less than the cash flow

 less than the cash flow from these assets, I grow richer with more and more income from sources other than my physical labor. As this reinvestment process continues, I am well on my way to becoming rich. Just remember this simple observation: • The rich buy assets. • The poor only have expenses. • The middle class buy liabilities they think are assets. So how do I start minding my own business? What is the answer? Listen to the founder of McDonald’s in the next chapter. Chapter Three LESSON 3: MIND YOUR OWN BUSINESS 71 The rich focus on their asset columns while everyone else focuses on their income statements. In 1974, Ray Kroc, the founder of McDonald’s, was asked to speak to the MBA class at the University of Texas at Austin. A friend of mine was a student in that MBA class. After a powerful and inspiring talk, the class adjourned and the students asked Ray if he would join them at their favorite hangout to have a few beers. Ray graciously accepted. “What business am I in?” Ray asked, once the group had all their beers in hand. “Everyone laughed,” my friend said. “Most of the MBA students thought Ray was just fooling around.” No one answered, so Ray asked again, “What business do you think I’m in?” The students laughed again, and finally one brave soul yelled out, “Ray, who in the world doesn’t know that you’re in the hamburger business?” Ray chuckled. “That’s what I thought you would say.” He paused and then quickly added, “Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.” Chapter Three: Lesson 3 72 As my friend tells the story, Ray spent a good amount of time explaining his viewpoint. In his business plan, Ray knew that the primary business focus was to sell hamburger franchises, but what he never lost sight of was the location of each franchise. He knew that the land and its location were the most significant factors in the success of each franchise. Basically, the person who bought the franchise was also buying the real estate under the franchise for Ray Kroc’s organization. Today, McDonald’s is the largest single owner of real estate in the world, owning even more than the Catholic church. McDonald’s owns some of the most valuable intersections and street corners in America and around the globe. My friend considers this as one of the most important lessons in his life. Today he owns car washes, but his business is the real estate under those car washes. The previous chapter presented diagrams illustrating that most people work for everyone but themselves. They work first for the owners of the company, then for the government through taxes, and finally for the bank that owns their mortgage. When I was a young boy, we did not have a McDonald’s nearby. Yet my rich dad was responsible for teaching Mike and me the same lesson that Ray Kroc talked about at the University of Texas. It is secret number three of the rich. That secret is: Mind your own business. Financial struggle is often directly the result of people working all their lives for someone else. Many people will simply have nothing at the end of their working days to show for their efforts. Our current educational system focuses on preparing today’s youth to get good jobs by developing scholastic skills. Their lives will revolve around their wages or, as described earlier, their income column. Many will study further to become engineers, scientists, cooks, police officers, artists, writers, and so on. These professional skills allow them to enter the workforce and work for money. But there is a big difference between your profession and your business. Often I ask people, “What is your business?” And they will Rich Dad Poor Dad 73 say, “Oh, I’m a banker.” Then I ask them if they own the bank. And they usually respond, “No, I work there.” In that instance, they have confused their profession with their business. Their profession may be a banker, but they still need their own business. A problem with school is that you often become what you study. So if you study cooking, you become a chef. If you study the law, you become an attorney, and a study of auto mechanics makes you a mechanic. The mistake in becoming what you study is that too many people forget to mind their own business. They spend their lives minding someone else’s business and making that person rich. To become financially secure, a person needs to mind their own business. Your business revolves around your asset column, not your income column. As stated earlier, the number-one rule is to know the difference between an asset and a liability, and to buy assets. The rich focus on their asset columns, while everyone else focuses on their income statements. That is why we hear so often: “I need a raise.” “If only I had a promotion.” “I am going back to school to get more training so I can get a better job.” “I am going to work overtime.” “Maybe I can get a second job.” In some circles, these are sensible ideas. But you are still not minding your own business. These ideas all still focus on the income column and will only help a person become more financially secure if the additional money is used to purchase incomegenerating assets. The primary reason the majority of the poor and middle class are fiscally conservative—which means, “I can’t afford to take risks”— is that they have no financial foundation. They have to cling to their jobs and play it safe. When downsizing became the “in” thing to do, millions of workers found out their largest so-called asset, their home, was eating them alive. Their “asset” was costing them money every month. Their Financial struggle is often the result of people working all their lives for someone else. Chapter Three: Lesson 3 74 car, another “asset,” was eating them alive. The golf clubs in the garage that cost $1,000 were not worth $1,000 anymore. Without job security, they had nothing to fall back on. What they thought were assets could not help them survive in a time of financial crisis. I assume most of us have filled out a credit application to buy a house or a car. It’s always interesting to look at the “net-worth” section because of what accepted banking and accounting practices allow a person to count as assets. One day when I wanted a loan, my financial position did not look too good. So I added my new golf clubs, my art collection, books, electronics, Armani suits, wristwatches, shoes, and other personal effects to boost the number in the asset column. But I was turned down because I had too much investment real estate. The loan committee didn’t like that I made so much money from rent. They wanted to know why I did not have a normal job with a salary. They did not question the Armani suits, golf clubs, or art collection. Life is sometimes tough when you do not fit the standard profile. I cringe every time I hear someone say to me that their net worth is a million dollars or $100,000 dollars or whatever. One of the main reasons net worth is not accurate is simply because, the moment you begin selling your assets, you are taxed for any gains. So many people have put themselves in deep financial trouble when they run short of income. To raise cash, they sell their assets. But their personal assets can generally be sold for only a fraction of the value that is listed on their personal balance sheet. Or if there is a gain on the sale of the assets, they are taxed on the gain. So again, the government takes its share, thus reducing the amount available to help them out of debt. That is why I say