on credit.
The old-money people, the long-term rich, built their asset column first. Then,
the income generated from the asset column bought their luxuries. The poor and
middle class buy luxuries with their own sweat, blood and children's inheritance.
A true luxury is a reward for investing in and developing a real asset.
For example, when my wife and I had extra money coming from our apartment houses,
she went out and bought her Mercedes. It did not take any extra work or risk on
her part because the apartment house bought the car. She did, however, have to
who controls the past controls the future, who controls the present controls the past.
wait for it for four years while the real estate investment portfolio grew and
finally began throwing off enough extra cash flow to pay for the car. But the
luxury, the Mercedes, was a true reward because she had proved she knew how to
grow her asset column. That car now means a lot more to her than simply another
pretty car. It means she used her financial intelligence to afford it.
What most people do is they impulsively go out and buy a new car, or some
other luxury, on credit. They may feel bored and just want a new toy. Buying a
luxury on credit often causes a person to sooner or later actually resent that
luxury because the debt on the luxury becomes a financial burden.
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.
5. CHAPTER FIVE
Lesson Four:The History of and The Power of Corporation
I remember in school being told the story of Robin Hood and his Merry Men.
My schoolteacher thought it was a wonderful story of a romantic hero, a Kevin
Costner type, who robbed from the rich and gave to the poor. My rich dad did not
see Robin Hood as a hero. He called Robin Hood a crook.
Robin Hood may be long gone, but his followers live on. How often I still
hear people say, "Why don't the rich pay for it?" Or "The rich should pay more
in taxes and give it to the poor."
It is this idea of Robin Hood, or taking from the rich to give to the poor
that has caused the most pain for the poor and the middle class. The reason the
middle class is so heavily taxed is because of the Robin Hood ideal. The real
reality is that the rich are not taxed. It's the middle class who pays for the
poor, especially the educated upper-income middle class.
Again, to understand fully how things happen, we need to look at the
historical perspective. We need to look at the history of taxes. Although my
highly educated dad was an expert on the history of education, my rich dad
fashioned himself as an expert on the history of taxes.
Rich dad explained to Mike and me that in England and America originally,
there were no taxes. Occasionally there were temporary taxes levied in order to
pay for wars. The king or the president would put the word out and ask everyone
to "chip in." Taxes were levied in Britain for the fight against Napoleon from
who controls the past controls the future, who controls the present controls the past.
1799 to 1816, and in America taxes were levied to pay for the Civil War from
1861 to 1865.
In 1874, England made income tax a permanent levy on its citizens. In 1913,
an income tax became permanent in the United States with the adoption of the
16th Amendment to the Constitution. At one time, Americans were anti-tax. It had
been the excessive tax on tea that led to the famous Tea Party in Boston Harbor,
an incident that helped ignite the Revolutionary War. It took approximately 50
years in both England and '• the United States to sell the idea of a regular
income tax. ;
What these historical dates fail to reveal is that both of these taxes
were initially levied against only the rich. It was this point that rich dad
wanted Mike and me to understand. He explained that the idea of taxes was made
popular, and accepted by the majority, by telling the poor and the middle class
that taxes were created only to punish the rich. This is how the masses voted
for the law, and it became constitutionally legal. Although it was intended to
punish the rich, in reality it wound up punishing the very people who voted for
it, the poor and middle class.
"Once government got a taste of money, the appetite grew," said rich dad.
"Your dad and I are exactly opposite. He's a government bureaucrat, and I am a
capitalist. We get paid, and our success is measured on opposite behaviors. He
gets paid to spend money and hire people. The more he spends and the more people
he hires, the larger his organization becomes. In the government, the larger his
organization, the more he is respected. On the other hand, within my
organization, the fewer people I hire and the less money I spend, the more I am
respected by my investors. That's why I don't like government people. They have
different objectives from most business people. As the government grows, more
and more tax dollars will be needed to support it."
My educated dad sincerely believed that government should help
people. He loved John F. Kennedy and especially the idea of the Peace
Corps. He loved the idea so much that both he and my mom worked for the Peace
Corps training volunteers to go to Malaysia, Thailand and the Philippines. He
always strived for additional grants and increases in his budget so he could
hire more people, both in his job with the Education Department and in the Peace
Corps. That was his job.
From the time I was about 10 years old, I would hear from my rich dad that
government workers were a pack of lazy thieves, and from my poor dad I would
hear how the rich were greedy crooks who should be made to pay more taxes. Both
sides have valid points. It was difficult to go to work for one of the biggest
who controls the past controls the future, who controls the present controls the past.
capitalists in town and come home to a father who was a prominent government
leader. It was not easy knowing who to believe.
Yet, when you study the history of taxes, an interesting perspective
emerges. As I said, the passage of taxes was only possible because the masses
believed in the Robin Hood theory of economics, which was to take from the rich
and give to everyone else. The problem was that the government's appetite for
money was so great that taxes soon needed to be levied on the middle class, and
from there it kept "trickling down."
The rich, on the other hand, saw an opportunity. They do not play by the
same set of rules. As I've stated, the rich already knew about corporations,
which became popular in the days of sailing ships. The rich created the
corporation as a vehicle to limit their risk to the assets of each voyage. The
rich put their money into a corporation to finance the voyage. The corporation
would then hire a crew to sail to the New World to look for treasures. If the
ship was lost, the crew lost their lives, but the loss to the rich would be
limited only to the money they invested for that particular voyage. The diagram
that follows shows how the corporate structure sits outside your personal income
statement and balance sheet.
How the Rich Play the Game
Is reduced/diminished by expenses
Assets ------------------------------------------------> Income
(through personal corporation)
It is the knowledge of the power of the legal structure of the corporation
that really gives the rich a vast advantage over the poor and the middle class.
Having two fathers teaching me, one a socialist and the other a capitalist, I
quickly began to realize that the philosophy of the capitalist made more
financial sense to me. It seemed to me that the socialists ultimately penalized
themselves, due to their lack of financial education. No matter what the "Take
from the rich" crowd came up with, the rich always found a way to outsmart them.
That is how taxes were eventually levied on the middle class. The rich
outsmarted the intellectuals, solely because they understood the power of money,
a subject not taught in schools.
