“There is a difference between being poor and being broke. Broke is temporary. Poor is eternal.”
“I don’t work for money!” were words he would repeat over and over. “Money works for me!”
But the truth is that you let life push you into submission. Deep down you were terrified of taking risks. You really wanted to win, but the fear of losing was greater than the excitement of winning. Deep inside, you and only you will know you didn’t go for it. You chose to play it safe.”
The poor and the middle class work for money. The rich have money work for them.
Anger is a big part of the formula, for passion is anger and love combined. When it comes to money, most people want to play it safe and feel secure. So passion does not direct them. Fear does.” “So is that why they’ll take jobs with low pay?” I asked.
“And you don’t?” I asked.
“No, not really,” said rich dad. “If you want to learn to work for money, then stay in school. That is a great place to learn to do that. But if you want to learn how to have money work for you, then I will teach you that. But only if you want to learn.” “Wouldn’t everyone want to learn that?” I asked. He was testing us, and he knew there was a part of our emotions that wanted to take the deal. He understood that every person has a weak and needy part of their soul that can be bought, and he knew that every individual also had a part of their soul that was resilient and could never be bought. It was only a question of which one was stronger.
People’s lives are forever controlled by two emotions: fear and greed.
“The pattern of get up, go to work, pay bills; get up, go to work, pay bills. People’s lives are forever controlled by two emotions: fear and greed. Offer them more money and they continue the cycle by increasing their spending. This is what I call the Rat Race.”
I just knew that I often wondered why grown-ups hurried off to work. It did not seem like much fun, and they never looked that happy, but something kept them going.
“No, it doesn’t. Let me explain the other emotion: desire. Some call it greed, but I prefer desire. It’s perfectly normal to desire something better, prettier, more fun, or exciting. So people also work for money because of desire. They desire money for the joy they think it can buy. But the joy that money brings is often short-lived, and they soon need more money for more joy, more pleasure, more comfort, and more security. So they keep working, thinking money will soothe their souls that are troubled by fear and desire. But money can’t do that.”
“Rich people included,” said rich dad. “In fact, the reason many rich people are rich isn’t because of desire, but because of fear. They believe that money can eliminate the fear of being poor, so they amass tons of it, only to find the fear gets worse. Now they fear losing the money. I have friends who keep working even though they have plenty. I know people who have millions who are more afraid now than when they were poor. They’re terrified of losing it all. The fears that drove them to get rich got worse. That weak and needy part of their soul is actually screaming louder. They don’t want to lose the big houses, the cars and the high life money has bought them. They worry about what their friends would say if they lost all their money. Many are emotionally desperate and neurotic, although they look rich and have more money.”
“I just want you boys to have a chance to avoid the trap caused by those two emotions, fear and desire. Use them in your favor, not against you. That’s what I want to teach you. I’m not interested in just teaching you to make a pile of money. That won’t handle the fear or desire. If you don’t first handle fear and desire, and you get rich, you’ll only be a highly paid slave.”
That is why rich people with lots of money often have more fear the richer they get. Money is the carrot, the illusion. If the donkey could see the whole picture, it might rethink its choice to chase the carrot.” Rich dad went on to explain that a human’s life is a struggle between ignorance and illumination. He explained that once a person stops searching for information and self-knowledge, ignorance sets in. That struggle is a moment-to-moment decision—to learn to open or close one’s mind.
To spend your life living in fear, never exploring your dreams, is cruel. To work hard for money, thinking that it will buy you things that will make you happy is also cruel. To wake up in the middle of the night terrified about paying bills is a horrible way to live. To live a life dictated by the size of a paycheck is not really living a life. Thinking that a job makes you secure is lying to yourself. That’s cruel, and that’s the trap I want you to avoid. I’ve seen how money runs people’s lives. Don’t let that
happen to you. Please don’t let money run your life.” A softball rolled under our table.