someone’s net worth is often “worth less” than they think. Start minding your own business. Keep your daytime job, but start buying real assets, not liabilities or personal effects that have no real value once you get them home. A new car loses nearly 25 percent of the price you pay for it the moment you drive it off the lot. It is Rich Dad Poor Dad 75 not a true asset even if your banker lets you list it as one. My $400 new titanium driver was worth $150 the moment I teed off. Keep expenses low, reduce liabilities, and diligently build a base of solid assets. For young people who have not yet left home, it is important for parents to teach them the difference between an asset and a liability. Get them to start building a solid asset column before they leave home, get married, buy a house, have kids, and get stuck in a risky financial position, clinging to a job, and buying everything on credit. I see so many young couples who get married and trap themselves into a lifestyle that will not let them get out of debt for most of their working years. For many people, just as the last child leaves home, the parents realize they have not adequately prepared for retirement and they begin to scramble to put some money away. Then their own parents become ill and they find themselves with new responsibilities. So what kind of assets am I suggesting that you or your children acquire? In my world, real assets fall into the following categories: • Businesses that do not require my presence I own them, but they are managed or run by other people. If I have to work there, it’s not a business. It becomes my job. • Stocks • Bonds • Income-generating real estate • Notes (IOUs) • Royalties from intellectual property such as music, scripts, and patents • Anything else that has value, produces income or appreciates, and has a ready market Chapter Three: Lesson 3 76 As a young boy, my educated dad encouraged me to find a safe job. But my rich dad encouraged me to begin acquiring assets that I loved. “If you don’t love it, you won’t take care of it.” I collect real estate simply because I love buildings and land. I love shopping for them, and I could look at them all day long. When problems arise, the problems aren’t so bad that it changes my love for real estate. For people who hate real estate, they shouldn’t buy it. I also love stocks of small companies, especially start-ups, because I am an entrepreneur, not a corporate person. In my early years, I worked in large organizations, such as Standard Oil of California, the U.S. Marine Corps, and Xerox Corp. I enjoyed my time with those organizations and have fond memories, but I know deep down I am not a company man. I like starting companies, not running them. So my stock buys are usually of small companies. Sometimes I even start the company and take it public. Fortunes are made in new stock issues, and I love the game. Many people are afraid of small-cap companies and call them risky, and they are. But that risk is diminished if you love what the investment is, understand it, and know the game. With small companies, my investment strategy is to be out of the stock in a year. On the other hand, my real estate strategy is to start small and keep trading up for bigger properties and, therefore, delay paying taxes on the gain. This allows the value to increase dramatically. I generally hold real estate less than seven years. For years, even while I was with the Marine Corps and Xerox, I did what my rich dad recommended. I kept my day job, but I still minded my own business. I was active in my asset column trading real estate and small stocks. Rich dad always stressed the importance of financial literacy. The better I was at understanding the accounting and cash management, the better I would be at analyzing investments and eventually starting and building my own company. Start minding your own business. Keep your daytime job, but start buying real assets, not liabilities. Rich Dad Poor Dad 77 I don’t encourage anyone to start a company unless they really want to. Knowing what I know about running a company, I wouldn’t wish that task on anyone. There are times when people can’t find employment and starting a company seems like the best solution. But the odds are against success: Nine out of ten companies fail in five years. Of those that survive the first five years, nine out of every ten of those eventually fail as well. So only if you really have the desire to own your own company do I recommend it. Otherwise, keep your day job and mind your own business. When I say mind your own business, I mean to build and keep your asset column strong. Once a dollar goes into it, never let it come out. Think of it this way: Once a dollar goes into your asset column, it becomes your employee. The best thing about money is that it works 24 hours a day and can work for generations. Keep your day job, be a great hardworking employee, but keep building that asset column. As your cash flow grows, you can indulge in some luxuries. An important distinction is that rich people buy luxuries last, while the poor and middle class tend to buy luxuries first. The poor and the middle class often buy luxury items like big houses, diamonds, furs, jewelry, or boats because they want to look rich. They look rich, but in reality they just get deeper in debt on credit. The old-money people, the long-term rich, build their asset column first. Then the income generated from the asset column buys their luxuries. The poor and middle class buy luxuries with their own sweat, blood, and children’s inheritance. A true luxury is a reward for investing in and developing a real asset. For example, when my wife Kim and I had extra money coming from our apartment houses, she went out and bought her Mercedes. It didn’t take any extra work or risk on her part because the apartment house bought the car. She did, however, have to wait four years while the real estate investment portfolio grew and began generating enough extra cash flow to pay for the car. But the luxury, the Mercedes, was a true reward because she proved she knew how to grow her asset column. That car now means a lot more to her than Chapter Three: Lesson 3 78 simply another pretty car. It means she used her financial intelligence to afford it. Instead, most people 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 eventually resent that luxury because the debt becomes a financial burden. After you’ve taken the time and invested in and built your own business, you are now ready to learn the biggest secret of the rich— the secret that puts the rich way ahead of the pack. Chapter Four LESSON 4: THE HISTORY OF TAXES AND THE POWER OF CORPORATIONS 79 My rich dad just played the game smart, and he did it through corporations— the biggest secret of the rich. I remember in school being told the story of Robin Hood and his Merry Men. My teacher thought it was a wonderful story of a romantic hero who robbed from the rich and gave to the poor. My rich dad did not see Robin Hood as a hero. He called Robin Hood a crook. Robin Hood may be long gone, but his followers live on. I often still hear people say, “Why don’t the rich pay for it?” or “The rich should pay more in taxes and give it to the poor.” It is this Robin Hood fantasy, or taking from the rich to give to the poor, that has caused the most pain for the poor and the middle class. The reason the middle class is so heavily taxed is because of the Robin Hood ideal. The reality is that the rich are