How did the rich outsmart the intellectuals? Once the "Take from the rich"
tax was passed, cash started flowing into government coffers. Initially, people
were happy. Money was handed out to government workers and the rich. It went to
who controls the past controls the future, who controls the present controls the past.
government workers in the form of jobs and pensions. It went to the rich via
their factories receiving government contracts. The government became a large
pool of money, but the problem was the fiscal management of that money. There
really is no recirculation. In other words, the government policy, if you were a
government bureaucrat, was to avoid having excess money. If you failed to spend
your allotted funding, you risked losing it in the next budget.
You would certainly not be recognized for being efficient. Business
people, on the other hand, are rewarded for having excess money and are
recognized for their efficiency.
As this cycle of growing government spending continued, the demand for
money increased and the "Tax the rich" idea was now being adjusted to include
lower-income levels, down to the very people who voted it in, the poor and the
middle class.
True capitalists used their financial knowledge to simply find a way to
escape. They headed back to the protection of a corporation. A corporation
protects the rich. But what many people who have never formed a corporation do
not know is that a corporation is not really a thing. A corporation is merely a
file folder with some legal documents in it, sitting in some attorney's office
registered with a state government agency. It's not a big building with the name
of the corporation on it. It's not a factory or a group of people. A corporation
is merely a legal document that creates a legal body without a soul. The wealth
of the rich was once again protected. Once again, the use of corporations became
popular-once the permanent income laws were passed- because the income-tax rate
of the corporation was less than the individual income-tax rates. In addition,
as described earlier, certain expenses could be paid with pre-tax dollars within
the corporation.
This war between the haves and have-nots has been going on for hundreds of
years. It is the "Take from the rich" crowd versus the rich. The battle is waged
whenever and wherever laws are made. The battle will go on forever. The problem
is, the people who lose are the uninformed. The ones who get up every day and
diligently go to work and pay taxes. If they only understood the way the rich
play the game, they could play it too. Then, they would be on their way to their
own financial independence. This is why I cringe every time I hear a parent
advise their children to go to school, so they can find a safe, secure job. An
employee with a safe, secure job, without financial aptitude, has no escape.
Average Americans today work five to six months for the government before
they make enough to cover their taxes. In my opinion, that is a long time. The
who controls the past controls the future, who controls the present controls the past.
harder you work, the more you pay the government. That is why I believe that the
idea of "Take from the rich" backfired on the very people who voted it in.
Every time people try to punish the rich, the rich don't simply
comply, they react. They have the money, power and intent to change things.
They do not just sit there and voluntarily pay more taxes. They search for ways
to minimize their tax burden. They hire smart attorneys j and accountants, and
persuade politicians to change laws or create legal loopholes. They have the
resources to effect change.
The Tax Code of the United States also allows other ways to save on taxes.
Most of these vehicles are available to anyone, but it is the rich who usually
look for them because they are minding their own business. For example, "1031"
is jargon for Section 1031 of the Internal Revenue Code, which allows a seller
to delay paying taxes on a piece of real estate; that is sold for a capital gain
through an exchange for a more expensive piece of real estate. Real estate is
one investment vehicle that allows such a great tax advantage. As long as you
keep trading up in value, you I will not be taxed on the gains, until you
liquidate. People who do not take advantage of these tax savings offered legally
are missing a great opportunity to build their asset columns.
The poor and middle class do not have the same resources. They sit there
and let the government's needles enter their arm and allow the blood donation to
begin. Today, I am constantly shocked at the number of people who pay more taxes,
or take fewer deductions, simply because they are afraid of the government. And
I do know how frightening and intimidating a government tax agent can be. I
have had friends who have had their businesses shut down and destroyed, only to
find out it was a mistake on the part of the government. I realize all that. But
the price of working from January to mid-May is a high price to pay for that
intimidation. My poor dad never fought back. My rich dad didn't either. He just
played the game smarter, and he did it through corporations-the biggest secret
of the rich.
You may remember the first lesson I learned from my rich dad. I was a
little boy of 9 who had to sit and wait for him to choose to talk to me. I often
sat in his office waiting for him to "get to me." He was ignoring me on purpose.
He wanted me to recognize his power and desire to have that power for myself one
day. For all the years I studied J and learned from him, he always reminded me
that knowledge was power. And with money comes great power that requires the
right knowledge to keep it and make it multiply. Without that knowledge, the
world pushes you around. Rich dad constantly reminded Mike and me that the
who controls the past controls the future, who controls the present controls the past.
biggest bully was not the boss or the supervisor, but the tax man. The tax man
will always take more if you let him.
The first lesson of having money work for me, as opposed to working for
money, is really all about power. If you work for money, you give the power up
to your employer. If your money works for you, you keep and control the power.
Once we had this knowledge of the power of money working for us, he wanted
us to be financially smart and not let bullies push us around. You need to know
the law and how the system works. If you're ignorant, it is easy to be bullied.
If you know what you're talking about, you have a fighting chance. That is why
he paid so much for smart tax accountants and attorneys. It was less expensive
to pay them than pay the government. His best lesson to me, which I have used
most of my life, is "Be smart and you won't be pushed around as much." He knew
the law because he was a law-abiding citizen. He knew the law because it was
expensive to not know the law. "If you know you're right, you're not afraid of
fighting back." Even if you are taking on Robin Hood and his band of Merry Men.
My highly educated dad always encouraged me to seek a good job with a
strong corporation. He spoke of the virtues of "working your way up the
corporate ladder." He didn't understand that, by relying solely on a paycheck
from a corporate employer, I would be a docile cow ready for milking.
When I told my rich dad of my father's advice, he only chuckled. "Why not
own the ladder?" was all he said.
As a young boy, I did not understand what rich dad meant by owning my own
corporation. It was an idea that seemed impossible, and intimidating. Although I
was excited by the idea, my youth would not let me envision the possibility that
grownups would someday work for a company I would own.
The point is, if not for my rich dad, I would have probably followed my
educated dad's advice. It was merely the occasional reminder of my rich dad that
kept the idea of owning my own corporation alive and kept me on a different path.
By the time I was 15 or 16, I knew I was not going to continue down the path my
educated dad was recommending. I did not know how I was going to do it, but I
was determined not to head in the direction most of my classmates were heading.
That decision changed my life.
