Rich Dad Poor Dad | S5 – E31 | Lesson V | Another Way to Develop Financial Intelligence

Another case for developing your financial intelligence over a lifetime is simply that more opportunities are presented to you. And the greater your financial intelligence, the easier it is to tell whether
a deal is good. It’s your intelligence that can spot a bad deal, or make a bad deal good. The more I learn—and there is a lot to learn—the more money I make simply because I gain experience and wisdom as the years go on. I have friends who are playing it safe, working hard at their profession, and failing to gain financial wisdom, which does take time to develop.

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Gaining experience and wisdom, just like in life, is the most important aspect of developing an area of life.

We also own a stock portfolio, surrounded by a corporation that Kim and I call our “personal mutual fund.” We have friends who deal specifically with investors like us who have extra money each month to invest. We buy high-risk, speculative private companies that are just about to go public on a stock exchange in the United States or Canada. An example of how fast gains can be made are 100,000 shares purchased for 25 cents each before the company goes public. Six months later, the company is listed, and the 100,000 shares now are worth $2 each. If the company is well managed, the price keeps going up, and the stock may go to $20 or more per share. There are years when our $25,000 has gone to a million in less than a year.

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Wow! This is just SPECTACULAR! To see this puts a huge smile on my face, and now I’m going to be diving very closely into this because if I’m able to buy into a company before it goes public, I would have completely profited from all of this.

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Rich Dad Poor Dad | S5 – E29 | Lesson V | Continuation of Investing

$40,000 is created in the asset column. Money is invented without being taxed. At 10 percent interest, $4,000 a year in cash flow is added to income. – Robert Kiyosaki

During this depressed market, Kim and I were able to do six of these simple transactions in our spare time. While the bulk of our money was in larger properties and the stock market, we were able to create more than $190,000 in assets (notes at 10 percent interest) in those six “buy, create, and sell” transactions. That comes to approximately $19,000
a year income, much of it sheltered through our private corporation. Much of that $19,000 a year goes to pay for our company cars, gas, trips, insurance, dinners with clients, and other things. By the time the government gets a chance to tax that income, it’s been spent on legally allowed pre-tax expenses.

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During this depressed market, Kim and I were able to do six of these simple transactions in our spare time. While the bulk of our money was in larger properties and the stock market, we were able to create more than $190,000 in assets (notes at 10 percent interest) in those six “buy, create, and sell” transactions. That comes to approximately $19,000 a year income, much of it sheltered through our private corporation. Much of that $19,000 a year goes to pay for our company cars, gas, trips, insurance, dinners with clients, and other things. By the time the government gets a chance to tax that income, it’s been spent on legally allowed pre-tax expenses.

This was a simple example of how money is invented, created, and protected using financial intelligence.

Ask yourself: How long would it take to save $190,000? Would the bank pay you 10 percent interest on your money? And the promissory note is good for 30 years. I hope they never pay me the $190,000. I have to pay a tax if they pay me the principal, and besides, $19,000 paid over 30 years is a little over $500,000 in income.

I have people ask what happens if the person doesn’t pay. That does happen, and it’s good news. That $60,000 home could be taken back and re-sold for $70,000, and another $2,500 collected as a loan-processing fee. It would still be a zero-down transaction in the mind of the new buyer. And the process would go on.

The first time I sold the house, I paid back the $2,000, so technically, I have no money in the transaction. My return on investment (ROI) is infinity. It’s an example of no money making a lot of money.

In the second transaction, when re-sold, I would have put $2,000 in my pocket and re-extended the loan to 30 years. What would my ROI be if I got paid money to make money? I do not know, but it sure beats saving $100 a month, which actually starts out as $150 because it’s after- tax income for 40 years earning low interest. And again, you’re taxed on the interest. That is not too intelligent. It may be safe, but it’s not smart.

A few years later, as the Phoenix real estate market strengthened, those houses we sold for $60,000 became worth $110,000. Foreclosure opportunities were still available, but became rare. It cost a valuable asset, my time, to go out looking for them. Thousands of buyers were looking for the few available deals. The market had changed. It was time to move on and look for other opportunities to put in the asset column.

“You can’t do that here.” “That is against the law.” “You’re lying.”
I hear those comments much more often than “Can you show me how to do that?” The math is simple. You do not need algebra or calculus. And the escrow company handles the legal transaction and the servicing of the payments. I have no roofs to fix or toilets to unplug because the owners do that. It’s their house. Occasionally someone does not pay. And that is wonderful because there are late fees, or they move out and the property is sold again.

Rich Dad Poor Dad | S5 – E28 | Lesson V | The Story of The Economy in Phoenix Circa 1990

That is why I invest in my financial intelligence, developing the most powerful asset I have. I want to be with people moving boldly forward. I do not want to be with those left behind.

I will give you a simple example of creating money. In the early 1990s, the economy of Phoenix, Arizona, was horrible. I was watching a TV show when a financial planner came on and began forecasting doom and gloom. His advice was to save money. “Put $100 away every month,” he said. “In 40 years you will be a multimillionaire.”

Well, putting money away every month is a sound idea. It is one option—the option most people subscribe to. The problem is this: It blinds the person to what is really going on. It causes them to miss major opportunities for much more significant growth of their money. The world is passing them by.

