Rich Dad Poor Dad for Teens – Robert Kiyosaki

My Reading Notes:

CLICK TO BUY: Wisdom from Rich Dad, Poor Dad for Teens: The Secrets about Money–That You Don’t Learn in School!

One of the reasons the rich get richer, the poor get poorer, and the middle class struggles in debt is because the subject of money is taught at home, not in school. Most of us learn about money from our parents. So what can a poor parent tell their child about money? They simply say “Stay in school and study hard.” The child may graduate with excellent grades but with a poor person’s financial programming and mind-set. It was learned while the child was young. Money is not taught in schools. Schools focus on scholastic and professional skills, but not on financial skills. This explains how smart bankers, doctors and accountants who earned excellent grades in school may still struggle financially all of their lives. Our staggering national debt is due in large part to highly educated politicians and government officials making financial decisions with little or no training on the subject of money.
“Taxes punish those who produce and reward those who don’t produce.” One dad recommended, “Study hard so you can find a good company to work for.” The other recommended, “Study hard so you can find a good company to buy.” One dad said, “The reason I’m not rich is because I have you kids.” The other said, “The reason I must be rich is because I have you kids.” One encouraged talking about money and business at the dinner ,table. The other forbade the subject of money to be discussed over a meal. One said, “When it comes to money, play it safe, don’t take risks.” The other said, “Learn to manage risk.”
Being a product of two strong dads allowed me the luxury of observing the effects different thoughts have on one’s life. I noticed that people really do shape their life through their thoughts.
For example, my poor dad always said, “I’ll never be rich.” And that prophesy became reality. My rich dad, on the other hand, always referred to himself as rich. He would say things like, “I’m a rich man, and rich people don’t do this.” Even when he was flat broke after a major financial setback, he continued to refer to himself as a rich man. He would cover himself by saying, “There is a difference between being poor and being broke. – Broke is temporary, and poor is eternal.” My poor dad would also say, “I’m not interested in money,” or “Money doesn’t matter.” My rich dad always said, “Money is power.” The power of our thoughts may never be measured or appreciated, but it became obvious to me as a young boy to be aware of my thoughts and how I expressed myself. I noticed that my poor dad was poor not because of the amount of money he earned, which was significant, but because of his thoughts and actions. As a young boy, having two fathers, I became acutely aware of being careful which thoughts I chose to adopt as my own. Whom should I listen to-my rich dad or my poor dad?
“Or if you’re the kind of person who has no guts, you just give up every time life pushes you. If you’re that kind of person, you’ll live all your life playing it safe, doing the right things, saving yourself for some event that never happens. Then, you die a boring old man. You’ll have lots of friends who really like you because you were such a nice hard-working guy. You spent a life playing it safe, doing the right things. But the truth is, 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.”
“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. “No,” said rich dad. “Simply because it’s easier to learn to work for money, especially if fear is your primary emotion when the subject of money is discussed.” “I don’t understand,” I said with a frown. “Don’t worry about that for now. Just know that it’s fear that keeps most people working at a job. The fear of not paying their bills. The fear of being fired. The fear of not having enough money. The fear of starting over. That’s the price of studying to learn a profession or trade, and then working for money. Most people become a slave to money… and then get angry at their boss.”
“You’re taxed when you earn. You’re taxed when you spend. You’re taxed when you save. You’re taxed when you die.”
“Most people have a price. And they have a price because of human emotions named fear and greed. First, the fear of being without money motivates us to work hard, and then once we get that paycheck, greed or desire starts us thinking about all the wonderful things money can buy. The pattern is then set.” “What pattern?” I asked. “The pattern of get up, go to work, pay bills, get up, go to work, pay bills… Their lives are then run forever by two emotions, fear and greed. Offer them more money, and they continue the cycle by also increasing their spending. This is what I call the Rat Race.” “There is another way?” Mike asked. “Yes,” said rich dad slowly. “But only a few people find it.” “And what is that way?” Mike asked. “That’s what I hope you boys will find out as you work and study with me. That is why I took away all forms of pay.”
“Instead, they feel the fear of not having money. Instead of confronting the fear, they react instead of think. They react emotionally instead of using their heads,” rich dad said, tapping us on our heads. “’Then, they get a few bucks in their hands, and again the emotion of joy and desire and greed take over, and again they react, instead of think.” “So their emotions do their thinking,” Mike said. “That’s correct,” said rich dad. “Instead of telling the truth about how they feel, they react to their feeling, fail to think. They feel the fear, they go to work, hoping that money will soothe the fear, but it doesn’t. That old fear haunts them, and they go back to work, hoping again that money will calm their fears, and again it doesn’t. Fear has them in this trap of working, earning money, working, earning money, hoping the fear will go away. But every day they get up, and that old fear wakes up with them. For millions of people, that old fear keeps them awake all night, causing a night of turmoil and worry. So they get up and go to work, hoping that a paycheck will kill that fear gnawing at their soul. Money is running their lives, and they refuse to tell the truth about that. Money is in control of their emotions and hence their souls.”
“I want you boys to avoid that trap. That is really what I want to teach you. Not just to be rich, because being rich does not solve the problem.” “It doesn’t?” I asked, surprised. “No, it doesn’t. Let me finish the other emotion, which is desire. Some call it greed, but I prefer desire. It is 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, more security. So they keep working, thinking money will soothe their souls that is troubled by fear and desire. But money cannot do that.”
“In fact, the reason many rich people are rich is not because of desire but because of fear. They actually think that money can eliminate that fear of not having money, of being poor, so they amass tons of it only tofind out the fear gets worse. They now fear losing it. 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 all their money. 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, the high life that 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.”
“Don’t worry about what I just said. It will make more sense in years to come. just be an observer, not a reactor, to your emotions. Most people do not know that it’s their emotions that are doing the thinking. Your emotions are your emotions, but you have got to learn to do your own thinking.” “Can you give me an example?” I asked. “Sure,” replied rich dad. “When a person says, I need to find a job,' it's most likely an emotion doing the thinking. Fear of not having money generates that thought.” “But people do need money if they have bills to pay,” I said. “Sure they do,” smiled rich dad. “All I'm saying is that it's fear that is all too often doing the thinking.” “I don't understand,” said Mike. “For example,” said rich dad. "If the fear of not having enough money arises, instead of immediately running out to get a job so they can earn a few bucks to kill the fear, they instead might ask themselves this question.Will a job be the best solution to this fear over the long run?’ In my opinion, the answer is `no.’ Especially when you look over a person’s lifetime. A job is really a short-term solution to a long-term problem.”
“I want to teach you to master the power of money. Not be afraid of it. And they don’t teach that in school. If you don’t learn it, you become a slave to money.”