“Remember what I said before: A job is only a short-term solution to a long-term problem. Most people have only one problem in mind, and it’s short-term. It’s the bills at the end of the month, the Tar Baby. Money controls their lives, or should I say the fear and ignorance about money controls it. So they do as their parents did. They get up every day and go work for money, not taking the time to ask the question, ‘Is there another way?’ Their emotions now control their thinking, not their heads.”
Rich dad went on to explain that the rich know that money is an illusion, truly like the carrot for the donkey. It’s only out of fear and greed that the illusion of money is held together by billions of people who believe that money is real. It’s not. Money is really made up. It is only because of the illusion of confidence and the ignorance of the masses that this house of cards stands. He talked about the gold standard that America was on, and that each dollar bill was actually a silver certificate. What concerned him was the rumor that we would someday go off the gold standard and our dollars would no longer be backed by something tangible. “If that happens, boys, all hell will break loose. The poor, the middle class, and the ignorant will have their lives ruined simply because they will continue to believe that money is real and that the company they work for, or the government, will look after them.”
Keep working boys, but the sooner you forget about needing a paycheck, the easier your adult life will be. Keep using your brain, work for free, and soon your mind will show you ways of making money far beyond what I could ever pay you. You will see things that other people never see. Most people never see these opportunities because they’re looking for money and security, so that’s all they get. The moment you see one opportunity, you’ll see them for the rest of your life. The moment you do that, I’ll teach you something else. Learn this, and you’ll avoid one of life’s biggest traps.
Our 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. Its roots are implanted deep enough. Then the tree provides shade for your enjoyment. Mike chose to run the empire, and I chose to retire. If they think money will solve problems, they will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.
Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.
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, and the fear of being an outcast. The fear of being different prevents most people from seeking new ways to solve their problems.
It is that same fear, the fear of ostracism, that causes people to conform to, 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 I get a raise, I’ll buy us a bigger house.” “Mutual funds are safe.”
Mike’s dad was not book-smart, but he was financially educated and successful as a result. He told us over and over again, “An intelligent person hires people who are more intelligent than he is.” So Mike and I had the benefit of spending hours listening to and learning from intelligent people.
The middle class finds itself in a constant state of financial struggle. Their primary income is through their salary. As their wages increase, so do their taxes. Their expenses tend to increase in proportion to their salary increase: hence, the phrase “the Rat Race.” They treat their home as their primary asset, instead of investing in income-producing assets.
This pattern of treating your home as an investment, and the philosophy that a pay raise means you can buy a larger home or spend more, is the foundation of today’s debt-ridden society. Increased spending throws families into greater debt and into more financial uncertainty, even though they may be advancing in their jobs and receiving raises on a regular basis. This is high-risk living caused by weak financial education.
• The rich buy assets.
• The poor only have expenses.
• The middle class buy liabilities they think are assets.
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. Many will study further to become engineers, scientists, cooks, police officers, artists, writers, and so on. These professional skills allow them to enter the workforce and work for money.
But 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.
A problem with school is that you often become what you study. So if you study 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, not your income column.
As stated earlier, the number-one 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.
Financial struggle is often the result of people working all their lives for someone else.
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:
• Stocks
• Bonds
• Income-generating real estate
• Notes (IOUs)
• Royalties from intellectual property such as music, scripts, and patents
• Anything else that has value, produces income or appreciates, and has a ready market
I also love stocks of small companies, especially start-ups, because 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 stock buys are usually of small companies. 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 companies and call them risky, and they are. But that risk is 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. On the other hand, my real estate strategy is to start small and keep trading up for bigger properties and, therefore, delay paying taxes on the gain. This allows the value to increase dramatically. I generally hold real estate less than seven years.
Start minding your own business. Keep your daytime job, but start buying real assets, not liabilities.
As your cash flow grows, you can indulge in 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 like 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, build their asset column first. Then the income generated from the asset column buys their luxuries. The poor and middle class buy luxuries with their own sweat, blood, and children’s inheritance.