As I said, the economy was terrible at that time. For investors, this is the perfect market condition. A chunk of my money was
in the stock market and in apartment houses. I was short of cash. Because people were giving properties away, I was buying. I was not saving money. I was investing. Kim and I had more than a million dollars in cash working in a market that was rising fast. It was the best opportunity to invest. The economy was terrible. I just could not pass up these small deals.

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.

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Rich Dad Poor Dad | S5 – E27 | Lesson V | The CASHFLOW GAME

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 gently smiled and poked me in the stomach to inform me that the pants had not shrunk. Something else had expanded—me!

The CASHFLOW game 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. Thousands of people throughout the world have played this game. The players who get out of the Rat Race the quickest are the people who understand numbers and have creative financial minds. They recognize different financial options. Rich people are often creative and take calculated risks. People who take the longest are people who are not familiar with numbers and often do not understand the power of investing.

What did you learn about your true behavior from playing the game

Some people playing CASHFLOW gain lots of money in the game, but they don’t know what to do with it. Even though they have money, everyone else seems to be getting ahead of them. 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.

I have watched people playing CASHFLOW complain that the right opportunity cards are not coming their way. So they sit there. I know people who do that in real life. They wait for the right opportunity.

I have watched people get the right opportunity card and then not have enough money. Then they complain that they would have gotten out of the Rat Race if they had had more money. So they sit there. I know people in real life who do that also. They see all the great deals, but they have no money.

And I have seen people pull a great opportunity card, read it out loud, and have no idea that it is a great opportunity. They have the money, the time is right, they have the card, but they can’t see the opportunity staring them in the face. They fail to see how it fits into their financial plan for escaping the Rat Race. And I know more people like that than all the others combined. Most people have an opportunity of a lifetime flash right in front of them, and they fail to see it. A year later, they find out about it, after everyone else got rich.

Financial intelligence is simply having more options. If the opportunities aren’t coming your way, what else can you do to improve your financial position? If an opportunity lands in your lap and you have no money and the bank won’t talk to you, what else can you do to get the opportunity to work in your favor? If your hunch is wrong, and what you’ve been counting on doesn’t happen, how can you turn a lemon into millions? That is financial intelligence. It is not so much what happens, but how many different financial solutions you can think of to turn a lemon into millions. It is how creative you are in solving financial problems.

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Rich Dad Poor Dad | S5 – E26 | Lesson V | The Rich Invent Money

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.”

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.

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 some people move boldly forward while others cling to worn-out life preservers.

Rich Dad Poor Dad | S5 – E25 | Lesson IV | Financial IQ

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

Rich Dad Poor Dad | S5 – E24 | Lesson IV | All Americans Work For The Government

Average Americans today work four to five months for the government just to cover their taxes. In my opinion, that is simply too long. The 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 don’t just sit there and voluntarily pay more taxes. Instead, they search for ways to minimize their tax burden. They hire smart attorneys and accountants, and persuade politicians to change laws or create legal loopholes. They use their resources to effect change.

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My highly educated dad always encouraged me to land 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 inexperience wouldn’t let me envision the possibility that grown-ups would someday work for a company I would own.

Rich Dad Poor Dad | S5 – E21 |You Become What You Study

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.

That is why we hear so often: “I need a raise.” “If only I had a promotion.” “I am going back to school to get more training so I

Financial struggle is often the result of people working all their lives for someone else.

can get a better job.” “I am going to work overtime.” “Maybe I can get a second job.” In some circles, these are sensible ideas. But 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 and play it safe.

So many people have put themselves in deep financial trouble when they run short of income. To raise cash, they sell their assets. But their personal assets can generally be sold for only a fraction of the value that is listed on 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, 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.

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Keep expenses low, reduce liabilities, and diligently build a base of solid assets. For young people who have not yet left home, it is 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.

Rich Dad Poor Dad | S5 – E20 |Lesson III | 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 friend of mine 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,” my friend said. “Most of the MBA students thought Ray was just fooling around.”

No one answered, so Ray asked 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 doesn’t know that you’re in the hamburger business?”

Ray chuckled. “That’s what I thought you would say.” He paused and then quickly added, “Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”

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As my friend tells the story, Ray spent a good amount of time explaining his viewpoint. In his 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 land and its location were the most significant factors in the success of each franchise. Basically, the person who bought the franchise was also buying the real estate under the franchise for Ray Kroc’s organization.

Today, McDonald’s is the largest single owner of real estate in the world, owning even more than the Catholic church. McDonald’s owns some of the most valuable intersections and street corners in America and around the globe.

My friend considers this as one of the most important lessons in his life. Today he owns car washes, but his business is the real estate under those car washes.

The previous chapter presented diagrams illustrating that most people work for everyone 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.

When I was 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 number three of the rich. That secret is: Mind your own business. Financial struggle is often directly the result of people working all their lives for someone else. Many people will simply have nothing at the end of their working days to show for their efforts.

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.

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Rich Dad Poor Dad | S5 – E19 | Building Excess Cash-flow

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 know where I was in terms of my goal to become financially independent.

Although net worth often includes 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 $1,000 a month. And I have monthly expenses of $2,000. What is my wealth?

Let’s go back to Buckminster Fuller’s definition. Using his definition, how many days forward can I survive? Assuming a 30-day month, I have enough cash flow for half a month.

When I achieve $2,000 a month cash flow from my assets, then I will be wealthy.

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 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 becoming rich. Just remember this simple observation:

  • The rich buy assets
  • The poor buy expenses
  • The middle class buy liabilities they think are assets

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