It was not until I was in my mid-20s that my rich dad's advice began to
make more sense. I was just out of the Marine Corps and working for Xerox. I was
making a lot of money, but every time I looked at my paycheck, I was always
disappointed. The deductions were so large, and the more I worked, the greater
the deductions. As I became more successful, my bosses talked about promotions
who controls the past controls the future, who controls the present controls the past.
and raises. It was flattering, but I could hear my rich dad asking me in my ear:
"Who are you working for? Who are you making rich?"
In 1974, while still an employee for Xerox, I formed my first corporation
and began "minding my own business." There were already a few assets in my asset
column, but now I was determined to focus on making it bigger. Those paychecks
with all the deductions made all the years of my rich dad's advice make total
sense. I could see the future if I followed my educated dad's advice.
Many employers feel that advising their workers to mind their own business
is bad for business. I am sure it can be for certain individuals. But for me,
focusing on my own business, developing assets, made me a better employee. I now
had a purpose. I came in early and worked diligently, amassing as much money as
possible so I could begin investing in real estate. Hawaii was just set to boom,
and there were 4 fortunes to be made. The more I realized we were in the
beginning stages of a boom, the more Xerox machines I sold. The more I sold, the
more money I made, and, of course, the more deductions there were from my
paycheck. It was inspiring. I wanted out of the trap of being an employee so
badly that I worked harder, not less. By 1978,I was consistently one of the top
five salespeople in sales, often No. 1. I badly wanted out of the rat race.
In less than three years, I was making more in my own little corporation,
which was a real estate holding company, than I was making at Xerox. And the
money I was making in my asset column, in my own corporation, was money working
for me. Not me pounding on doors selling copiers. My rich dad's advice made
much more sense. Soon the cash flow from my properties was so strong that my
company bought me my first Porsche. My fellow Xerox salespeople thought I was
spending my commissions. I wasn't. I was investing my commissions in assets.
My money was working hard to make more money. Each dollar in my asset
column was a great employee, working hard to make more employees and buy the
boss a new Porsche with before-tax dollars. I began to work harder for Xerox.
The plan was working, and my Porsche was the proof.
By using the lessons I learned from my rich dad, I was able to get out of
the "proverbial rat race" of being an employee at an early age. It was made
possible because of the strong financial knowledge I had acquired through these
lessons. Without this financial knowledge, which I call financial IQ, my road to
financial independence would have been much more difficult. I now teach others
through financial seminars in the hope that I may share my knowledge with them.
Whenever I do my talks, I remind people that financial IQ is made up of
knowledge from four broad areas of expertise.
who controls the past controls the future, who controls the present controls the past.
No. 1 is accounting. What I call financial literacy. A vital skill if you
want to build an empire. The more money you are responsible for, the more
accuracy is required, or the house comes tumbling down. This is the left brain
side, or the details. Financial literacy is the ability to read and understand
financial statements. This ability allows you to identify the strengths and
weaknesses of any business.
No. 2 is investing. What I call the science of money making money. This
involves strategies and formulas. This is the right brain side, or the creative
side.
No. 3 is understanding markets. The science of supply and demand. There is
a need to know the "technical" aspects of the market, which is emotion driven;
the Tickle Me Elmo doll during Christmas 1996 is a case of a technical or
emotion-driven market. The other market factor is the "fundamental" or the
economic sense of an investment. Does an investment make sense or does it not
make sense based on the current market conditions.
Many people think the concepts of investing and understanding the market
are too complex for kids. They fail to see that kids know those subjects
intuitively. For those not familiar with the Elmo doll, it was a Sesame Street
character that was highly touted to the kids just before Christmas. Most all
kids wanted one, and put it at the top of their Christmas list. Many parents
wondered if the company intentionally held the product off the market, while
continuing to advertise it for Christmas. A panic set in due to high demand and
lack of supply. Having no dolls to buy in the stores, scalpers saw an
opportunity to make a small fortune from desperate parents. The unlucky parents
who did not find a doll were forced to buy another toy for Christmas. The
incredible popularity of the Tickle Me Elmo doll made no sense to me, but it
serves as an excellent example of supply and demand economics. The same thing
goes on in the stock, bond, real estate and baseball-card markets.
No. 4 is the law. For instance, utilizing a corporation wrapped around the
technical skills of accounting, investing and markets can aid explosive growth.
An individual with the knowledge of the tax advantages and protection provided
by a corporation can get rich so much faster than someone who is an employee or
a small-business sole proprietor. It's like the difference between someone
walking and someone flying. The difference is profound when it comes to long-
term wealth.
who controls the past controls the future, who controls the present controls the past.
1. Tax advantages: A corporation can do so many things that an individual
cannot. Like pay for expenses before it pays taxes. That is a whole area of
expertise that is so exciting, but not necessary to get into unless you have
sizable assets or a business.
Employees earn and get taxed and they try to live on what is left. A
corporation earns, spends everything it can, and is taxed on anything that is
left. It's one of the biggest legal tax loopholes that the rich use. They're
easy to set up and are not expensive if you own investments that are producing
good cash flow. For example; by owning your own corporation - vacations are
board meetings in Hawaii. Car payments, insurance, repairs are company expenses.
Health club membership is a company expense. Most restaurant meals are partial
expenses. And on and on - but do it legally with pre-tax dollars.
2. Protection from lawsuits. We live in a litigious society. Everybody
wants a piece of your action. The rich hide much of their wealth using vehicles
such as corporations and trusts to protect their assets from creditors. When
someone sues a wealthy individual they are often met with layers of legal
protection, and often find that the wealthy person actually owns nothing. They
control everything, but own nothing. The poor and middle class try to own
everything and lose it to the government or to fellow citizens who like to sue
the rich. They learned it from the Robin Hood story. Take from the rich, give to
the poor.
It is not the purpose of this book to go into the specifics of owning a
corporation. But I will say that if you own any kind of legitimate assets, I
would consider finding out more about the benefits and protection offered by a
corporation as soon as possible. There are many books
written on the subject that will detail the benefits and even walk you
through the steps necessary to set up a corporation. One book in particular, Inc.
and Grow Rich provides a wonderful insight into the power of personal
corporations.