I want you always to think of the donkey. Never forget, because your two emotions, fear and desire, can lead you into life’s biggest trap, if you’re not aware of them controlling your thinking. To spend your life living in fear, never exploring your dreams, is cruel. To work hard for money, thinking that money 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 a life. Thinking that a job will make you feel secure is lying to yourself. That’s cruel, and that’s the trap I want you to avoid, if possible. I’ve seen how money runs people’s lives. Don’t let that happen to you. Please don’t let money run your life.”
“That’s what I will be teaching you. I’ll be teaching you to have a choice of thoughts to consider, rather than knee-jerk reacting, like gulping down your morning coffee and running out the door. “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 now runs their lives. Or should I say the fear and ignorance about money. So they do as their parents did, get up every day and go work for money. Not having the time to say, `Is there another way?’ Their emotions now control their thinking, not their heads.”
Anyway, rich dad was excited because he had new things he wanted to teach us. He was happy because we had learned our first lesson so well. We had learned to have money work for us. By not getting paid for our work at the store, we were forced to use our imaginations to identify an opportunity to make money. By starting our own business, the comic-book library, we were in control of our own finances, not dependent on an employer. The best part was that our business generated money for us, even when we weren’t physically there. Our money worked for us. Instead of paying us money, rich dad had given us so much more.
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 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.
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. “Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets”
An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket.
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.
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 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.
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. 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.
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 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.”
“An intelligent person hires people who are more intelligent than they are.”
The middle class finds itself in a constant state of financial struggle. Their primary- income is through wages, and as their wages increase, so do their taxes. Their expenses tend to increase in equal increments as their wages increase; hence the phrase “the rat race.” They treat their home as their primary asset, instead on investing in income-producing assets.
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. 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.
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.
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.
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?
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.
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 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.
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. 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. 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 1. Spend 2. 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.
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.
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.
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. 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.
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 was that my logic was my rich dad’s logic. Job security meant everything to my educated dad. Learning meant everything to my rich dad.
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.
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.” 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.”
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.
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.
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.
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.
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.”
Failure inspires winners. And failure defeats losers. It is the biggest secret of winners. It’s the secret that losers do not know. The greatest secret of winners is that failure inspires winning; thus, they’re not afraid of losing. Repeating Fran Tarkenton’s quote, “Winning means being unafraid to lose.” People like Fran Tarkenton are not afraid of losing because they know who they are. They hate losing, so they know that losing will only inspire them to become better. There is a big difference between hating losing and being afraid to lose. Most people are so afraid of losing money that they lose. They go broke over a duplex. Financially they play life too safe and too small. They buy big houses and big cars, but not big investments. The main reason that over 90 percent of the American public struggles financially is because they play not to lose. They don’t play to win.
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. Don’t get me wrong. It’s probably a better portfolio than more than 70 percent of the population, and that’s frightening. Because a safe portfolio is a lot better than no portfolio. It’s a great portfolio for someone who loves safely. But playing it safe and going “balanced” on your investment portfolio is not the way successful investors play the game. If you have little money and you want to be rich, you must first be “focused,” not “balanced.” If you look at anyone successful, at the start they were not balanced. Balanced people go nowhere. They stay in one spot. To make progress, you must first go unbalanced. Just look at how you make progress walking.
If you hate losing, play it safe. If losing makes you weak, play it safe. Go with balanced investments. If you’re over 25 years old and are terrified of taking risks, don’t change. Play it safe, but start early. Start accumulating your nest egg early because it will take time. But if you have dreams of freedom-of getting out of the rat race- the first question to ask yourself is, “How do I respond to failure?” If failure inspires you to win, maybe you should go for it-but only maybe. If failure makes you weak or causes you to throw temper tantrums-like spoiled brats who call an attorney to file a lawsuit every time something does not go their way-then play it safe. Keep your daytime job. Or buy bonds or mutual funds. But remember, there is risk in those financial instruments also, even though they are safer.
All of us have doubts. “I’m not smart.” “I’m not good enough.” “So ‘$ and so is better than me.” Or our doubts often paralyze us. We play the. | “What if?” game. “What if the economy crashes right after I invest?” Or “What if I lose control and I can’t pay the money back?” “What if things don’t go as I planned?” Or we have friends or loved ones who will remind us of our shortcomings regardless of whether we ask. They often say, “What makes you think you can do that?” Or “If it’s such a good idea, how come someone else hasn’t done it?” Or “That will never work. You don’t know what you’re talking about.” These words of doubt often get so loud that we fail to act. A horrible feeling builds in our stomach. Sometimes we can’t sleep. We fail to move forward. So we stay with what is safe and opportunities pass us by.
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 5 percent the bank offers. 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, especially if they have money in CDs, that I hold my money this way, 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 I yield I look for is 16 percent, but people who are filled with doubt are willing to accept 5 percent. Doubt is expensive.
“Cynics never win,” said rich dad. “Unchecked doubt and fear creates i a cynic. Cynics criticize, and winners analyze” was another of his favorite sayings. Rich dad explained that criticism blinded while analysis opened -< eyes. Analysis allowed winners to see that critics were blind, and to see opportunities that everyone else missed. And finding what people miss is | key to any success.
Instead of analyzing, their little chicken closes their mind. 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. So whenever I hear people focusing on their “I don’t wants,” rather than what they do want, I know the “noise” in their head must be loud. Chicken Little has taken over their brain and is yelling, “The sky is falling and toilets are breaking.” So they avoid their “don’t wants,” but they pay a huge price. They may never get what they want in life.
When I decided to exit the rat race, it was simply a question. “How can I afford to never work again?” And my mind began to kick out answers and solutions. The hardest part was fighting my real parents’ dogma of “We can’t afford that.” Or “Stop thinking only about yourself.” Or “Why don’t you think about others?” and other such words designed to instill guilt to suppress my greed.
“What I know makes me money. What I don’t know loses me money. Every time I have been arrogant, I have lost money. Because when I’m arrogant, I truly believe that what I don’t know is not important,” rich dad would often tell me.
Most people choose not to be rich. For 90 percent of the population, being rich is “too much of a hassle.” So they invent sayings that go, “I’m not interested in money.” Or “I’ll never be rich.” Or “I don’t have to worry, I’m still young.” Or “When I make some money, then I’ll think about my future.” Or “My husband/wife handles the finances.” The problem with those statements is they rob the person who chooses to think such thoughts of two things: one is time, which is your most precious asset, and two is learning. Just because you have no money, should not be an excuse to not learn. But that is a choice we all make daily, the choice of what we do with our time, our money and what we put in our heads. That is the power of choice. All of us have choice. I just choose to be rich, and I make that choice every day.
I often say, “How would Peter Lynch do this, or Donald Trump or Warren Buffett or George Soros?” The only way I can access their vast mental power is to be humble enough to read or listen to what they have to say. Arrogant or critical people are often people with low self-esteem who are afraid of taking risks. You see, if you learn something new, you are then required to make mistakes in order to fully understand what you have learned. If you have read this far, arrogance is not one of your problems. Arrogant people rarely read or buy tapes. Why should they? They are the center of the universe.