not taxed. It’s the middle class, especially the educated upper-income middle class, who pays for the poor. Again, to understand fully how things happen, we need to look at the history of taxes. Although my highly educated dad was an expert on the history of education, my rich dad fashioned himself as an expert on the history of taxes. Chapter Four: Lesson 4 80 Rich dad explained to Mike and me that originally, in England and America, there were no taxes. Occasionally, there were temporary taxes levied in order to pay for wars. The king or the president would put the word out and ask everyone to “chip in.” Taxes were levied in Britain for the fight against Napoleon from 1799 to 1816, and in America to pay for the Civil War from 1861 to 1865. In 1874, England made income tax a permanent levy on its citizens. In 1913, an income tax became permanent in the United States with the adoption of the 16th Amendment to the U.S. Constitution. At one time, Americans were anti-tax. It had been the tax on tea that led to the famous Tea Party in Boston Harbor, an incident that helped ignite the Revolutionary War. It took approximately 50 years in both England and the United States to sell the idea of a regular income tax. What these historical dates fail to reveal is that both of these taxes were initially levied against only the rich. It was this point that rich dad wanted Mike and me to understand. He explained that the idea of taxes was made popular, and accepted by the majority, by telling the poor and the middle class that taxes were created only to punish the rich. This is how the masses voted for the law, and it became constitutionally legal. Although it was intended to punish the rich, in reality it wound up punishing the very people who voted for it, the poor and middle class. “Once government got a taste of money, its appetite grew,” said rich dad. “Your dad and I are exactly opposite. He’s a government bureaucrat, and I am a capitalist. We get paid, and our success is measured on opposite behaviors. He gets paid to spend money and hire people. The more he spends and the more people he hires, the larger his organization becomes. In the government, a large organization is a respected organization. On the other hand, within my organization, the fewer people I hire and the less money I spend, the more I am respected by my investors. That’s why I don’t like government people. They have different objectives than most business people. As the government grows, more and more tax dollars are needed to support it.” My educated dad sincerely believed that government should help people. He loved John F. Kennedy and especially the idea of the Peace Rich Dad Poor Dad 81 Corps. He loved the idea so much that both he and my mom worked for the Peace Corps, training volunteers to go to Malaysia, Thailand, and the Philippines. He always strived for additional grants and budget increases so he could hire more people, both in his job with the Education Department and in the Peace Corps. From the time I was about 10 years old, I would hear from my rich dad that government workers were a pack of lazy thieves, and from my poor dad I would hear how the rich were greedy crooks who should be made to pay more taxes. Both sides had valid points. It was difficult to go to work for one of the biggest capitalists in town and come home to a father who was a prominent government leader. It was not easy to know which dad to believe. Yet when you study the history of taxes, an interesting perspective emerges. As I said, the passage of taxes was only possible because the masses believed in the Robin Hood theory of economics: Take from the rich, and give to everyone else. The problem was that the government’s appetite for money was so great that taxes soon needed to be levied on the middle class, and from there it kept trickling down. However, the rich saw an opportunity because they don’t play by the same set of rules. The rich knew about corporations, which became popular in the days of sailing ships. The rich created the corporation as a vehicle to limit their risk to the assets of each voyage. The rich put their money into a corporation to finance the voyage. The corporation would then hire a crew to sail to the New World to look for treasure. If the ship was lost, the crew lost their lives, but the loss to the rich would be limited only to the money they invested for that particular voyage. My rich dad did not see Robin Hood as a hero. He called Robin Hood a crook. Chapter Four: Lesson 4 82 The diagram that follows shows how the corporate structure sits outside your personal income statement and balance sheet. Assets PERSONAL INCOME STATEMENT PERSONAL BALANCE SHEET Income Expenses CORPORATION INCOME STATEMENT Liabilities Income Expenses Rich Dad Poor Dad 83 It is the knowledge of the legal corporate structure that really gives the rich a vast advantage over the poor and the middle class. Having two fathers teaching me, one a socialist and the other a capitalist, I quickly began to realize that the philosophy of the capitalist made more financial sense to me. It seemed to me that the socialists ultimately penalized themselves due to their lack of financial education. No matter what the “take-from-the-rich” crowd came up with, the rich always found a way to outsmart them. That is how taxes were eventually levied on the middle class. The rich outsmarted the intellectuals solely because they understood the power of money, a subject not taught in schools. How did the rich outsmart the intellectuals? Once the “take-fromthe-rich” tax was passed, cash started flowing into government coffers. Initially, people were happy. Money was handed out to government workers and the rich. It went to government workers in the form of jobs and pensions, and it went to the rich via their factories receiving government contracts. The government received a large pool of money, but the problem was the fiscal management of that money. The government ideal is to avoid having excess money. If you fail to spend your allotted funds, you risk losing it in the next budget. You would certainly not be recognized for being efficient. Business people, on the other hand, are rewarded for having excess money and are applauded for their efficiency. As this cycle of growing government spending continued, the demand for money increased, and the “tax-the-rich” idea was adjusted to include lower-income levels, down to the very people who voted it in, the poor and the middle class. True capitalists used their financial knowledge to simply find an escape. They headed back to the protection of a corporation. But what many people who have never formed a corporation don’t know is that a corporation is not really a thing. A corporation is merely a file folder with some legal documents in it, sitting in some attorney’s office and registered with a state government agency. It’s not a big building or a factory or a group of people. A corporation is merely a legal document that creates a legal body without a soul. Using it, the wealth of the rich was once again protected. It was popular because the income-tax rate of a corporation is less than the individual Chapter Four: Lesson 4 84 income-tax rates. In addition, certain expenses could be paid by a corporation with pre-tax dollars. This war between the haves and have-nots has raged for hundreds of years. The battle is waged whenever and wherever laws are made, and it will go on forever. The problem is that the people who lose