Financial IQ is actually the synergy of many skills and talents. But I
would say it is the combination of the four technical skills listed above that
make up basic financial intelligence. If you aspire to great wealth, it is the
combination of these skills that will greatly amplify an individual's financial
intelligence.
In summary
who controls the past controls the future, who controls the present controls the past.
The Rich People With Corporations
Corporations
1. Earn
The People Who Work for
1. Earn
2. Spend
3. Pay Taxes
2. Pay Taxes
3. Spend
As part of your overall financial strategy, we strongly recommend owning
your own corporation wrapped around your assets.
6. CHAPTER SIX
Lesson Five:The Rich Invent Money
Last night, I took a break from writing and watched a TV program on the
history of a young man named Alexander Graham Bell. Bell had just patented his
telephone, and was having growing pains because the demand for his new invention
was so strong. Needing a bigger company, he then went to the giant at that time,
Western Union, and asked them if they would buy his patent and his tiny company.
He wanted $100,000 for the whole package. The president of Western Union scoffed
at him and turned him down, saying the price was ridiculous. The rest is history.
A multi-billion-dollar industry emerged, and AT&T was born.
The evening news came on right after the story of Alexander Graham Bell
ended. On the news was a story of another downsizing at a local company. The
workers were angry and complained that the company ownership was unfair. A
terminated manager of about 45 years of age had his wife and two babies at the
plant and was begging the guards to let him talk to the owners to ask if they
would reconsider his termination. He had just bought a house and was afraid of
losing it. The camera focused in on his pleading for all the world to see.
Needless to say, it held my attention.
I have been teaching professionally since 1984. It has been a great
experience and rewarding. It is also a disturbing profession, for I have
taught thousands of individuals and I see one thing in common in all of us,
myself included. We all have tremendous potential, and we all are blessed with
gifts. Yet, the one thing that holds all of us back is some degree of self-doubt.
It is not so much the lack of technical information that holds us back, but more
the lack of self-confidence. Some are more affected than others.
who controls the past controls the future, who controls the present controls the past.
Once we leave school, most of us know that it is not as much a matter of
college degrees or good grades that count. In the real world outside of
academics, something more than just grades is required. I have heard it called
"guts," "chutzpah," "balls," "audacity," "bravado," "cunning," "daring,"
"tenacity" and "brilliance." This factor, whatever it is labeled, ultimately
decides one's future much more than school grades.
Inside each of us is one of these brave, brilliant and daring characters.
There is also the flip side of that character: people who could get down on
their knees and beg if necessary. After a year in Vietnam, as a Marine Corps
pilot, I intimately got to know both of those characters-inside of me. One is
not better than the other.
Yet, as a teacher, I recognized that it was excessive fear and self-doubt
that were the greatest detractors of personal genius. It broke my heart to see
students know the answers, yet lack the courage to act on the answer. Often in
the real world, it's not the smart that get ahead but the bold.
In my personal experience, your financial genius requires both technical
knowledge as well as courage. If fear is too strong, the genius is suppressed.
In my classes I strongly urge students to learn to take • risks, to be
bold, to let their genius convert that fear into power and brilliance. It works
for some and just terrifies others. I have come to realize that for most people,
when it comes to the subject of money, they would rather play it safe. I have
had to field questions such as: Why take risks? Why should I bother developing
my financial IQ? Why should I become financially literate?
And I answer, "Just to have more options."
There are huge changes up head. Just as I started with the story of the
young inventor Alexander Graham Bell, in the coming years there will be more
people just like him. There will be a hundred people like Bill Gates and hugely
successful companies like Microsoft created every year, all over the world. And
there also will be many more bankruptcies, layoffs and downsizing.
So why bother developing your financial IQ? No one can answer that but you.
Yet, I can tell you why I myself do it. I do it because it is the most exciting
time to be alive. I'd rather be welcoming change than dreading change. I'd
rather be excited about making millions than worrying about not getting a raise.
This period we are in now is a most exciting time, unprecedented in our world's
history. Generations from now, people will look back at this period of time and
remark at what an exciting era it must have been. It was the death of the old
and birth of the new. It was full of turmoil and it was exciting.
who controls the past controls the future, who controls the present controls the past.
So why bother developing your financial IQ? Because if you do, you will
prosper greatly. And if you don't, this period of time will be a frightening one.
It will be a time of watching people move boldly forward while others cling to
decaying life rings.
Land was wealth 300 years ago. So the person who owned the land owned the
wealth. Then, it was factories and production, and America rose to dominance.
The industrialist owned the wealth. Today, it is information. And the person who
has the most timely information owns the wealth. The problem is, information
flies all around the world at the speed of light. The new wealth cannot be
contained by boundaries and borders as land and factories were. The changes will
be faster and more dramatic. There will be a dramatic increase in the number of
new multimillionaires. There also will be those who are left behind.
Today, I find so many people struggling, often working harder, simply
because they cling to old ideas. They want things to be the way they were; they
resist change. I know people who are losing their jobs or their houses, and
they blame technology or the economy or their boss. Sadly they fail to realize
that they might be the problem. Old ideas are their biggest liability. It is a
liability simply because they fail to realize that while that idea or way of
doing something was an asset yesterday, yesterday is gone.
One afternoon I was teaching investing using a board game I had invented,
CASHFLOW, as a teaching tool. A friend had brought someone along to attend the
class. This friend of a friend was recently divorced, had been badly burned in
the divorce settlement, and was now searching for some answers. Her friend
thought the class might help.
The game was designed to help people learn how money works. In playing the
game, they learn about the interaction of the income statement with the balance
sheet. They learn how "cash flows" between
the two and how the road to wealth is through striving to increase your
monthly cash flow from the asset column to the point that it exceeds your j
monthly expenses. Once you accomplish this, you are able to get out of the "Rat
Race" and out onto the "Fast Track".
As I have said, some people hate the game, some love it, and others miss
the point. This woman missed a valuable opportunity to learn something. In the
opening round, she drew a "doodad" card with the boat on it. At first she was
happy. "Oh, I've got a boat." Then, as her friend tried to explain how the
numbers worked on her income statement and balance sheet, she got frustrated
because she "had never liked math. The rest of her table waited while her friend
continued explaining the relationship between the income statement, balance
who controls the past controls the future, who controls the present controls the past.
sheet and monthly cash flow. Suddenly, when she realized how the numbers worked,
it dawned on her that her boat was eating her alive. Later on in the game, she
was also "downsized" and had a child. It was a horrible game for her.