CHOOSE FRIENDS CAREFULLY: The power of association. First of all, I do not choose my friends by their financial statements. I have friends who have actually taken the vow of poverty as well as friends who earn millions every year. The point is I learn from all of them, and I consciously make the effort to learn from them.
A WARNING: Don’t listen to poor or frightened people. I have such friends, and I love them dearly, but they are the “Chicken Littles” of life. When it comes to money, especially investments, “The sky is always falling.” They can always tell you why something won’t work. The problem is, people listen to them, but people who blindly accept doom-and-gloom information are also “Chicken Littles.” As that old saying goes, “Chickens of a feather agree together.”
I have had more close friends try to talk me out of a deal or an investment. A few years ago, a friend told me he was excited because he found a 6 percent certificate of deposit. I told him I earn 16 percent from the state government. The next day he sent me an article about why my investment was dangerous. I have received 16 percent for years now, and he still receives 6 percent. I would say that one of the hardest things about wealth building is to be true to yourself and be willing to not go along with the crowd. For in the market, it is usually the crowd that shows up late and is slaughtered. If a great deal is on the front page, it’s too late in most instances. Look for a new deal. As we used to say as surfers: “There is always another wave.” People who hurry and catch a wave late usually are the ones who wipe out.
MASTER A FORMULA AND THEN LEARN A NEW ONE: The power of learning quickly. In order to make bread, every baker follows a recipe, even if it’s only held in their head. The same is true for making money. That’s why money is often called “dough.”
Another side note. In today’s fast-changing world, it’s not so much what you know anymore that counts, because often what you know is old. It is how fast you learn. That skill is priceless. It’s priceless in finding faster formulas-recipes, if you will, for making dough. Working hard for money is an old formula born in the day of cave men.
In the entrepreneur classes I teach, I constantly remind people to not focus on their product, service or widget, but to focus on developing management skills. The three most important management skills necessary to start your own business are: 1. Management of cash flow. 2. Management of people. 3. Management of personal time. I would say, the skills to manage these three apply to anything, not just entrepreneurs. The three matter in the way you live your life as an individual, or as part of a family, a business, a charitable organization, a city or a nation. Each of these skills is enhanced by the mastery of self discipline.
I am not saying be irresponsible. The reason I don’t have high credit card debt, and doodad debt, is because I want to pay myself first. The reason I minimize my income is because I don’t want to pay it to the government. That is why, for those of you who have watched the video The Secrets of the Rich, my income comes from my asset column, through a Nevada corporation. If I work for money, the government takes it.
So the answer is: 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. ; : So many times I have gotten into financial hot water, and used my brain to create more income, while staunchly defending the assets in my asset column. My bookkeeper has screamed and dived for cover, but I was like a good trooper defending the fort, Fort Assets.
If you do not like financial pressure, then find a formula that works for you. A good one is to cut expenses, put your money in the bank, pay more than your fair share of income tax, buy safe mutual funds and take the vow of the average. But this violates the “pay yourself first” rule.
PAY YOUR BROKERS WELL: The power of good advice. I often see people posting a sign in front of their house that says, “For Sale by Owner.” Or I see on TV today many people claiming to be “Discount Brokers.” My rich dad taught me to take the opposite tack. He believed in paying professionals well, and I have adopted that policy also. Today, I have expensive attorneys, accountants, real estate brokers and stockbrokers. Why? Because if, and I do mean if, the people are professionals, their services should make you money. And the more money they make, the more money I make. We live in the Information Age. Information is priceless. A good broker should provide you with information as well as take the time to educate you. I have several brokers who are willing to do that for me. Some taught me when I had little or no money, and I am still with them today. What I pay a broker is tiny in comparison with what kind of money I can make because of the information they provide. I love it when my real estate broker or stockbroker makes a lot of money. Because it usually means I made a lot of money. A good broker saves me time in addition to making me money-as when I bought the piece of vacant land for $9,000 and sold it immediately for over $25,000, so I could buy my Porsche quicker. A broker is your eyes and ears to the market. They’re there every day so I do not have to be. I’d rather play golf. Also, people who sell their house on their own must not value their time much. Why would I want to save a few bucks when I could use that time to make more money or spend it with those I love? What I find funny is that so many poor and middle class people insist on tipping restaurant help 15 to 20 percent even for bad service and complain about paying a broker 3 to 7 percent. They enjoy tipping people in the expense column and stiffing people in the asset column. That is not financially intelligent.
When I interview any paid professional, I first find out how much property or stocks they personally own and what percentage they pay in taxes. And that applies to my tax attorney as well as my accountant. I have an accountant who minds her own business. Her profession is accounting, but her business is real estate. I used to have an accountant that was a small business accountant, but he had no real estate. I switched because we did not love the same business. Find a broker who has your best interests at heart. Many brokers will .’; spend the time educating you, and they could be the best asset you find. Just be fair, and most of them will be fair to you. If all you can think about is cutting their commissions, then why should they want to be around you? It’s just simple logic.
In the world of the “asset column,” being an Indian giver is vital to wealth. The sophisticated investor’s first question is, “How fast do I get my money back?” They also want to know what they get for free, also called a piece of the action. That is why the ROI, or return of and on investment, is so important. For example, I found a small condominium, a few blocks from where I live, that was in foreclosure. The bank wanted $60,000, and I submitted a bid for $50,000, which they took, simply because, along with my bid, was a cashier’s check for $50,000. They realized I was serious. Most investors would say, aren’t you tying up a lot of cash? Would it not be better to get a loan on it? The answer is, not in this case. My investment company uses this as a vacation rental in the winter months, when the “snowbirds” come to Arizona, and rent it for $2,500 a month for four months out of the year. For rental during the off?season, it rents for only $1,000 a month. I had my money back in about three years. Now I own this asset, which pumps money out for me, month in and month out.
On every one of my investments, there must be an upside, something for free. A condominium, a mini-storage, a piece of free land, a house, stock shares, office building. And there must be limited risk, or a low-risk idea. There are books devoted entirely to this subject that I will not get into here. Ray Kroc, of McDonald’s fame, sold hamburger franchises, not because he loved hamburgers, but because he wanted the real estate ; under the franchise for free. So wise investors must look at more than ROI; it’s the assets you get for free once you get your money back. That is financial intelligence.
We go to school to learn a profession so we can work for money. It is my opinion that it is also important to learn how to have money work for you. I love my luxuries as much as anyone else. The difference is, some people buy their luxuries 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. As a habit, I used my desire to consume to inspire and motivate my financial genius to invest. Too often today, we focus to borrowing money to get the things we want instead of focusing on creating money. One is easier in the short term, but harder in the long term. It’s a bad habit that we as individuals and as a nation have gotten into. Remember, the easy road often becomes hard, and the hard road often becomes easy. The earlier you can train yourself and those you love to be masters of money, the better. Money is a powerful force. Unfortunately, people use the power of money against them. If your financial intelligence is low, money will run all over you. It will be smarter than you. If money is smarter than you, you will work for it all your life. 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.