are the uninformed: the ones who get up every day and diligently go to work and pay taxes. If they only understood the way the rich play the game, they could play it too. Then they would be on their way to their own financial independence. This is why I cringe every time I hear a parent advise their children to go to school so they can find a safe, secure job. An employee with a safe, secure job, without financial aptitude, has no escape. Average Americans today work four to five months for the government just to cover their taxes. In my opinion, that is simply too long. The harder you work, the more you pay the government. That is why I believe that the idea of “take-from-the-rich” backfired on the very people who voted it in. Every time people try to punish the rich, the rich don’t simply comply. They react. They have the money, power, and intent to change things. They don’t just sit there and voluntarily pay more taxes. Instead, they search for ways to minimize their tax burden. They hire smart attorneys and accountants, and persuade politicians to change laws or create legal loopholes. They use their resources to effect change. The Tax Code of the United States also allows other ways to reduce taxes. Most of these vehicles are available to anyone, but it is the rich who find them because they are minding their own business. For example, “1031” is jargon for Section 1031 of the Internal Revenue Code which allows a seller to delay paying taxes on a piece of real estate that is sold for a capital gain through an exchange for a more expensive piece of real estate. Real estate is one investment vehicle that has a great tax advantage. As long as you keep trading up in value, you will not be taxed on the gains until you liquidate. People who don’t take advantage of these legal tax savings are missing a great opportunity to build their asset columns. Rich Dad Poor Dad 85 The poor and middle class don’t have the same resources. They sit there and let the government’s needles enter their arm and allow the blood donation to begin. Today, I am constantly shocked at the number of people who pay more taxes, or take fewer deductions, simply because they are afraid of the government. I have friends who have had their businesses shut down and destroyed, only to find out it was a mistake on the part of the government. I realize all that. But the price of working from January to May is a high price to pay for that intimidation. My poor dad never fought back. My rich dad didn’t either. He just played the game smarter, and he did it through corporations—the biggest secret of the rich. You may remember the first lesson I learned from my rich dad. I was a little boy of 9 who had to sit and wait for him to choose to talk to me. I sat in his office waiting for him to get to me. He was ignoring me on purpose. He wanted me to recognize his power and to desire to have that power for myself one day. During all the years I studied and learned from him, he always reminded me that knowledge is power. And with money comes great power that requires the right knowledge to keep it and make it multiply. Without that knowledge, the world pushes you around. Rich dad constantly reminded Mike and me that the biggest bully was not the boss or the supervisor, but the tax man. The tax man will always take more if you let him. The first lesson of having money work for you, as opposed to you working for money, is all about power. If you work for money, you give the power to your employer. If money works for you, you keep the power and control it. Once we had this knowledge of the power of money working for us, he wanted us to be financially smart and not let anyone or anything push us around. If you’re ignorant, it’s easy to be bullied. If you know what you’re talking about, you have a fighting chance. That is why he paid so much for smart tax accountants and attorneys. It was less expensive to pay them than to pay the government. His If you work for money, you give the power to you employer. If money works for you, you keep the power and control it. Chapter Four: Lesson 4 86 best lesson to me was: “Be smart and you won’t be pushed around as much.” He knew the law because he was a law-abiding citizen and because it was expensive to not know the law. “If you know you’re right, you’re not afraid of fighting back.” Even if you are taking on Robin Hood and his band of Merry Men. My highly educated dad always encouraged me to land a good job with a strong corporation. He spoke of the virtues of “working your way up the corporate ladder.” He didn’t understand that, by relying solely on a paycheck from a corporate employer, I would be a docile cow ready for milking. When I told my rich dad of my father’s advice, he only chuckled. “Why not own the ladder?” was all he said. As a young boy, I did not understand what rich dad meant by owning my own corporation. It was an idea that seemed impossible and intimidating. Although I was excited by the idea, my inexperience wouldn’t let me envision the possibility that grown-ups would someday work for a company I would own. The point is that, if not for my rich dad, I would have probably followed my educated dad’s advice. It was merely the occasional reminder of my rich dad that kept the idea of owning my own corporation alive and kept me on a different path. By the time I was 15 or 16, I knew I wasn’t going to continue down the path my educated dad recommended. I didn’t know how I was going to do it, but I was determined not to head in the direction most of my classmates were heading. That decision changed my life. It was not until my mid-twenties that my rich dad’s advice began to make more sense to me. I was just out of the Marine Corps and working for Xerox. I was making a lot of money, but every time I looked at my paycheck, I was disappointed. The deductions were so large and, the more I worked, the greater they became. As I became Each dollar in my asset column was a great employee, working hard to make more employees and buy the boss a new Porsche. Rich Dad Poor Dad 87 more successful, my bosses talked about promotions and raises. It was flattering, but I could hear my rich dad asking in my ear: “Who are you working for? Who are you making rich?” In 1974, while still an employee for Xerox, I formed my first corporation and began minding my own business. There were already a few assets in my asset column, but now I was determined to focus on making it bigger. Those paychecks, with all the deductions, made all the years of my rich dad’s advice make total sense. I could see the future if I followed my educated dad’s advice. Many employers feel that advising their workers to mind their own business is bad for business. But for me, focusing on my own business and developing assets made me a better employee because I now had a purpose. I came in early and worked diligently, amassing as much money as possible so I could invest in real estate. Hawaii was just set to boom, and there were fortunes to be made. The more I realized that we were in the beginning stages of a boom, the more Xerox machines I sold. The more I sold, the more money I made and, of course, the more deductions came out of my paycheck. It was inspiring. I wanted out of the employee trap so badly that I worked even harder so I could invest more. By 1978, I was consistently one of the top five sales people at the company. I badly wanted out of the Rat Race. In less than three years, I was making more in my real estate holding