After the class, her friend came by and told me that she was upset. She
had come to the class to learn about investing and did not like the idea that it
took so long to play a silly game.
Her friend attempted to tell her to look within herself to see if the game
"reflected" on herself in any way. With that suggestion, the woman demanded her
money back. She said that the very idea that a game could be a reflection of her
was ridiculous. Her money was promptly refunded and she left.
Since 1984, I have made millions simply by doing what the school system
does not. In school, most teachers lecture. I hated lectures as a student; I was
soon bored and my mind would drift.
In 1984,I began teaching via games and simulations. I always encouraged
adult students to look at games as reflecting back to what they know, and what
they needed to learn. Most importantly, a game reflects back on one's behavior.
It's an instant feedback system. Instead of the teacher lecturing you, the game
is feeding back a personalized lecture, custom made just for you.
The friend of the woman who left later called to give me an update. She
said her friend was fine and had calmed down. In her cooling-off period, she
could see some slight relationship between the game and her life.
Although she and her husband did not own a boat, they did own
everything else imaginable. She was angry after their divorce, both
because he had run off with a younger woman and because after twenty years of
marriage, they had accumulated little in the way of assets. There was virtually
nothing for them to split. Their twenty years of married life had been
incredible fun, but all they had accumulated was a ton of doodads.
She realized that her anger at doing the numbers-the income statement and
balance sheet-came from her embarrassment of not understanding them. She had
believed that finances were the man's job. She maintained the house and did the
entertaining, and he handled the finances. She was now quite certain that in the
last five years of their marriage, he had hidden money from her. She was angry
at herself for not being more aware of where the money was going, as well as for
not knowing about the other woman.
Just like a board game, the world is always providing us with instant
feedback. We could learn a lot if we tuned in more. One day not long ago, I
complained to my wife that the cleaners must have shrunk my pants. My wife
who controls the past controls the future, who controls the present controls the past.
gently smiled and poked me in the stomach to inform me that the pants had not
shrunk, something else had expanded me!
The game CASHFLOW was designed to give every player personal feedback. Its
purpose is to give you options. If you draw the boat card and it puts you into
debt, the question is, "Now what can you do?" How many different financial
options can you come up with? That is the purpose of the game: to teach players
to think and create new and various financial options.
I have watched this game played by more than 1,000 people. The people who
get out of the "Rat Race" in the game the quickest are the people who understand
numbers and have creative financial minds. They recognize different financial
options. People who take the longest are people who are not familiar with
numbers and often do not understand the power of investing. Rich people are
often creative and take calculated risks.
There have been people playing CASHFLOW who gain lots of money in the game,
but they don't know what to do with it. Most of them have not been financially
successful in real life either. Everyone else seems to be getting ahead of them,
even though they have money. And that is true in real life. There are a lot of
people who have a lot of money and do not get ahead financially.
7. CHAPTER SEVEN
Lesson Six:Work to Learn - Don't Work for Money
In 1995,1 granted an interview with a newspaper in Singapore. The young
female reporter was on time, and the interview got under way immediately. We sat
in the lobby of a luxurious hotel, sipping coffee and discussing the purpose of
my visit to Singapore. I was to share the platform with Zig Ziglar. He was
speaking on motivation, and I was speaking on "The Secrets of the Rich."
"Someday, I would like to be a best-selling author like you," she said. I
had seen some of the articles she had written for the paper, and I was impressed.
She had a tough, clear style of writing. Her articles held a reader's interest.
"You have a great style," I said in reply. "What holds you back from
achieving your dream?"
"My work does not seem to go anywhere," she said quietly. "Everyone says
that my novels are excellent, but nothing happens. So I keep my job with the
paper. At least it pays the bills. Do you have any suggestions?"
who controls the past controls the future, who controls the present controls the past.
"Yes, I do," I said brightly. "A friend of mine here in Singapore runs a
school that trains people to sell. He runs sales-training courses for many of
the top corporations here in Singapore, and I think attending one of his courses
would greatly enhance your career."
She stiffened. "Are you saying I should go to school to learn to sell?"
I nodded.
"You aren't serious, are you?"
Again, I nodded. "What is wrong with that?" I was now backpeddling. She
was offended by something, and now I was wishing 11 had not said anything. In my
attempt to be helpful, I found myself defending my suggestion.
"I have a master's degree in English Literature. Why would I go to school
to learn to be a salesperson? I am a professional. I went to school to be
trained in a profession so I would not have to be a salesperson. I hate
salespeople. All they want is money. So tell me why| I should study sales?" She
was now packing her briefcase forcibly. The interview was over.
On the coffee table sat a copy of an earlier best-selling book I wrote. I
I picked it up as well as the notes she had jotted down on her legal pad. | "Do
you see this?" I said pointing to her notes.
She looked down at her notes. "What," she said, confused.
Again, I pointed deliberately to her notes. On her pad she had written
"Robert Kiyosaki, best-selling author."
"It says 'best-selling author,' not best 'writing' author."
Her eyes widened immediately.
"I am a terrible writer. You are a great writer. I went to sales school.
You have a master's degree. Put them together and you get a 'best-selling
author' and a 'best-writing author.'"
Anger flared from her eyes. "I'll never stoop so low as to learn how to
sell. People like you have no business writing. I am a professionally trained
writer and you are a salesman. It is not fair."
The rest of her notes were put away, and she hurried out through the j,
large glass doors into the humid Singapore morning.
At least she gave me a fair and favorable write-up the next morning.
The world is filled with smart, talented, educated and gifted people. We
meet them every day. They are all around us.
A few days ago, my car was not running well. I pulled into a garage, and
the young mechanic had it fixed in just a few minutes. He knew what was wrong by
simply listening to the engine. I was amazed.
The sad truth is, great talent is not enough.
who controls the past controls the future, who controls the present controls the past.
I am constantly shocked at how little talented people earn. I heard the
other day that less than 5 percent of Americans earn more than $100,000 a year.
I have met brilliant, highly educated people who earn less than $20,000 a year.