Just as I was not me when I was up to bat, when I’m in the market or I’m negotiating a deal, I am subconsciously acting with the bravado of Trump. Or when analyzing a trend, I look at it as though Peter Lynch were doing it. By having heroes, we tap into a tremendous source of raw genius. But heroes do more than simply inspire us. Heroes make things look easy. It’s the making it look easy that convinces us to want to be just like them. “If they can do it, so can I.” When it comes to investing, too many people make it sound hard. Instead find heroes who make it look easy.
My rich dad would often say, “Poor people are more greedy than rich people.” He would explain that if a person was rich, that person was providing something that other people wanted. In my life, over all these ; years, whenever I have felt needy or short of money or short of help, I simply went out or found in my heart what I wanted, and decided to give it first. And when I gave, it always came back.
My dad taught teachers, and he became a master teacher. My rich dad always taught young people his way of doing business. In retrospect, it was their generosity with what they knew that made them smarter. There are powers in this world that are much smarter than we are. You can get there on your own, but it’s easier with the help of the powers that be. All you need to be is generous with what you have, and the powers will be generous with you.
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 and expecting a different result. Stop doing what is not working and look for something new to do.
Look for new ideas. For new investing ideas, I go to bookstores and look for books on different and unique subjects. I call them formulas. I buy how-to books on a formula I know nothing about. For example, it was in the bookstore that I found the book The 16 Percent Solution, by Joel Moskowitz. I bought the book and read it.
Find someone who has done what you want to do. Take them to lunch. Ask them for tips, for little tricks of the trade.
Take classes and buy tapes. I search the newspapers for new and interesting classes. Many are for free or a small fee. I also attend and pay for expensive seminars on what I want to learn. I am wealthy and free from needing a job simply because of the courses I took. I have friends who did not take those classes who told me I was wasting my money, and yet they’re still at the same job.
Make lots of offers. When I want a piece of real estate, I look at many properties and generally write an offer. If you don’t know what the “right offer” is, neither do I. That is ‘the job of the real estate agent. They make the offers. I do as little work as possible.
Moral of the story: Make offers. People who are not investors have no idea what it feels like to be trying to sell something. I have had a piece of real estate that I wanted to sell for months. I would have welcomed anything. I would not care how low the price. They could have offered me ten pigs and I would have been happy. Not at the offer, but just because someone was interested. I would have countered, maybe for a pig farm in exchange. But that’s how the game works. The game of buying and selling is fun. Keep that in mind. It’s fun and only a game. Make offers. Someone might say “yes.”
Finding a good deal, the right business, the right people, the right investors, or whatever is just like dating. You must go to the market and talk to a lot of people, make a lot of offers, counteroffers, negotiate, reject and accept. I know single people who sit at home and wait for the phone to ring, but unless you’re Cindy Crawford or Tom Cruise, I think you’d best go to the market, even if it’s only the supermarket. Search, offer, reject, negotiate and accept are all parts of the process of almost everything in life. • Jog, walk or drive a certain area once a month for ten minutes. I have found some of my best real estate investments while jogging. I will jog a certain neighborhood for a year. What I look for is 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.
Look in the right places. A neighbor bought a condominium for $100,000. I bought the identical condo next door to his for $50,000. He told me he’s waiting for the price to go up. I told him that his profit is made when you buy, not when you sell. He shopped with a real estate broker who owns no property of her own. I shopped at the foreclosure department of a bank. I paid $500 for a class on how to do this. My neighbor thought that the $500 for a real estate investment class was too expensive. He said he could not afford it, and he couldn’t afford the time. So he waits for the price to go up.
I look for people who want to buy first, then I look for someone who wants to sell. A friend was looking for a certain piece of land. He had the money and did not have the time. I found a large piece of land larger than what my friend wanted to buy, tied it up with an option, called my friend and he wanted a piece of it. So I sold the piece to him and then bought the land. I kept the remaining land as mine for free. Moral of the story: Buy the pie and cut it in pieces. Most people look for what they can afford, so they look too small. They buy only a piece of the pie, so they end up paying more for less. Small thinkers don’t get the big breaks. If you want to get richer, think bigger first.
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.
Action always beats inaction. These are just a few of the things I have done and continue to do to recognize opportunities. The important words being “done” and “do”. As repeated many times throughout the book, you must take action before you can receive the financial rewards. Act now!
Money is only an idea. If you want more money simply change your thinking. Every self-made person started small with an idea, then turned it into something big. The same applies with investing. It takes only a few dollars to start and grow it into something big. I meet so many people who spend their lives chasing the big deal, or trying to mass a lot of money to get into a big deal, but to me that is foolish.
Education and wisdom about money are important. Start early. Buy a book. Go to a seminar. Practice. Start small. I turned $5,000 cash into a $1 million dollar asset producing $5,000 a month cash flow in less than six years. But I started learning as a kid. I encourage you to learn because it’s not that hard. In fact, it’s kind of easy once you get the hang of it.
Today, don’t play it safe, play it smart.
Over 40 years ago, the most important thing my rich dad did for me was spark my curiosity on this subject of investing. My curiosity was aroused when I realized that my best friend’s dad, a man who made less money than my real dad, at least when comparing paycheck to paycheck, could afford to acquire investments that only rich people could afford. I realized that my rich dad had a power my real dad did not have, and I wanted to have that power also.
I realized that my rich dad had a thinking pattern that was almost exactly opposite and often contradicted the thinking of my real dad. I realized that I needed to understand the thinking pattern of my rich dad if I wanted to have the same financial power he had. I knew that if I thought like him, I would be rich forever. I also knew that if I did not think like him, I would never really be rich, regardless of how much money I had. Rich dad had just invested in one of the most expensive pieces of land in our town, and he had no money. I realized that wealth was a way of thinking and not a dollar amount in the bank. It is this thinking pattern of rich investors that I want to deliver to you in this book.
Some time ago, I was teaching a three-day investment course in Sydney, Australia. The first day and a half I discussed the ins and outs of building a business. Finally, in frustration, a participant raised his hand and said, “I came to learn about investing. Why are you spending so much time on business?” My reply was, “There are two reasons. Reason number one is that what we ultimately invest in is a business. If you invest in stocks, you are investing in a business. If you buy a piece of real estate, such as an apartment building, that building is also a business. If you buy a bond, you are also investing in a business. In order to be a good investor, you first need to be good at business. Reason number two is that the best way to invest is to have your business buy your investments for you. The worst way to invest is to invest as an individual. The average investor knows very little about business and often invests as an individual. That is why I spend so much time on the subject of business in an investment course.”
A true investor makes money regardless of whether the market is going up or crashing down. They make money regardless of whether they are winning or losing. The average investor does not know how to do that, and that is why most investors are average investors who fall into the 90 percent that make only 10 percent of the money.