The Tax Code of the United States also allows other ways to reduce taxes. Most of these vehicles are available to anyone, but it is the rich who find 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 has a great tax advantage.
As long as you keep trading up in value, you will not be taxed on the gains until you liquidate. People who don’t take advantage of these legal tax savings are missing a great opportunity to build their asset columns.
I remind people that financial IQ is made up of knowledge from four broad areas of expertise:
1. Accounting
Accounting is financial literacy or the ability to read numbers. This is 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 which allows you to identify the strengths and weaknesses of any business.
2. Investing
Investing is the science of “money making money.” This involves strategies and formulas which use the creative right-brain side.
3. Understanding markets
Understanding markets is the science of supply and demand. You need to know the technical aspects of the market, which are emotion-driven, in addition to the fundamental or economic aspects of an investment. Does an investment make sense or does it not make sense based on current market conditions?
4. The law
A corporation wrapped around the technical skills of accounting, investing, and markets can contribute to explosive growth. A person who understands the tax advantages and protections 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.
• Tax advantages
A corporation can do many things that an employee cannot, like pay expenses before paying taxes. That is a whole area of expertise that is very exciting. 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 cashflow. For example, by owning your own corporation, your vacations can be board meetings in Hawaii. Car payments, insurance, repairs, and health-club memberships are company expenses. Most restaurant meals are partial expenses, and on and on. But it’s done legally with pre-tax dollars.
• 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, and give it to the poor.
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. Once we leave school, most of us know that it is not so 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 many things; 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 do. 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 got to know both of those characters inside of me intimately. 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 who 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, and 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.”
Land was wealth 300 years ago. So the person who owned the land owned the wealth. Later, wealth was in factories and production, and America rose to dominance. The industrialist owned the wealth. Today, wealth is in information. And the person who has the most timely information owns the wealth. The problem is that information flies 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. I find so many people struggling today, often working harder, simply because they cling to old ideas. They want things to be the way they were, and 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.
Why would you want to increase your financial intelligence? Because you want to be the kind of person who creates your own luck. You take whatever happens and make it better. Few people realize that luck is created, just as money is. And if you want to be luckier and create money instead of working hard, then your financial intelligence is important. If you are the kind of person who is waiting for the right thing to happen, you might wait for a long time. It’s like waiting for all the traffic lights to be green for five miles before you’ll start your trip.
Houses that were once $100,000 were now $75,000. But instead of shopping with local real estate agents, I began shopping at the bankruptcy attorney’s office, or the courthouse steps. In these shopping places, a $75,000 house could sometimes be bought for $20,000 or less. For $2,000, which was loaned to me from a friend for 90 days for $200, I gave an attorney a cashier’s check as a down payment. While the acquisition was being processed, I ran an ad advertising a $75,000 house for only $60,000 and no money down. The phone rang hard and heavy. Prospective buyers were screened and once the property was legally mine, all the prospective buyers were allowed to look at the house. It was a feeding frenzy. The house sold in a few minutes. I asked for a $2,500 processing fee, which they gladly handed over, and the escrow and title company took over from there. I returned the $2,000 to my friend with an additional $200. He was happy, the home buyer was happy, the attorney was happy, and I was happy. I had sold a house for $60,000 that cost me $20,000. The $40,000 was created from money in my asset column in the form of a promissory note from the buyer. Total working time: five hours.
Which one sounds harder to you?
1. Work hard. Pay 50% in taxes. Save what is left. Your savings then earn 5%, which is also taxed.
OR
2. Take the time to develop your financial intelligence. Harness the power of your brain and the asset column.
I have said it before, but it’s worth repeating. Financial intelligence is made up of these four main technical skills:
1. Accounting
Accounting is financial literacy, or the ability to read numbers. This is a vital skill if you want to build businesses or investments.
2. Investing
Investing is the science of money making money.
3. Understanding markets
Understanding markets is the science of supply and demand Alexander Graham Bell gave the market what it wanted. So did Bill Gates. A $75,000 house offered for $60,000 that cost $20,000 was also the result of seizing an opportunity created by the market. Somebody was buying, and someone was selling.