corporation than I was making at Xerox. And the money I was making in my asset column in my own corporation was money working for me, not me pounding on doors selling copiers. My rich dad’s advice made much more sense. Soon the cash flow from my properties was so strong that my company bought me my first Porsche. My fellow Xerox salespeople thought I was spending my commissions. I wasn’t. I was investing my commissions in assets. My money was working hard to make more money. Each dollar in my asset column was a great employee, working hard to make more employees and buy the boss a new Porsche with before-tax dollars. I began to work harder for Xerox. The plan was working, Chapter Four: Lesson 4 88 and my Porsche was the proof. By using the lessons I learned from my rich dad, I was able to get out of the proverbial Rat Race at an early age. It was made possible because of the strong financial knowledge I had acquired through rich dad’s lessons. Without this financial knowledge, which I call financial intelligence or financial IQ, my road to financial independence would have been much more difficult. I now teach others in the hope that I may share my knowledge with them. I remind people that financial IQ is made up of knowledge from four broad areas of expertise: 1. Accounting Accounting is financial literacy or the ability to read numbers. This is a vital skill if you want to build an empire. The more money you are responsible for, the more accuracy is required, or the house comes tumbling down. This is the left-brain side, or the details. Financial literacy is the ability to read and understand financial statements which allows you to identify the strengths and weaknesses of any business. 2. Investing Investing is the science of “money making money.” This involves strategies and formulas which use the creative right-brain side. 3. Understanding markets Understanding markets is the science of supply and demand. You need to know the technical aspects of the market, which are emotion-driven, in addition to the fundamental or economic aspects of an investment. Does an investment make sense or does it not make sense based on current market conditions? 4. The law A corporation wrapped around the technical skills of accounting, investing, and markets can contribute to explosive growth. A person who understands the tax advantages and protections provided by a corporation can get rich so much Rich Dad Poor Dad 89 faster than someone who is an employee or a small-business sole proprietor. It’s like the difference between someone walking and someone flying. The difference is profound when it comes to long-term wealth. • Tax advantages A corporation can do many things that an employee cannot, like pay expenses before paying taxes. That is a whole area of expertise that is very exciting. Employees earn and get taxed, and they try to live on what is left. A corporation earns, spends everything it can, and is taxed on anything that is left. It’s one of the biggest legal tax loopholes that the rich use. They’re easy to set up and are not expensive if you own investments that are producing good cashflow. For example, by owning your own corporation, your vacations can be board meetings in Hawaii. Car payments, insurance, repairs, and health-club memberships are company expenses. Most restaurant meals are partial expenses, and on and on. But it’s done legally with pre-tax dollars. • Protection from lawsuits We live in a litigious society. Everybody wants a piece of your action. The rich hide much of their wealth using vehicles such as corporations and trusts to protect their assets from creditors. When someone sues a wealthy individual, they are often met with layers of legal protection and often find that the wealthy person actually owns nothing. They control everything, but own nothing. The poor and middle class try to own everything and lose it to the government or to fellow citizens who like to sue the rich. They learned it from the Robin Hood story: Take from the rich, and give it to the poor. Chapter Four: Lesson 4 90 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. Garret Sutton’s books on corporations provide wonderful insight into the power of personal corporations. Financial IQ is actually the synergy of many skills and talents. 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 your financial intelligence. In summary: Business Owners Employees Who Work with Corporations for Corporations 1. Earn 1. Earn 2. Spend 2. Pay Taxes 3. Pay Taxes 3. Spend As part of your overall financial strategy, I recommend that you learn about the protection that legal entities can provide for businesses and assets. 91 Chapter Five LESSON 5: THE RICH INVENT MONEY Often in the real world, it’s not the smart who get ahead, but the bold. Last night, I took a break from writing and watched a TV program on the history of a young man named Alexander Graham Bell. Bell had just patented his telephone and was having growing pains because the demand for his new invention was so strong. Needing a bigger company, he then went to the giant at that time, Western Union, and asked them if they would buy his patent and his tiny company. He wanted $100,000 for the whole package. The president of Western Union scoffed at him and turned him down, saying the price was ridiculous. The rest is history. A multi-billiondollar industry emerged, and AT&T was born. The evening news came on right after the story of Alexander Graham Bell. On the news was a story of another downsizing at a local company. The workers were angry and complained that the company ownership was unfair. A terminated manager of about 45 years of age had his wife and two babies at the plant and was begging the guards to let him talk to the owners to ask if they would reconsider his termination. He had just bought a house and was afraid of losing it. The camera focused in on his pleading for all the world to see. Needless to say, it held my attention. Chapter Five: Lesson 5 92 I have been teaching professionally since 1984. It has been a great experience and a rewarding one. It is also a disturbing profession, for I have taught thousands of individuals and I see one thing in common in all of us, myself included. We all have tremendous potential, and we all are blessed with gifts. Yet the one thing that holds all of us back is some degree of self-doubt. It is not so much the lack of technical information that holds us back, but more the lack of self-confidence. Some are more affected than others. Once we leave school, most of us know that it is not so much a matter of college degrees or good grades that count. In the real world outside of academics, something more than just grades is required. I have heard it called many things; guts, chutzpah, balls, audacity, bravado, cunning, daring, tenacity, and brilliance. This factor, whatever it is labeled, ultimately decides one’s future much more than school grades do. Inside each of us is one of these brave, brilliant, and daring characters. There is also the flip side of that character: people who could get down on their knees and beg if necessary. After a year in Vietnam as a Marine Corps pilot, I got to know both of those characters inside of me intimately. One is not better than the other. Yet as a teacher, I recognized that it was excessive fear and self-doubt that were the greatest detractors of personal genius. It broke my heart to see students know the answers, yet lack the courage to act on the answer. Often in the real world, it’s not the smart who get ahead, but the bold. In my personal experience, your financial genius requires both technical knowledge as well as courage. If fear is too strong, the genius is suppressed. In my classes, I strongly urge students to learn to take risks, to be bold, and to let their genius convert that fear into power and brilliance. It works for some and just terrifies others. I have come to realize that for most people, when it comes to the subject of money, they would rather play it safe. I have had to field questions such as: “Why take risks?” “Why should I bother developing my financial IQ?” “Why should I become financially literate?” And I answer, “Just to have more options.” Rich Dad Poor Dad 93 There are huge changes up ahead. In the coming years, there will be more people just like the young inventor Alexander Graham Bell. 