“A sophisticated investor knows the three E’s,” said rich dad. “The three E’s,” I repeated. “What are the three E’s?” Rich dad then turned over the private placement memorandum we were looking at and wrote the following on the back of one of the pages. • Education • Experience • Excess cash “Those are the three E’s,” he said, looking up from the page. “Achieve those three items and you will be a sophisticated investor.” Looking at the three items, I said, “So the movie star had excess cash, but he lacked the first two items.” Rich dad nodded. “And there are many people with the right education, but they lack the experience. And without real-life experience, they often lack the excess cash.” “People like that often say, ‘I know,’ when you explain things to them, but they do not do what they know,” added Mike. “Our banker always says, ‘I know,’ to what dad and I do, but for some reason, he does not do what he claims he knows.” “And that is why your banker lacks the excess cash,” I said.
The idea of job protection for life and job benefits seemed more important, at times, than the job. He would often say, “I’ve worked hard for the government, and I’m entitled to these benefits.” The other believed in total financial self-reliance. He spoke out against the “entitlement” mentality and how it was creating weak and financially needy people.
One dad taught me how to write an impressive resume so I could find a good job. The other taught me how to write strong business and financial plans so I could create jobs. Being a product of two strong dads allowed me the luxury of observing the effects different thoughts have on one’s life. I noticed that people really do shape their life through their thoughts. For example, my poor dad always said, “I’ll never be rich.” And that prophesy became reality. My rich dad, on the other hand, always referred to himself as rich. He would say things like, “I’m a rich man, and rich people don’t do this.” Even when he was flat broke after a major financial setback, he continued to refer to himself as a rich man. He would cover himself by saying, “There is a difference between being poor and being broke. – Broke is temporary, and poor is eternal.” My poor dad would also say, “I’m not interested in money,” or “Money doesn’t matter.” My rich dad always said, “Money is power.” The power of our thoughts may never be measured or appreciated, but it became obvious to me as a young boy to be aware of my thoughts and how I expressed myself. I noticed that my poor dad was poor not because of the amount of money he earned, which was significant, but because of his thoughts and actions. As a young boy, having two fathers, I became acutely aware of being careful which thoughts I chose to adopt as my own. Whom should I listen to-my rich dad or my poor dad?
Most of the time, life does not talk to you. It just sort of pushes you around. Each push is life saying, `Wake up. There’s something I want you to learn.’ ”
“I want you boys to avoid that trap. That is really what I want to teach you. Not just to be rich, because being rich does not solve the problem.” “It doesn’t?” I asked, surprised. “No, it doesn’t. Let me finish the other emotion, which is desire. Some call it greed, but I prefer desire. It is 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, more security. So they keep working, thinking money will soothe their souls that is troubled by fear and desire. But money cannot do that.”
It took me 20 years to achieve what I thought I should have been able to do in 10 years. There is some truth to the saying, “It’s the first million that is the hardest.” In retrospect, making $1 million was not that difficult. It’s keeping the million and having it work hard for you that I found to be difficult. Nevertheless, I was able to retire in 1994 at the age of 47, financially free and with ample money to enjoy life.
The following is a list of some of the investments in which so-called accredited investors and sophisticated investors invest: • Private placements • Real estate syndication and limited partnerships • Pre-initial public offerings (IPOs) • IPOs (while available to all investors, IPOs are not usually easily accessible) • Sub-prime financing • Mergers and acquisitions • Loans for start-ups • Hedge funds For the average investor, these investments are too risky, not because the investment itself is necessarily risky, but because all too often, the average investor lacks sufficient education, experience, and excess capital to handle the exigencies of the investment. I now tend to side with the SEC and agree that it is better to protect unqualified investors by restricting their access to these types of investments. This is because I made some errors and false steps along the way and know that others may do the same.
Rich dad broke my development program into five distinct phases, which I have organized into phases, lessons, and chapters. The phases are: 1. Are you mentally prepared to be an investor? 2. What type of investor do you want to become? 3. How do you build a strong business? 4. Who is a sophisticated investor? 5. Giving it back
Rich dad often said, “Money will be anything you want it to be.” What he meant was that money comes from our minds, our thoughts. If a person says, “Money is hard to get,” it will probably be hard to get. If a person says, “Oh, I’ll never be rich,” or “It’s really hard to get rich,” it will probably be true for that person. If a person says, “The only way to get rich is to work hard,” then that person will probably work hard. If the person says, “If I had a lot of money, I would put it in the bank because I wouldn’t know what to do with it,” then it will probably happen just that way. You’d be surprised how many people think and do just that. And if a person says, “Investing is risky,” then it is. As rich dad said, “Money will be anything you want it to be.”
“You start as I did. You start without any money. All you have is hope and a dream of attaining great wealth. While many people dream of it, only a few achieve it. Think hard and prepare mentally because you are about to learn to invest in a way that very few people are allowed to invest. You will see the investment world from the inside rather than from the outside. There are far easier paths in life and easier ways to invest. So think it over and be prepared if you decide this is the path for your life.”
They had started on the poor side of town, living frugally, building businesses, buying real estate, and working on their plan. I now understood that rich dad’s plan was to become very wealthy. While Mike and I were in high school, rich dad had made his move by expanding to different islands of the Hawaiian chain, buying businesses and real estate. While Mike and I were in college, he made his big move and became one of the major private investors in businesses in Honolulu and parts of Waikiki. While I was flying for the Marine Corps in Vietnam, his foundation of wealth was set in place. It was a strong and firm foundation.
Rich dad went on to stress the difference between an employee buying an investment and a business buying an investment. He said, “Most investments are too expensive when you purchase them as an employee. But they are much more affordable if my business buys them for me.”
The lessons came in five phases, each phase taking me to a higher level of understanding rich dad’s thought process and his investment plan. The lessons began with preparing mentally and taking control of myself—because that is the only place that investing really takes place anyway. Investing ultimately begins and ends with taking control of yourself.
That night, I began my mental preparation by choosing between seeking job security, the road my poor dad chose, and pouring a foundation of real wealth, the road my rich dad chose. That is where the process of investing truly begins and where rich dad’s lessons on investing start. It starts with a very personal decision—a mental choice to be rich, poor, or middle class. It is an important decision because, whichever financial position in life you choose—be it rich, poor, or middle class—everything in your life then changes.
“When it comes to money and investing, people have three fundamental reasons or choices for investing—to be: 1. Secure, 2. Comfortable, or 3. Rich.” Rich dad continued, “All three choices are important. The difference in one’s life occurs when the choices are prioritized.” He continued by saying that most people make their money and investment choices in that exact order. In other words, their first choice when it comes to money decisions is security, second is comfort, and third is to be rich. That is why most people make job security their highest priority. After they have a secure job or profession, then they focus on comfort. The last choice for most people is to be rich.