4. The law
The law is the awareness of accounting corporate, state and federal regulations. I recommend playing by the rules.
Most large brokerage houses will not touch speculative transactions in order to protect themselves and their clients. And that is a wise policy. The really hot deals are not offered to people who are novices. Often, the best deals that make the rich even richer are reserved for those who understand the game.
It is not gambling if you know what you’re doing. It is gambling if you’re just throwing money into a deal and praying. The idea in anything is to use your technical knowledge, wisdom, and love of the game to cut the odds down, to lower the risk. Of course, there is always risk. It is financial intelligence that improves the odds. Thus, what is risky for one person is less risky to someone else. That is the primary reason I constantly encourage people to invest more in their financial education than in stocks, real estate, or other markets. The smarter you are, the better chance you have of beating the odds.
You can work if you like or take time off if you choose and use the government tax system in your favor, rather than against you.
If I make great profits in the stock market, I pay my capital-gains tax on the gain and then reinvest what’s left in real estate, again further securing my asset foundation.
In the final chapter of this book, I offer 10 steps that I followed on the road to my financial freedom. But always remember to have fun. When you learn the rules and the vocabulary of investing and begin to build your asset column, I think you’ll find that it’s as fun a game as you’ve ever played.
Sometimes you win and sometimes you learn. But have fun. Most people never win because they’re more afraid of losing. That is why I found school so silly. In school we learn that mistakes are bad, and we are punished for making them. Yet if you look at the way humans are designed to learn, we learn by making mistakes. We learn to walk by falling down. If we never fell down, we would never walk. The same is true for learning to ride a bike. I still have scars on my knees, but today I can ride a bike without thinking. The same is true for getting rich. Unfortunately, the main reason most people are not rich is because they are terrified of losing. Winners are not afraid of losing. But losers are. Failure is part of the process of success. People who avoid failure also avoid success.
There are two kinds of investors:
1. The first and most common type is a person who buys a packaged investment. They call a retail outlet, such as a real estate company, a stockbroker, or a financial planner, and they buy something. It could be a mutual fund, a REIT, a stock or a bond. It is a clean and simple way of investing. An analogy would be a shopper who goes to a computer store and buys a computer right off the shelf.
2. The second type is an investor who creates investments. This investor usually assembles a deal in the same way a person who buys components builds a computer. I do not know the first thing about putting components of a computer together, but I do know how to put pieces of opportunities together, or know people who know how. It is this second type of investor who is the more professional investor.
If you want to be the second type of investor, you need to develop three main skills.
1. Find an opportunity that everyone else missed. You see with your mind what others miss with their eyes. For example, a friend bought this rundown old house. It was spooky to look at. Everyone wondered why he bought it. What he saw that we did not was that the house came with four extra empty lots. He discovered that after going to the title company. After buying the house, he tore the house down and sold the five lots to a builder for three times what he paid for the entire package. He made $75,000 for two months of work. It’s not a lot of money, but it sure beats minimum wage. And it’s not technically difficult.
2. Raise money.
I once bought an apartment house for $1.2 million. I did what is called “tying it up,” with a written contract between seller and buyer. I then raised the $100,000 deposit, which bought me 90 days to raise the rest of the money. Why did I do it? Simply because I knew it was worth $2 million. I never raised the money. Instead, the person who put up the $100,000 gave me $50,000 for finding the deal, took over my position, and I walked away. Total working time: three days. Again, it’s what you know more than what you buy. Investing is not buying. It’s more a case of knowing.
If I failed, I would go broke. Rich dad thought it best to go broke before 30. “You still have time to recover” was his advice.
Job is an acronym for “Just Over Broke.”
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 to that statement. Karpel goes on to explain the difference between the old defined-benefit retirement plans and the new 401(k) plans that are riskier. It is not a pretty picture for most people working today. And that is just for retirement.
So I wonder: Are workers looking into the future or just until their next paycheck, never questioning where they are headed?