A business consultant who specializes in the medical trade was telling me how
many doctors, dentists and chiropractors struggle financially. All this time, I
thought that when they graduated, the dollars would pour in. It was this
business consultant who gave me the phrase, "They are one skill away from great
wealth."
What this phrase means is that most people need only to learn and master
one more skill and their income would jump exponentially. I have mentioned
before that financial intelligence is a synergy of accounting, investing,
marketing and law. Combine those four technical skills and making money with
money is easier. When it comes to money, the only skill most people know is to
work hard.
The classic example of a synergy of skills was that young writer for the
newspaper. If she diligently learned the skills of sales and marketing, her
income would jump dramatically. If I were her, I would take some courses in
advertising copywriting as well as sales. Then, instead of working at the
newspaper, I would seek a job at an advertising agency. Even if it were a cut in
pay, she would learn how to communicate in "short cuts" that are used in
successful advertising. She also would spend time learning public relations, an
important skill. She would learn how to get millions in free publicity. Then, at
night and on weekends, she could be writing her great novel. When it was
finished, she would be better able to sell her book. Then, in a short while, she
could be a "best-selling author."
When I first came out with my first book If You Want To Be Rich and Happy,
Don't Go to School? a publisher suggested I change the tide to The Economics of
Education. I told the publisher that with a title like that, I would sell two
books: one to my family and one to my best friend. The problem is, they would
expect it for free. The obnoxious title If You Want To Be Rich and Happy, Don't
Go to School? was chosen because we knew it would get tons of publicity. I am
pro-education and believe in education reform. Otherwise, why would I continue
to press for changing our antiquated educational system? So I chose a title that
would get me on more TV and radio shows, simply because I was willing to be
controversial. Many people thought I was a fruitcake, but the book sold and sold.
When I graduated from the U.S. Merchant Marine Academy in 1969, my
educated dad was happy. Standard Oil of California had hired me for its oil-
tanker fleet. I was a third mate, and the pay was low compared with my
who controls the past controls the future, who controls the present controls the past.
classmates, but it was OK for a first real job after college. My starting pay
was about $42,000 a year, including overtime, and I only had , to work for seven
months. I had five months of vacation. If I had wanted to, I could have taken
the run to Vietnam with a subsidiary shipping company, and easily doubled my pay
instead of taking the five J months' vacation.
I had a great career ahead of me, yet I resigned after six months with the
company and joined the Marine Corps to learn how to fly. My educated dad was
devastated. Rich dad congratulated me.
In school and in the workplace, the popular opinion is the idea of
"specialization." That is, in order to make more money or get promoted, you need
to "specialize." That is why medical doctors immediately begin to seek a
specialty such as orthopedics or pediatrics. The same is true for accountants,
architects, lawyers, pilots and others.
My educated dad believed in the same dogma. That is why he was thrilled
when he eventually achieved his doctorate. He often admitted •;• that schools
reward people who study more and more about less and less.
Rich dad encouraged me to do exactly the opposite. "You want to ' know a
little about a lot" was his suggestion. That is why for years I worked in
different areas of his companies. For awhile, I worked in his accounting
department. Although I would probably never have been an accountant, he wanted
me to learn via "osmosis." Rich dad knew I would pick up "jargon" and a sense of
what is important and what is not. I also worked as a bus boy and construction
worker, as well as in sales, reservations and marketing. He was "grooming" Mike
and me. That is why he insisted we sit in on the meetings with his bankers,
lawyers, accountants and brokers. He wanted us to know a little about every
aspect of his empire.
When I quit my high-paying job with Standard Oil, my educated dad had a
heart-to-heart with me. He was bewildered. He could not understand my decision
to resign from a career that offered high pay, great benefits, lots of time off,
and opportunity for promotion. When he asked me one evening, "Why did you quit?"
I could not explain it to him, as much as I tried. My logic did not fit his
logic. The big problem wasthat my logic was my rich dad's logic.
Job security meant everything to my educated dad. Learning meant
everything to my rich dad.
Educated dad thought I went to school to learn to be a ship's officer.
Rich dad knew that I went to school to study international trade. So as a
student, I made cargo runs, navigating large freighters, oil tankers and
passenger ships to the Far East and the South Pacific. Rich dad emphasized that
who controls the past controls the future, who controls the present controls the past.
I stay in the Pacific instead of taking ships to Europe because he knew that the
"emerging nations" were in Asia, not Europe. While most of my classmates,
including Mike, were partying at their fraternity houses, I was studying trade,
people, business styles and cultures in Japan, Taiwan, Thailand, Singapore, Hong
Kong, Vietnam, Korea, Tahiti, Samoa and the Philippines. I also was partying,
but it was not in any frat house. I grew up rapidly.
Educated dad just could not understand why I decided to quit and join the
Marine Corps. I told him I wanted to learn to fly, but really I wanted to learn
to lead troops. Rich dad explained to me that the hardest part of running a
company is managing people. He had spent three years in the Army; my educated
dad was draft-exempt. Rich dad told me of the value of learning to lead men into
dangerous situations. "Leadership is what you need to learn next," he said. "If
you're not a good leader, you'll get shot in the back, just like they do in
business."
Returning from Vietnam in 1973,1 resigned my commission, even though I
loved flying. I found a job with Xerox Corp. I joined it for one reason, and it
was not for the benefits. I was a shy person, and the thought of selling was the
most frightening subject in the world. Xerox has one of the best sales-training
programs in America.
Rich dad was proud of me. My educated dad was ashamed. Being an
intellectual, he thought that salespeople were below him. I worked with Xerox
for four years until I overcame my fear of knocking on doors and being rejected.
Once I could consistently be in the top five in sales, I again resigned and
moved on, leaving behind another great career with an excellent company.
In 1977,1 formed my first company. Rich dad had groomed Mike and me to
take over companies. So I now had to learn to form them and put them together.
My first product, the nylon and velcro wallet, was manufactured in the Far East
and shipped to a warehouse in New York, near where I had gone to school. My
formal education was complete, and it was time to test my wings. If I failed, I
went broke. Rich dad
thought it best to go broke before 30. "You still have time to recover"
was his advice. On the eve of my 30th birthday, my first shipment
left ,,
Korea for New York.