One of the most startling differences between my rich dad and poor dad was the kind of world they saw. My poor dad always saw a world of financial scarcity. That view was reflected when he said, “Do you think money grows on trees?” or “Do you think I’m made of money?” or “I can’t afford it.” When I spent time with my rich dad, I began to realize that he saw a completely different world. He could see a world of too much money. That view was reflected when he said, “Don’t worry about money. If we do the right things, there will always be plenty of money. Don’t let not having money be an excuse for not getting what you want.”
I have noticed that most people let their panic about money defeat them and dictate the terms and conditions of their lives. Hence, they remain terrified about risk and money.
As the great baseball player, Yogi Berra, once said, “Strike out just 7 out of 10 times and you’re in the Hall of Fame.” In other words, if he came to bat 1,000 times in his baseball career and if he struck out only 700 times, he would be in the Hall of Fame. After reading Yogi Berra’s quote, rich dad said, “Most people are so security conscious that they live their entire lives avoiding striking out just once.”
One of the most important lessons I learned from my rich dad was this: “Investing is a plan, not a product or procedure.” He went on to say, “Investing is a very personal plan.”
Are you willing to invest the time to find out where you are financially today and where you want to be financially, and are you willing to spell out how you plan to get there? In addition, always remember that a plan is not really a plan until it is in writing and you can show it to someone else.
It does not take money to make money. It takes words. The difference between a rich person and a poor person is the person’s vocabulary. All a person needs to do to become richer is increase his or her financial vocabulary. And the best news is that most words are free.
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. 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. 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 1. Spend 2. 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.
The fear of losing money is real. Everyone has it. Even the rich. But it’s not fear that is the problem. It’s how you handle fear. It’s how you handle losing. It’s how you handle failure that makes the difference in one’s life. That goes for anything in life, not just money. The primary difference between a rich person and a poor person is how they handle that fear.
All of us have doubts. “I’m not smart.” “I’m not good enough.” “So ‘$ and so is better than me.” Or our doubts often paralyze us. We play the. | “What if?” game. “What if the economy crashes right after I invest?” Or “What if I lose control and I can’t pay the money back?” “What if things don’t go as I planned?” Or we have friends or loved ones who will remind us of our shortcomings regardless of whether we ask. They often say, “What makes you think you can do that?” Or “If it’s such a good idea, how come someone else hasn’t done it?” Or “That will never work. You don’t know what you’re talking about.” These words of doubt often get so loud that we fail to act. A horrible feeling builds in our stomach. Sometimes we can’t sleep. We fail to move forward. So we stay with what is safe and opportunities pass us by.
Real estate is a powerful investment tool for anyone seeking financial independence or freedom. It is a unique investment tool. Yet, every time I mention real estate as a vehicle, I often hear, “I don’t want to fix toilets.” That’s what Peter Lynch calls “noise.” That’s what my rich dad would say is the cynic talking. Someone who criticizes and does not analyze. Someone who lets their doubts and fears close their mind instead of open their eyes.” So when someone says, “I don’t want to fix toilets,” I want to fire back, “What makes you think I want to?” They’re saying a toilet is more important than what they want. I talk about freedom from the rat race, and they focus on toilets. That is the thought pattern that keeps most people poor. They criticize instead of analyze. “ ‘I don’t wants’ hold the key to your success,” rich dad would say. Because I, too, do not want to fix toilets, I shop hard for a property manager who does fix toilets. And by finding a great property manager who runs houses or apartments, well, my cash flow goes up. But more importantly a great property manager allows me to buy a lot more real estate since I don’t have to fix toilets. A great property manager is key to success in real estate. Finding a good manager is more important to me than the real estate. A great property manager often hears of great deals before real estate agents do, which makes them even more valuable. That is what rich dad meant by “ ‘I don’t wants’ hold the key to your success.” Because I do not want to fix toilets either, I figured out how to buy more real estate and expedite my getting out of the rat race. The people who continue to say “I don’t want to fix toilets” often deny themselves the use of this powerful investment vehicle. Toilets are more important than their freedom. In the stock market, I often hear people say, “I don’t want to lose money.” Well, what makes them think I or anyone else likes losing money? They don’t make money because they chose to not lose money. Instead of analyzing, they close their minds to another powerful investment vehicle, the stock market.
Rich dad often said, “More than not knowing the definitions of words, using the wrong definition of a word is what really causes long-term financial problems. Nothing is more destructive to a person’s financial stability than to call a liability an asset.” That is why he was a stickler for the definition of financial words. He taught me that the word mortgage comes from mortir, which is French for death. So a mortgage is “an engagement until death.”
Other people say, “I don’t need to plan. I have a retirement and medical plan from my work.” The problem with such thinking is that there is more to an investment plan than simply investments and money. A financial plan is important before someone begins to invest because it needs to take into consideration many different financial needs. These needs include college education, retirement, medical costs, and long-term health care. Many of these often large and pressing needs can be provided for by investing in products other than stocks and bonds or real estate—such as insurance products and different investment vehicles.
It is imperative that our schools begin to teach young people to invest for their long-term health and financial well-being. If we do not, we will have a massive socioeconomic time bomb on our hands.
I often say to my classes, “Be sure you have a plan. First, ask yourself if you are planning to be rich or if you are planning to be poor. If you are planning to be poor, the older you get, the more difficult you will find the financial world.” Rich dad said to me many years ago, “The problem with being young is that you don’t know what it feels like to be old. If you knew what being old felt like, you would plan your financial life differently.”
“The problem with being young is that you don’t know what it feels like to be old. If you knew what being old felt like, you would plan your financial life differently.” He also said, “The problem with many people is that they plan only up to retirement. Planning up to retirement is not enough. You need to plan far beyond retirement. In fact, if you’re rich, you should plan for at least three generations beyond you. If you don’t, the money could be gone soon after you’re gone. Besides, if you don’t have a plan for your money before you depart from this earth, the government does.”
“Words form thoughts, thoughts form realities, and realities become life. The primary difference between a rich person and a poor person is the words he or she uses. If you want to change a person’s external reality, you need to first change that person’s internal reality. That is done through changing, improving, or updating the words he or she uses. If you want to change people’s lives, first change their words. The good news is that words are free.”
Rich dad continued. “I now realize why it is so hard for most people to follow a simple plan.” “And why is that?” I asked. “Because following a simple plan to become rich is boring,” said rich dad. “Human beings are quickly bored and want to find something more exciting and amusing. That is why only three out of a hundred people become rich. They start following a plan, and soon they are bored. So they stop following the plan and then they look for a magic way to get rich quick. They repeat the process of boredom, amusement, and boredom again for the rest of their lives. That is why they do not get rich. They cannot stand the boredom of following a simple, uncomplicated plan to get rich. Most people think there is some magic to getting rich through investing. Or they think that if it is not complicated, it cannot be a good plan. Trust me. When it comes to investing, simple is better than complex.”