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 downsizings. So why bother developing your financial IQ? No one can answer that but you. Yet I can tell you why I myself do it. I do it because it is the most exciting time to be alive. I’d rather be welcoming change than dreading change. I’d rather be excited about making millions than worrying about not getting a raise. This period we are in now is a most exciting time, unprecedented in our world’s history. Generations from now, people will look back at this period of time and remark at what an exciting era it must have been. It was the death of the old and birth of the new. It was full of turmoil, and it was exciting. So why bother developing your financial IQ? Because if you do, you will prosper greatly. And if you don’t, this period of time will be a frightening one. It will be a time of watching some people move boldly forward while others cling to worn-out life preservers. Land was wealth 300 years ago. So the person who owned the land owned the wealth. Later, wealth was in factories and production, and America rose to dominance. The industrialist owned the wealth. Today, wealth is in information. And the person who has the most timely information owns the wealth. The problem is that information flies around the world at the speed of light. The new wealth cannot be contained by boundaries and borders as land and factories were. The changes will be faster and more dramatic. There will be a dramatic increase in the number of new multimillionaires. There also will be those who are left behind. I find so many people struggling today, often working harder, simply because they cling to old ideas. They want things to be the way they were, and they resist change. I know people who are losing their jobs or their houses, and they blame technology or the economy or their boss. Sadly, they fail to realize that they might be the problem. Old ideas are their biggest liability. It is a liability simply because they Chapter Five: Lesson 5 94 fail to realize that while that idea or way of doing something was an asset yesterday, yesterday is gone. One afternoon I was teaching how to invest using a board game I had invented, CASHFLOW®, as a teaching tool. A friend had brought someone along to attend the class. This friend of a friend was recently divorced, had been badly burned in the divorce settlement, and was now searching for some answers. Her friend thought the class might help. The game was designed to help people learn how money works. In playing the game, they learn about the interaction of the income statement with the balance sheet. They learn how cash flows between the two and how the road to wealth is through striving to increase your monthly cash flow from the asset column to the point that it exceeds your monthly expenses. Once you accomplish this, you are able to get out of the Rat Race and out onto the Fast Track. As I have said, some people hate the game, some love it, and others miss the point. This woman missed a valuable opportunity to learn something. In the opening round, she drew a “doodad” card with the boat on it. At first she was happy. “Oh, I’ve got a boat.” Then, as her friend tried to explain how the numbers worked on her income statement and balance sheet, she got frustrated because she had never liked math. The rest of her table waited while her friend continued explaining the relationship between the income statement, balance sheet, and monthly cash flow. Suddenly, when she realized how the numbers worked, it dawned on her that her boat was eating her alive. Later on in the game, she was also downsized and had a child. It was a horrible game for her. After the class, her friend came by and told me that she was upset. She had come to the class to learn about investing and did not like the idea that it took so long to play a silly game. Her friend attempted to tell her to look within herself to see if the game reflected her in any way. With that suggestion, the woman You can play CASHFLOW Classic on the web at www.richdad.com and learn how money works. Rich Dad Poor Dad 95 demanded her money back. She said that the very idea that a game could be a reflection of her was ridiculous. Her money was promptly refunded, and she left. Since 1984, I have made millions simply by doing what the school system does not do. In school, most teachers lecture. I hated lectures as a student. I was soon bored, and my mind would drift. In 1984, I began teaching via games and simulations, and I still rely on these tools today. I always encourage adult students to look at games as reflecting back to them what they know and what they need to learn. Most importantly, games reflect behavior. They are instant feedback systems. Instead of the teacher lecturing you, the game is giving you a personalized lecture, one that is custom-made just for you. The friend of the woman who left later called to give me an update. She said her friend was fine and had calmed down. In her cooling-off period, she could see some slight relationship between the game and her life. Although she and her husband did not own a boat, they did own everything else imaginable. She was angry after their divorce, both because he had run off with a younger woman and because, after twenty years of marriage, they had accumulated little in the way of assets. There was virtually nothing for them to split. Their twenty years of married life had been incredible fun, but all they had accumulated was a ton of doodads. She realized that her anger at doing the numbers—the income statement and balance sheet—came from her embarrassment about not understanding them. She had believed that finances were the man’s job. She maintained the house and did the entertaining, and he handled the finances. She was now quite certain, that in the last five years of their marriage, he had hidden money from her. She was angry at herself for not being more aware of where the money was going, as well as for not knowing about the other woman. Games reflect behavior. They are instant feedback systems. Chapter Five: Lesson 5 96 Just like a board game, the world is always providing us with instant feedback. We could learn a lot if we tuned in more. One day not long ago, I complained to my wife that the cleaners must have shrunk my pants. My wife gently smiled and poked me in the stomach to inform me that the pants had not shrunk. Something else had expanded—me! The CASHFLOW game was designed to give every player personal feedback. Its purpose is to give you options. If you draw the boat card and it puts you into debt, the question is: “Now what can you do? How