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 are unsuccessful. Education is more valuable than money, in the long run.
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 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 selling and delivering a basic average burger.
Rich dad advised that Mike and I groom ourselves. Many corporations do the same thing. They find a young bright student just out of business school and begin grooming that person to someday take over the company.
The most important specialized skills are sales and marketing. The ability to sell—to communicate to another human being, be it a customer, employee, boss, spouse, or child—is the base skill of personal success. Communication skills such as writing, speaking, and negotiating are crucial to a life of success. These are skills I work on constantly, attending courses or buying educational resources to expand my knowledge.
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 together to work as a team. Today it would be called a synergy of professional specialties.
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.
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 part 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.
The primary difference between a rich person and a poor person is how they manage fear. Rich dad knew that failure would only make him stronger and smarter. It’s not that he wanted to lose. He just knew who he was and how he would take a loss. He would take a loss and make it a win. That’s what made him a winner and others losers. It gave him the courage to cross the line when others backed out.
Failure inspires winners. Failure defeats losers.
Repeating Fran Tarkenton’s quote, “Winning means being unafraid to lose.”
Do not do what poor and middle-class people do: put their few eggs in many baskets. Put a lot of your eggs in a few baskets and FOCUS: Follow One Course Until Successful.
They go to their financial planners or accountants or stockbrokers and buy a balanced portfolio. Most have lots of cash in CDs, low-yield bonds, mutual funds that can be traded within a mutual-fund family, and a few individual stocks. It is a safe and sensible portfolio. But it is not a winning portfolio. It is a portfolio of someone playing not to lose.
Losers avoid failing. And failure turns losers into winners. In another example, I hold a small portion of my assets in tax-lien certificates instead of CDs. I earn 16 percent per year on my money, which certainly beats the interest rates banks offer on CDs. The certificates are secured by real estate and enforced by state law, which is also better than most banks. The formula they’re bought on makes them safe. They just lack liquidity. So I look at them as 2- to 7-year CDs. Almost every time I tell someone that I hold my money this way, especially if they have money in CDs, they will tell me it’s risky. They tell me why I should not do it. When I ask them where they get their information, they say from a friend or an investment magazine. They’ve never done it, and they’re telling someone who’s doing it why they shouldn’t. The lowest yield I look for is 16 percent, but people who are filled with doubt are willing to accept a far lower return. Doubt is expensive.
If most people understood how a “stop” worked in stock-market investing, there would be more people investing to win instead of investing not to lose. A stop is simply a computer command that sells your stock automatically if the price begins to drop, helping to minimize your losses and maximize some gains. It’s a great tool for those who are terrified of losing.
Rich dad gave me a way of looking at Chicken Little. “Just do what Colonel Sanders did.” At the age of 66, he lost his business and began to live on his Social Security check. It wasn’t enough. He went around the country selling his recipe for fried chicken. He was turned down 1,009 times before someone said yes. And he went on to become a multimillionaire at an age when most people are quitting. “He was a brave and tenacious man,” rich dad said of Harlan Sanders. So when you’re in doubt and feeling a little afraid, just do what Colonel Sanders did to his little chicken. He fried it.
While they desire to have the finer things that life offers, most have been conditioned subconsciously to say, “I can’t have that,” or “I’ll never be able to afford that.” So how do you beat laziness? Once again, the answer is a little greed. It’s that radio station WII-FM, which stands for “What’s In It For Me?” A person needs to sit down and ask, “What would my life be like if I never had to work again?” “What would I do if I had all the money I needed?” Without that little greed, the desire to have something better, progress is not made. Our world progresses because we all desire a better life. New inventions are made because we desire something better. We go to school and study hard because we want something better. So whenever you find yourself avoiding something you know you should be doing, then the only thing to ask yourself is, “What’s in it for me?” Be a little greedy. It’s the best cure for laziness.