James P. O’Shaughnessy wrote the perfect book for people who think that investing has to be risky, complex, and dangerous. It is also the perfect book for those who think that they can outsmart the market. This book has the academic and numerical proof that a passive or mechanical system of investing will in most cases beat a human system of investing—even a system using professional investors such as fund managers. This book also explains why nine out of ten investors do not make money. O’Shaughnessy’s best-selling book is titled What Works On Wall Street: The Classic Guide to the Best-Performing Investment Strategies of All Time.
Whenever I hear someone say to me, “It takes money to make money,” I cringe. I cringe because my rich dad said, “You don’t have to be a rocket scientist to be rich. You don’t need a college education, a high-paying job, or any money at all to start. All you have to do is know what you want, have a plan, and stick to it.” In other words, all it takes is a little discipline. The problem when it comes to money, however, is that a little discipline is often a rare commodity.
“How do I find the plan that is right for me?” is a question I am asked often. My standard answer is that it comes in steps: 1. Take your time. Think quietly about your life up to this point. Take days to think quietly. Take weeks if you need to. 2. Ask yourself in these moments of quiet, “What do I want from this gift called my life?” 3. Don’t talk to anyone else for awhile, at least until you are certain you know what you think you want. All too often, people either innocently or intentionally want to impose on others what they want for those people instead of respecting what others want for themselves. The biggest killers of deep inner dreams are your friends and family members who say, “Oh, don’t be silly,” or “You can’t do that.” 4. Remember that Bill Gates was in his twenties when he started with $50,000 and became the richest man in the world with $90 billion. It’s a good thing he did not ask too many people for their ideas on what they thought was possible for his life. 5. Call professional investors. All investment plans begin with a financial plan. If you do not like what the professional says, find another one. You would ask for a second opinion for a medical problem, so why not ask for many opinions for financial challenges? Financial advisors come in many forms. The advisor could be a coach or a mentor, someone who has already done what you want to do. Choose an advisor who is equipped to assist you in developing a written financial plan.
“Instead of investing the time, they say things like ‘investing is risky,’ ‘it takes money to make money,’ or ‘I don’t have the time to learn to invest. I’m too busy working and I have bills to pay,’” I added, as I began to understand rich dad’s point. Rich dad nodded. “And those very common ideas or excuses are why so few people achieve great wealth in a world that is filled with money. Those ideas or words are why 90 percent of the population has the problem of not having enough money rather than the problem of having too much money. Their ideas about money and investing cause their money problems. All they have to do is change a few words, a few ideas, and their financial world will change like magic. But most people are too busy working, and they do not have the time. Many often say, “‘I’m not interested in learning to invest. It is a subject that does not interest me.’” Yet they fail to see that when they say those words, they become slaves to money—working for money, having money dictate the financial boundaries of their lives, living frugally and within their means—instead of investing a little time, following a plan, and having money work for them.”
“Investment basic rule number one,” said rich dad, “is to always know what kind of income you are working for.” For years, rich dad had always said to Mike and me that there were three different kinds of income: 1. Ordinary earned income is generally derived from a job or some form of labor. In its most common form, it is income from a paycheck. It is also the highest-taxed income, so it is the hardest income with which to build wealth. When you say to a child, “Get a good job,” you are advising the child to work for ordinary earned income. 2. Portfolio income is generally derived from paper assets such as stocks, bonds, and mutual funds. Portfolio income is by far the most popular form of investment income, simply because paper assets are easier to manage and maintain. 3. Passive income is generally derived from real estate. It can also be derived from royalties from patents or license agreements. Yet approximately 80 percent of the time, passive income is from real estate. There are many tax advantages available for real estate.
“That is investment basic rule number six,” said rich dad. “If you are prepared, which means you have education and experience, and you find a good deal, the money will find you or you will find the money. Good deals seem to bring out the greed in people. So when a person finds a good deal, the deal—because it promises great rewards—attracts the cash. If the deal is bad and doesn’t promise great rewards, then it is really hard to raise the cash.” “Have you ever seen a good deal that did not attract the money?” I asked. “Many times,” rich dad said, “but it was not the deal that did not attract the cash. The person controlling the deal did not attract the cash. In other words, the deal would have been good if the guy in charge of the deal had stepped aside. It is like having a world-ranked race car with an average driver. No matter how good the car is, no one would bet on it with an average driver at the wheel. In real estate, people often say the key to success is location, location, location. I think differently. In reality, in the world of investing—regardless of whether it is real estate, business, or paper assets—the key is always people, people, people. I have seen the best real estate in the best location lose money because the wrong people were in charge.”
If you work hard for bad money and do not know the difference between assets, liabilities, good securities, and bad securities, you may struggle financially all your life. It is truly a shame that those who work the hardest and are paid the least suffer the most from this constant erosion of money’s value. People who do the hardest work have the hardest time getting ahead due to the effects of Gresham’s Law. Since money has ever-declining value, a financially wise person must constantly seek things that do have value and can also produce more and more debased money. If you don’t do that, you fall behind financially over time rather than get ahead.”
“Financial literacy is one of the most important investor basics, especially if you want to be a safe investor, an inside investor, and a rich investor. Anyone who is not financially literate cannot see into an investment. Just as a doctor uses X-rays to look into the human body, a financial statement allows you to look into an investment and see the truth, the facts, the fiction, the opportunities, and the risk. Reading a financial statement of a business or individual is like reading a biography or an autobiography.”
Most investors look at the price and then the stock’s P/E, or Price/Earnings ratio. The P/E of a stock is an outsider’s indicator of the business. An insider needs other indicators, and that is what I will teach you. Those indicators are part of a safety checklist to make sure that all the parts of the business are functioning well. If you are not financially literate, you cannot tell the differences. Then, of course, investing becomes risky for that person.”
“The second thing is that when I look at an investment, I overlay it on my personal financial statement and see where it fits. As I said, investing is a plan. I want to see how the financial statement of the business, the stock, the bond, or the real estate will impact my personal financial statement. I want to know that this investment will get me to where I want to go. I can also analyze how I can afford the investment. By knowing my numbers, I know what will happen if I borrow money to buy an investment and the long-term impact balanced with income and outflow due to debt payments.”
Rich dad thought the relationship between the income statement and the balance sheet was everything. He would say, “How can you understand one without the other? How can you tell what an asset or liability really is without the income column or the expense column?” He would go on and say, “Just because something is listed under the asset column does not make it an asset.” I think that statement was the single most important point he made. He would say, “The reason most people suffer financially is that they purchase liabilities and list them under the asset column. That is why so many people call their home an asset when it is really a liability.” If you understand Gresham’s Law, you can see why such a seemingly minor oversight can cause a lifetime of financial struggle instead of financial freedom. He would also say, “If you want to be rich for generations, you and the ones you love must know the difference between an asset and a liability. You must know the difference between something of value and something of no value.”