many different financial options can you come up with?” That is the purpose of the game: to teach players to think and create new and various financial options. Thousands of people throughout the world have played this game. The players who get out of the Rat Race the quickest are the people who understand numbers and have creative financial minds. They recognize different financial options. Rich people are often creative and take calculated risks. People who take the longest are people who are not familiar with numbers and often do not understand the power of investing. Some people playing CASHFLOW gain lots of money in the game, but they don’t know what to do with it. Even though they have money, everyone else seems to be getting ahead of them. And that is true in real life. There are a lot of people who have a lot of money and do not get ahead financially. Limiting your options is the same as hanging on to old ideas. I have a friend from high school who now works at three jobs. Years ago, he was the richest of all my classmates. When the local sugar plantation closed, the company he worked for went down with the plantation. In his mind, he had but one option, and that was the old option: Work hard. The problem was that he couldn’t find an equivalent job that recognized his seniority from the old company. Play CASHFLOW Classic on the web at www.richdad.com What did you learn about your true behavior from playing the game Rich Dad Poor Dad 97 As a result, he is overqualified for the jobs he currently has, so his salary is lower. He now works three jobs to earn enough to survive. I have watched people playing CASHFLOW complain that the right opportunity cards are not coming their way. So they sit there. I know people who do that in real life. They wait for the right opportunity. I have watched people get the right opportunity card and then not have enough money. Then they complain that they would have gotten out of the Rat Race if they had had more money. So they sit there. I know people in real life who do that also. They see all the great deals, but they have no money. And I have seen people pull a great opportunity card, read it out loud, and have no idea that it is a great opportunity. They have the money, the time is right, they have the card, but they can’t see the opportunity staring them in the face. They fail to see how it fits into their financial plan for escaping the Rat Race. And I know more people like that than all the others combined. Most people have an opportunity of a lifetime flash right in front of them, and they fail to see it. A year later, they find out about it, after everyone else got rich. Financial intelligence is simply having more options. If the opportunities aren’t coming your way, what else can you do to improve your financial position? If an opportunity lands in your lap and you have no money and the bank won’t talk to you, what else can you do to get the opportunity to work in your favor? If your hunch is wrong, and what you’ve been counting on doesn’t happen, how can you turn a lemon into millions? That is financial intelligence. It is not so much what happens, but how many different financial solutions you can think of to turn a lemon into millions. It is how creative you are in solving financial problems. Most people only know one solution: Work hard, save, and borrow. So why would you want to increase your financial intelligence? Because you want to be the kind of person who creates your own luck. You take whatever happens and make it better. Few people realize that luck is created, just as money is. And if you want to be luckier and create money instead of working hard, then your financial intelligence is important. If you are the kind of person who is waiting for the right Chapter Five: Lesson 5 98 thing to happen, you might wait for a long time. It’s like waiting for all the traffic lights to be green for five miles before you’ll start your trip. As young boys, Mike and I were constantly told by my rich dad that “money is not real.” Rich dad occasionally reminded us of how close we came to the secret of money on that first day we got together and began “making money” out of plaster of paris. “The poor and middle class work for money,” he would say. “The rich make money. The more real you think money is, the harder you will work for it. If you can grasp the idea that money is not real, you will grow richer faster.” “What is it?” was a question Mike and I often came back with. “What is money if it is not real?” “What we agree it is,” was all rich dad would say. The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth seemingly instantaneously. An untrained mind can also create extreme poverty that can crush a family for generations. In the Information Age, money is increasing exponentially. A few individuals are getting ridiculously rich from nothing, just ideas and agreements. If you ask many people who trade stocks or other investments for a living, they see it done all the time. Often, millions can be made instantaneously from nothing. And by nothing, I mean no money was exchanged. It is done via agreement: a hand signal in a trading pit, a blip on a trader’s screen in Lisbon from a trader’s screen in Toronto and back to Lisbon, a call to my broker to buy and a moment later to sell. Money did not change hands. Agreements did. So why develop your financial genius? Only you can answer that. I can tell you why I have been developing this area of my intelligence. I do it because I want to make money fast. Not because I need to, but because I want to. It is a fascinating learning process. I develop my financial IQ because I want to participate in the fastest game and The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth. Rich Dad Poor Dad 99 biggest game in the world. And in my own small way, I would like to be part of this unprecedented evolution of humanity, the era where humans work purely with their minds and not with their bodies. Besides, it is where the action is. It is what is happening. It’s hip. It’s scary. And it’s fun. That is why I invest in my financial intelligence, developing the most powerful asset I have. I want to be with people moving boldly forward. I do not want to be with those left behind. I will give you a simple example of creating money. In the early 1990s, the economy of Phoenix, Arizona, was horrible. I was watching a TV show when a financial planner came on and began forecasting doom and gloom. His advice was to save money. “Put $100 away every month,” he said. “In 40 years you will be a multimillionaire.” Well, putting money away every month is a sound idea. It is one option—the option most people subscribe to. The problem is this: It blinds the person to what is really going on. It causes them to miss major opportunities for much more significant growth of their money. The world is passing them by. As I said, the economy was terrible at that time. For investors, this is the perfect market condition. A chunk of my money was in the stock market and in apartment houses. I was short of cash. Because people were giving properties away, I was buying. I was not saving money. I was investing. Kim and I had more than a million dollars in cash working in a market that was rising fast. It was the best opportunity to invest. The economy was terrible. I just could not pass up these small deals. Houses that were once $100,000 were now $75,000. But instead of shopping with local real estate agents, I began shopping at the