Too much greed, however, as anything in excess can be, is not good. But just remember what Michael Douglas said in the movie Wall Street: “Greed is good.” Rich dad said it differently: “Guilt is worse than greed, for guilt robs the body of its soul.” I think Eleanor Roosevelt said it best: “Do what you feel in your heart to be right—for you’ll be criticized anyway. You’ll be damned if you do, and damned if you don’t.”
“So you see, after paying myself, the pressure to pay my taxes and the other creditors is so great that it forces me to seek other forms of income. The pressure to pay becomes my motivation. I’ve worked extra jobs, started other companies, traded in the stock market, anything just to make sure those guys don’t start yelling at me. That pressure made me work harder, forced me to think, and all in all, made me smarter and more active when it comes to money. If I had paid myself last, I would have felt no pressure, but I’d be broke.”
“So it is the fear of the government or other people you owe money to that motivates you?”
“That’s right,” said rich dad. “You see, government bill collectors are big bullies. So are bill collectors in general. Most people give into these bullies. They pay them and never pay themselves. It has encouraged us to learn a profession so we can work for money, but failed to teach us how to have money work for us. It taught us not to worry about our financial future because our company or the government would take care of us when our working days are over. However, it is our children, educated in the same school system, who will end up paying for this absence of financial education. The message is still to work hard, earn money, and spend it, and when we run short, we can always borrow more.
I will list a few: first, the “don’t wants,” for they create the “wants.” I don’t want to work all my life. I don’t want what my parents aspired for, which was job security and a house in the suburbs. I don’t like being an employee. I hated that my dad always missed my football games because he was so busy working on his career. I hated it when my dad worked hard all his life and the government took most of what he worked for at his death. He could not even pass on what he worked so hard for when he died. The rich don’t do that. They work hard and pass it on to their children.
Most people simply buy investments rather than first investing in learning about investing.
Wise investors buy an investment when it’s not popular. They know their profits are made when they buy, not when they sell. They wait patiently. As I said, they do not time the market. Just like a surfer, they get in position for the next big swell.
It’s all “insider trading.” There are forms of insider trading that are illegal, and there are forms of insider trading that are legal. But either way, it’s insider trading. The only distinction is: How far away from the inside are you? The reason you want to have rich friends is because that is where the money is made. It’s made on information. You want to hear about the next boom, get in, and get out before the next bust. I’m not saying do it illegally, but the sooner you know, the better your chances are for profits with minimal risk. That is what friends are for. And that is financial intelligence.
When it comes to money, the masses generally have one basic formula they learned in school and it’s this: Work for money. The predominant formula I see in the world is that every day millions of people get up, go to work, earn money, pay bills, balance checkbooks, buy some mutual funds, and go back to work. That is the basic formula, or recipe.
Working hard for money is an old formula born in the day of cavemen.
The three most important management skills necessary to start your own business are management of:
1. Cash flow
2. People
3. Personal time
If I work for money, the government takes it. Although I pay my bills last, I am financially astute enough to not get into a tough financial situation. I don’t like consumer debt. I actually have liabilities that are higher than 99 percent of the population, but I don’t pay for them. Other people pay for my liabilities. They’re called tenants. So rule number one in paying yourself first is: Don’t get into consumer debt in the first place. Although I pay my bills last, I set it up to have only small unimportant bills that are due. When I occasionally come up short, I still pay myself first. I let the creditors and even the government scream. I like it when they get tough. Why? Because those guys do me a favor. They inspire me to go out and create more money. So I pay myself first, invest the money, and let the creditors yell. I generally pay them right away anyway. Kim and I have excellent credit. We just don’t cave in to pressure and spend our savings or liquidate stocks to pay for consumer debt. That is not too financially intelligent.
To successfully pay yourself first, keep the following in mind:
1. Don’t get into large debt positions that you have to pay for. Keep your expenses low. Build up assets first. Then buy the big house or nice car. Being stuck in the Rat Race is not intelligent.