Rich dad was very much in favor of home ownership. He thought that a home was a secure place to put your money, even though it was not necessarily an asset. In fact, once he had acquired enough real assets, he lived in a big beautiful home. Those real assets generated the cash flow that allowed him to buy his big beautiful home. The point he was making was that people should not call a liability an asset, or buy liabilities that they think are assets. He thought that was one of the biggest mistakes a person could make. He would say, “If something is a liability, you’d better call it a liability and watch it closely.”
You can tell if people are in control of themselves by looking at their financial statements. Just because people have high-paying jobs, big houses, and nice cars does not necessarily mean they are in control financially. If people knew how a financial statement worked, they would be more financially literate and more in control of their money. By understanding financial statements, people can better see how their cash is flowing. For example, this is the cash-flow pattern of writing a check.
In rich dad’s world, risk, mistakes, and failure are integral parts of human development. So instead of avoiding risk and mistakes, he learned to manage risk and mistakes. He believed that a mistake was simply a lesson with emotions attached to it. He said, “Whenever we make a mistake, we become upset. An upset is our maker’s way of telling us that we need to learn something. It is a tap on our shoulder saying, ‘Pay attention. You have something important to learn. If you lie, blame, justify, or deny the upset, you waste the upset and will waste a precious gem of wisdom.’” Rich dad taught me to count to 10 if I was angry, or to 100 if I was very angry. After cooling off, I simply say, “I apologize,” and never blame the other person, no matter how angry I am. If I blame, I give power to the other person. If I take responsibility for whatever happened, I will learn a precious lesson that I obviously need to learn. If I lie, blame, justify, or deny, I learn nothing.
Forbes magazine defines rich as $1 million in income and $10 million in net worth. Rich dad had a tougher definition: a consistent $1 million in passive income, which is income that comes in regardless of whether you work or not, and $5 million in assets, not net worth since net worth can be an elusive and much-manipulated figure. Rich dad also felt that if you could not maintain a 20-percent return from capital invested, you were not really an investor.
“The difference between a rich person and a poor person is much more than how much money they make. The difference is found in their financial literacy and the standards of importance they put on that literacy. Simply put, poor people have very low financial literacy standards, regardless of how much money they make.” He also said, “People with low financial literacy standards are often unable to take their ideas and create assets out of them. Instead of creating assets, many people create liabilities with their ideas just because of low financial literacy standards.”
What Does P/E Mean? The qualified investor understands the price earnings (P/E) ratio of a stock, which is also referred to as the market multiplier. The P/E ratio is calculated by dividing the current market price of a stock by the previous year’s earnings per share. Generally, a low P/E would mean that a stock is selling at a relatively low price compared to its earnings. A high P/E would indicate that a stock’s price is high and may not be much of a bargain. The P/E ratio of one successful company may be very different from that of another successful company if the two companies are in different industries. For example, high-tech companies with big growth and high earnings generally sell at much higher P/Es than low-tech or mature companies where growth has stabilized. Some stocks can sell at very high prices even when the companies have no earnings. The high prices reflect the market’s expectation for high earnings in the future. Future P/E Is the Key A qualified investor recognizes that the current P/E is not as important as the future P/E. The investor wants to invest in a company that has a strong financial future. In order for the P/E ratio to be helpful to the investor, much more information about the company may be needed. Generally, the investor will compare a company’s ratios for the current year with that of previous years to measure the growth of the company. The investor will also compare the company’s ratios with those of other companies in the same industry.
“But why a C corporation?” I asked. “What is the difference that is so important to you?” “This is the one big difference,” he said, having waited a long time to explain it. “A sole proprietorship, a partnership, and an S corporation are all part of you. They are, in simple terms, an extension of you.” “And what is a C corporation?” I asked. “A C corporation is another you. It is not just an extension of you. A C corporation has the ability to be a clone of you. If you are serious about doing business, then you do not want to do business as a private citizen. That is too risky, especially in this day and age of lawsuits. When you do business, you want a clone of you actually doing the business. You do not want to do business or own anything as a private citizen,” rich dad guided me. “If you want to be a rich private citizen, you need to be as poor and penniless as possible on paper.” Rich dad also said, “The poor and the middle class, on the other hand, want to own everything in their name. ‘Pride of ownership,’ they call it. I call anything with your name on it ‘a target for predators and lawyers.’”
“I pay taxes on net income, and your dad’s taxes are withheld from his total income. That is one of the biggest differences between your dad and me. I get ahead faster because I get to buy my assets with gross income and pay taxes on net income. Your dad pays taxes on gross income and then tries to buy assets with his net income. That is why it is very, very hard for him to achieve any kind of wealth. He gives a lot of his money to the government first, money that he could be using to buy assets. I pay my taxes on the net, or what is left over, after I buy my assets. I buy assets first and pay taxes last. Your dad pays taxes first and has very little money left over to buy assets with.”
This law change prevented someone in the S quadrant from using the same tax laws used by the B quadrant. For example, if a person in the S quadrant has the same income as someone in the B quadrant, the S-quadrant worker will have to pay a beginning tax rate of 35 percent (50 percent when you include social insurance taxes). On the other hand, the B-quadrant person could possibly pay zero percent on the same amount of income. In other words, the golden rule—“He who makes the rules keeps the gold”—was once again true. The rules are made from the B quadrant and have been made from there ever since 1215 when the barons forced the king to sign the Magna Carta.
In 1977, I started my nylon-and-Velcro wallet business part-time. Many of you are familiar with that product line today. From 1977 to 1978, I worked very hard at Xerox, eventually becoming one of the top sales representatives in the branch. In my spare time, I was also building a business that would soon become a worldwide, multimillion-dollar business. When people ask me if I loved my product line—a line that consisted of colorful nylon wallets, nylon watchbands, and nylon shoe pockets that attached to the laces of a running shoe and held a key, money, and ID card—I answer, “No. I was not in love with the product line. But I did enjoy the challenge of building the business.”
I mention this point specifically because so many people tell me such things as: 1. “I have a great idea for a new product.” 2. “You have to feel passionate about your product.” 3. “I’m looking for the right product before I begin my business.” To these people, I generally say, “The world is filled with great ideas for new products. The world is also filled with great products. But the world is short of great businesspeople. The primary reason to start a business part-time is not so much to make a great product. The real reason for starting a part-time business is to make yourself a great businessperson. Great products are a dime a dozen. But great businesspeople are rare and rich.”
Many people dream of starting their own business but never do because they’re afraid of failing. Many other people dream of becoming rich but don’t because they lack the skills and experience. The business skill and experience is where money really comes from. Rich dad said to me, “The education you receive in school is important, but the education you receive on the street is even better.” Starting a business at home part-time allows you to learn priceless business skills and subjects such as: 1. Communication skills 2. Leadership skills 3. Team-building skills 4. Tax law 5. Corporate law 6. Securities law These skills and subjects cannot be learned in a weekend course or in a single book. I continue to study them today. The more I study them, the more my businesses improve.

My Reading Notes:

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