Today, I still do business internationally. And as my rich dad encouraged
me to do, I keep seeking the emerging nations. Today my investment company
invests in South America, Asia, Norway and Russia. There is an old cliche that
goes, "Job is an acronym for 'Just Over Broke.'" And unfortunately, I would say
who controls the past controls the future, who controls the present controls the past.
that the saying applies to millions of people. Because school does not think
financial intelligence is an intelligence, most workers "live within their
means." They work and they pay the bills.
There is another horrible management theory that goes, "Workers work hard
enough to not be fired, and owners pay just enough so that workers won't quit."
And if you look at the pay scales of most companies, again I would say there is
a degree of truth in that statement.
The net result is that most workers never get ahead. They do what they've
been taught to do: "Get a secure job." Most workers focus on working for pay and
benefits that reward them in the short term, but is often disastrous in the long.
Instead I recommend to young people to seek work for what they will learn, more
than what they will earn. Look down the road at what ; skills they want to
acquire before choosing a specific profession and before getting trapped in the
"Rat Race."
Once people are trapped in the lifelong process of bill paying, they 1
become like those little hamsters running around in those little metal wheels.
Their little furry legs are spinning furiously, the wheel is turning furiously,
but come tomorrow morning, they'll still be in the same cage: great job.
In the movie Jerry Maguire, starring Tom Cruise, there are many great one
liners. Probably the most memorable is "Show me the money." But there is one
line I thought most truthful. It comes from the scene where Tom Cruise is
leaving the firm. He has just been fired, and he is asking the entire company
"Who wants to come with me?" And the whole place is silent and frozen. Only one
woman speaks up and says, "I'd like to but I'm due for a promotion in three
months."
That statement is probably the most truthful statement in the whole movie.
It is the type of statement that people use to keep themselves
busy working away to pay bills. I know my educated dad looked forward to
his pay raise every year, and every year he was disappointed. So he would go
back to school to earn more qualifications so he could get another raise, but
again, it would be another disappointment.
The question I often ask people is, "Where is this daily activity taking
you?" Just like the little hamster, I wonder if people look at where their hard
work is taking them. What does the future hold?
Cyril Brickfield, the former executive director of The American
Association of Retired People, reports that "private pensions are in a state of
chaos. First of all, 50 percent of the workforce today has no pension. That
who controls the past controls the future, who controls the present controls the past.
alone should be of great concern. And 75 to 80 percent of the other 50 percent
have ineffective pensions that pay $55 or $150 or $300 a month."
In his book The Retirement Myth, Craig S. Karpel writes: "I visited the
headquarters of a major national pension consulting firm and met with a managing
director who specializes in designing lush retirement plans for top management.
When I asked her what people who don't have corner offices will be able to
expect in the way of pension income, she said with a confident smile: "The
Silver Bullet.'
" 'What,' I asked, 'is The Silver Bullet?'
"She shrugged, 'If baby boomers discover they don't have enough money to
live on when they're older, they can always blow their brains out.'" Karpel goes
on to explain the difference between the old Defined Benefit retirement plans
and the new 401K plans which are riskier. It is not a pretty picture for most
people working today. And that is just for retirement. When medical fees and
long-term nursing home care are added to the picture, the picture is frightening.
In his 1995 book, he indicates that nursing-home fees run from $30,000 to
$125,000 per year. He went to a clean no-frills nursing home in his area and
found the price to be $88,000 a year in 1995.
Already, many hospitals in countries with socialized medicine need to make
tough decisions such as "Who will live and who will die?" They make those
decisions purely on how much money they have and how old the patients are. If
the patient is old, they often will give the medical care to someone younger.
The older poor patient gets put to the back of the line. So just as the rich
can afford better education, the rich will be able to keep themselves alive,
while those who have little wealth will die.
So I wonder, are workers looking into the future or just until their next
paycheck, never questioning where they are headed?
When I speak to adults who want to earn more money, I always recommend the
same thing. I suggest taking a long view of their life. Instead of simply
working for the money and security, which I admit are important, I suggest they
take a second job that will teach them a second skill. Often I recommend
joining a network marketing company, also called multilevel marketing, if they
want to learn sales skills. Some of these companies have excellent training
programs that help people get over their fear of failure and rejection, which
are the main reasons people /j are unsuccessful. Education is more valuable than
money, in the long run.
When I offer this suggestion, I often hear in response, "Oh that is too
much hassle," or "I only want to do what I am interested in."
who controls the past controls the future, who controls the present controls the past.
To the statement of "It's too much of a hassle," I ask, "So you would ;
rather work all your life giving 50 percent of what you earn to the government'"
To the other statement-"I only do what I am interested in"-I say, "I'm not
interested in going to the gym, but I go because I want to feel better and live
longer."
Unfortunately, there is some truth to the old statement "You can't teach
an old dog new tricks." Unless a person is used to changing, it's hard to change.
But for those of you who might be on the fence when it comes to the idea
of working to learn something new, I offer this word of encouragement: Life is
much like going to the gym. The most painful part is deciding to go. Once you
get past that, it's easy. There have been many days I have dreaded going to the
gym, but once I am there and in motion, it is a pleasure. After the workout is
over, I am always glad I talked myself into going.
If you are unwilling to work to learn something new and insist on, instead,
becoming highly specialized within your field, make sure the company you work
for is unionized. Labor unions are designed to protect specialists.
My educated dad, after falling from grace with the governor, became the
head of the teachers union in Hawaii. He told me that it was the hardest job he
ever held. My rich dad, on the other hand, spent his life doing his best to keep
his companies from becoming unionized. He was successful. Although the unions
came close, rich dad was always able to fight them off.
Personally, I take no sides because I can see the need for and the
benefits of both sides. If you do as school recommends, become highly
specialized, then seek union protection. For example, had I continued on with my
flying career, I would have sought a company that had a strong pilots union. Why?
Because my life would be dedicated to learn a skill that was valuable in only
one industry. If I were pushed out of that industry, my life's skills would not
be as valuable to another industry. A displaced senior pilot-with 100,000 hours
of heavy airline transport time, earning $150,000 a year-would have a hard time
finding an equivalent high-paying job in school teaching. The skills do not
necessarily transfer from industry to industry, because the skills the pilots
are paid for in the airline industry are not as important in, say, the school
system.