2. When you come up short, let the pressure build and don’t dip into your savings or investments. Use the pressure to inspire your financial genius to come up with new ways of making more money, and then pay your bills. You will have increased your ability to make more money as well as your financial intelligence.
Poor people have poor habits. A common bad habit is innocently called “dipping into savings.” The rich know that savings are only used to create more money, not to pay bills. I know that sounds tough, but as I said, if you’re not tough inside, the world will always push you around anyway.
We go to school to learn a profession so we can work for money. It is my opinion that it’s just as important to learn how to have money work for you. I love my luxuries as much as anyone else. The difference is I don’t buy them on credit. It’s the keep-up-with-the-Joneses trap. When I wanted to buy a Porsche, the easy road would have been to call my banker and get a loan. Instead of choosing to focus in the liability column, I chose to focus in the asset column.
To be the master of money, you need to be smarter than it. Then money will do as it is told. It will obey you. Instead of being a slave to it, you will be the master of it. That is financial intelligence.
• Stop doing what you’re doing. In other words, take a break and assess what is working and what is not working. The definition of insanity is doing the same thing over and over and expecting a different result. Stop doing what is not working, and look for something new.
• Look for new ideas. For new investing ideas, I go to bookstores and search for books on different and unique subjects. I call them formulas. I buy how-to books on formulas I know nothing about.
• Jog, walk, or drive a certain area once a month for 10 minutes. I have found some of my best real estate investments doing this. I will jog a certain neighborhood for a year and look for change. For there to be profit in a deal, there must be two elements: a bargain and change. There are lots of bargains, but it’s change that turns a bargain into a profitable opportunity. So when I jog, I jog a neighborhood I might like to invest in. It is the repetition that causes me to notice slight differences. I notice real estate signs that are up for a long time. That means the seller might be more agreeable to deal. I watch for moving trucks going in or out. I stop and talk to the drivers. I talk to the postal carriers. It’s amazing how much information they acquire about an area. I find a bad area, especially an area that the news has scared everyone away from. I drive it for sometimes a year waiting for signs of some thing changing for the better. I talk to retailers, especially new ones, and find out why they’re moving in. It takes only a few minutes a month, and I do it while doing something else, like exercising, or going to and from the store.
• Shop for bargains in all markets. Consumers will always be poor. When the supermarket has a sale, say on toilet paper, the consumer runs in and stocks up. But when the housing or stock market has a sale, most often called a crash or correction, the same consumer often runs away from it. When the supermarket raises its prices, the consumer shops somewhere else. But when housing or the stock market raise their prices, the same consumer often rushes in and starts buying. Always remember: Profits are made in the buying, not in the selling.
Small thinkers don’t get the big breaks. If you want to get richer, think big.
• Think big. Retailers love giving volume discounts, simply because most business people love big spenders. So even if you’re small, you can always think big. When my company was in the market for computers, I called several friends and asked them if they were ready to buy also. We then went to different dealers and negotiated a great deal because we wanted to buy so many. I have done the same with stocks. Small people remain small because they think small, act alone, or don’t act all.
They have their money work for them,” he was talking about passive income and portfolio income. Passive income, in most cases, is income derived from real estate investments. Portfolio income is income derived from paper assets such as stocks and bonds. Portfolio income is the income that makes Bill Gates the richest man in the world, not earned income. Rich dad used to say, “The key to becoming wealthy is the ability to convert earned income into passive income or portfolio income as quickly as possible.” He would say, “Taxes are highest on earned income. The least taxed income is passive income. That is another reason why you want your money working hard for you. The government taxes the income you work hard for more than the income your money works hard for.”
In my second book, Rich Dad’s CASHFLOW Quadrant, I explain the four different types of people who make up the world of business. They are E (Employee), S (Self-employed), B (Business Owner), and I (Investor). Most people go to school to learn to be an E or an S. The CASHFLOW Quadrant is written about the core differences of these four types and how people can change their quadrant. In fact, most of our products are created for people in the B and I quadrants.
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All of you were given two great gifts: your mind and your time.