The same is true even for doctors today. With all the changes in medicine,
many medical specialists are needing to conform to medical organizations such as
HMO's. Schoolteachers definitely need to be union members. Today in America, the
teachers union is the largest and the richest labor union of all. The NEA,
National Education Association, has tremendous political clout. Teachers need
who controls the past controls the future, who controls the present controls the past.
the protection of their union because their skills are also of limited value to
an industry outside of education. So the rule of thumb is, "Highly specialized,
then unionize." It's the smart thing to do.
When I ask the classes I teach, "How many of you can cook a better
hamburger than McDonald's?" almost all the students raise their hands. I then
ask, "So if most of you can cook a better hamburger, how come McDonald's makes
more money than you?"
The answer is obvious: McDonald's is excellent at business systems. The
reason so many talented people are poor is because they focus on building a
better hamburger and know little to nothing about business systems.
A friend of mine in Hawaii is a great artist. He makes a sizable amount of
money. One day his mother's attorney called to tell him that she had left him
$35,000. That is what was left of her estate after the attorney and the
government took their shares. Immediately, he saw an opportunity to increase
his business by using some of this money to advertise. Two months later, his
first four-color, full-page ad appeared in an expensive magazine that targeted
the very rich. The ad ran for three months. He received no replies from the ad,
and all of his inheritance is now gone. He now wants to sue the magazine for
misrepresentation.
This is a common case of someone who can build a beautiful hamburger, but
knows little about business. When I asked him what he learned, his only reply
was that "advertising salespeople are crooks." I then asked him if he would be
willing to take a course in sales and a course in direct marketing. His reply,
"I don't have the time, and I don't want to waste my money."
The world is filled with talented poor people. All too often, they're •
poor or struggle financially or earn less than they are capable of, not f
because of what they know but because of what they do not know. They focus on
perfecting their skills at building a better hamburger rather than the skills of
selling and delivering the hamburger. Maybe McDonald's does not make the best
hamburger, but they are the best at f selling and delivering a basic average
burger.
Poor dad wanted me to specialize. That was his view on how to be paid more.
Even after being told by the governor of Hawaii that he could no longer work in
state government, my educated dad continued to encourage me to get specialized.
Educated dad then took up the cause of the teachers union, campaigning for
further protection and benefits for I these highly skilled and educated
professionals. We argued often, but I know he never agreed that
overspecialization is what caused the need for union protection. He never
who controls the past controls the future, who controls the present controls the past.
understood that the more specialized you become, the more you are trapped and
dependent on that specialty.
Rich dad advised that Mike and I "groom" ourselves. Many corporations do
the same thing. They find a young bright student out of business school and
begin "grooming" that person to someday take over the company. So these bright
young employees do not specialize in one department; they are moved from
department to department to learn all the aspects of business systems. The rich
often "groom" their children or the children of others. By doing so, their
children gain an overall knowledge of the operations of the business and how the
various departments interrelate.
For the World War II generation, it was considered "bad" to skip from
company to company. Today, it is considered smart. Since people will skip from
company to company, rather than seek greater specialization, why not seek to
"learn" more than "earn." In the short term, it may earn you less. In the long
term, it will pay off in large dividends.
The main management skills needed for success are:
1. The management of cash flow
2. The management of systems (including yourself and time with family).
3. The management of people.
The most important specialized skills are sales and understanding
marketing. It is the ability to sell--therefore, to communicate to another human
being, be it a customer, employee, boss, spouse or child-that is the base skill
of personal success. It is communication skills such as writing, speaking and
negotiating that are crucial to a life of success. It is a skill that I work on
constantly, attending courses or buying educational tapes to expand my knowledge.
As I have mentioned, my educated dad worked harder and harder the more
competent he became. He also became more trapped the more specialized he got.
Although his salary went up, his choices diminished. Soon after he was locked
out of government work, he found out how vulnerable he really was professionally.
It is like professional athletes who suddenly are injured or are too old to play.
Their once high-paying position is gone, and they have limited skills to fall
back on. I think that is why my educated dad sided so much with unions after
that. He realized how much a union would have benefited him.
Rich dad encouraged Mike and me to know a little about a lot. He
encouraged us to work with people smarter than we were and to bring smart people
who controls the past controls the future, who controls the present controls the past.
together to work as a team. Today it would be called a synergy of professional
specialities.
Today, I meet ex-schoolteachers earning hundreds of thousands of dollars a
year. They earn that much because they have specialized skills in their field as
well as other skills. They can teach as well as sell and market. I know of no
other skills to be more important than selling as well as marketing. The skills
of selling and marketing are difficult for most people primarily due to their
fear of rejection. The better you are at communicating, negotiating and handling
your fear of rejection, the easier life is. Just as I advised that newspaper
writer who wanted to become a "best-selling author," I advise anyone else today.
Being technically specialized has its strengths as well as its weaknesses. I
have friends who are geniuses, but they cannot communicate effectively with
other human beings and, as a result, their earnings are pitiful. I advise them
to just spend a year learning to sell. Even if they earn nothing, their
communication skills will improve. And that is priceless.
In addition to being good learners, sellers and marketers, we need to be
good teachers as well as good students. To be truly rich, we need to be able to
give as well as to receive. In cases of financial or professional struggle,
there is often a lack of giving and receiving. I know many people who are poor
because they are neither good students nor good teachers.
Both of my dads were generous men. Both made it a practice to give first.
Teaching was one of their ways of giving. The more they gave, the more they
received. One glaring difference was in the giving of money. My rich dad gave
lots of money away. He gave to his church, to charities, to his foundation. He
knew that to receive money, you had to give money. Giving money is the secret to
most great wealthy families. That is why there are organizations like the
Rockefeller Foundation and the Ford Foundation. These are organizations designed
to take their wealth and increase it, as well as give it away in perpetuity.
My educated dad always said, "When I have some extra money, I'll give it."
The problem was, there was never any extra. So he worked harder to draw more
money in rather than focus on the most important law of money: "Give and you
shall receive." Instead, he believed in "Receive and then you give."
In conclusion, I became both dads. One part of me is a hard-core
capitalist who loves the game of money making money. The other side is ': a
socially responsible teacher who is deeply concerned with this ever-widening gap
between the haves and have nots. I personally hold the archaic educational
system primarily responsible for this growing gap.
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