bankruptcy attorney’s office, or the courthouse steps. In these shopping places, a $75,000 house could sometimes be bought for $20,000 or less. For $2,000, which was loaned to me from a friend for 90 days for $200, I gave an attorney a cashier’s check as a down payment. While the acquisition was being processed, I ran an ad advertising a $75,000 house for only $60,000 and no money down. Chapter Five: Lesson 5 100 The phone rang hard and heavy. Prospective buyers were screened and once the property was legally mine, all the prospective buyers were allowed to look at the house. It was a feeding frenzy. The house sold in a few minutes. I asked for a $2,500 processing fee, which they gladly handed over, and the escrow and title company took over from there. I returned the $2,000 to my friend with an additional $200. He was happy, the home buyer was happy, the attorney was happy, and I was happy. I had sold a house for $60,000 that cost me $20,000. The $40,000 was created from money in my asset column in the form of a promissory note from the buyer. Total working time: five hours. So now that you are on your way to becoming more financially literate and skilled at reading numbers, I will show you why this is an example of money being invented. $40,000 is created in the asset column. Money is invented without being taxed. At 10 percent interest, $4,000 a year in cash flow is added to income. Assets BALANCE SHEET Liabilities Income Expenses Taxes Mortgage Payment $40,000 Note $20,000 Mortgage INCOME STATEMENT Rich Dad Poor Dad 101 During this depressed market, Kim and I were able to do six of these simple transactions in our spare time. While the bulk of our money was in larger properties and the stock market, we were able to create more than $190,000 in assets (notes at 10 percent interest) in those six “buy, create, and sell” transactions. That comes to approximately $19,000 a year income, much of it sheltered through our private corporation. Much of that $19,000 a year goes to pay for our company cars, gas, trips, insurance, dinners with clients, and other things. By the time the government gets a chance to tax that income, it’s been spent on legally allowed pre-tax expenses. BALANCE SHEET INCOME STATEMENT Job Assets Income Expenses Liabilities Salary Taxes Savings How much income would you have to earn if the government takes 50 percent in taxes? How long would it take you to save $40,000? Chapter Five: Lesson 5 102 This was a simple example of how money is invented, created, and protected using financial intelligence. Ask yourself: How long would it take to save $190,000? Would the bank pay you 10 percent interest on your money? And the promissory note is good for 30 years. I hope they never pay me the $190,000. I have to pay a tax if they pay me the principal, and besides, $19,000 paid over 30 years is a little over $500,000 in income. I have people ask what happens if the person doesn’t pay. That does happen, and it’s good news. That $60,000 home could be taken back and re-sold for $70,000, and another $2,500 collected as a loan-processing fee. It would still be a zero-down transaction in the mind of the new buyer. And the process would go on. The first time I sold the house, I paid back the $2,000, so technically, I have no money in the transaction. My return on investment (ROI) is infinity. It’s an example of no money making a lot of money. In the second transaction, when re-sold, I would have put $2,000 in my pocket and re-extended the loan to 30 years. What would my ROI be if I got paid money to make money? I do not know, but it sure beats saving $100 a month, which actually starts out as $150 because it’s aftertax income for 40 years earning low interest. And again, you’re taxed on the interest. That is not too intelligent. It may be safe, but it’s not smart. A few years later, as the Phoenix real estate market strengthened, those houses we sold for $60,000 became worth $110,000. Foreclosure opportunities were still available, but became rare. It cost a valuable asset, my time, to go out looking for them. Thousands of buyers were looking for the few available deals. The market had changed. It was time to move on and look for other opportunities to put in the asset column. “You can’t do that here.” “That is against the law.” “You’re lying.” I hear those comments much more often than “Can you show me how to do that?” The math is simple. You do not need algebra or calculus. And the escrow company handles the legal transaction and the servicing of the payments. I have no roofs to fix or toilets to unplug because the owners do that. It’s their house. Occasionally someone does not pay. And that is wonderful because there are late fees, or they move out and the property is sold again. The court system handles that. Rich Dad Poor Dad 103 And it may not work in your area. The market conditions may be different. But the example illustrates how a simple financial process can create hundreds of thousands of dollars, with little money and low risk. It is an example of money being only an agreement. Anyone with a high school education can do it. Yet most people won’t. Most people listen to the standard advice of “Work hard and save money.” For about 30 hours of work, approximately $190,000 was created in the asset column, and no taxes were paid. Which one sounds harder to you? 1. Work hard. Pay 50% in taxes. Save what is left. Your savings then earn 5%, which is also taxed. OR 2. Take the time to develop your financial intelligence Harness the power of your brain and the asset column. If you use option number one, be sure to factor in how much time it takes you to save $190,000. Time is one of your greatest assets. Now you may understand why I silently shake my head when I hear parents say, “My child is doing well in school and receiving a good education.” It may be good, but is it adequate? I know the above investment strategy is a small one. It is used to illustrate how small can grow into big. Again, my success reflects the importance of a strong financial foundation, which starts with a strong financial education. Chapter Five: Lesson 5 104 I have said it before, but it’s worth repeating. Financial intelligence is made up of these four main technical skills: 1. Accounting Accounting is financial literacy, or the ability to read numbers. This is a vital skill if you want to build businesses or investments. 2. Investing Investing is the science of money making money. 3. Understanding markets Understanding markets is the science of supply and demand Alexander Graham Bell gave the market what it wanted. So did Bill Gates. A $75,000 house offered for $60,000 that cost $20,000 was also the result of seizing an opportunity created by the market. Somebody was buying, and someone was selling. 4. The law The law is the awareness of accounting corporate, state and federal regulations. I recommend playing by the rules. It is this basic foundation, or the combination of these skills, that is needed to be successful in the pursuit of wealth, whether it be through the buying of small homes, apartment buildings, companies, stocks, bonds, precious metals, baseball cards, or the like. A few years later, the real estate market rebounded and everyone else was getting in. The stock market was booming, and everyone was getting in. The U.S. economy was getting back on its feet. I began selling and was now traveling to Peru, Norway, Malaysia, and the Philippines. The investment landscape had changed. We were no longer buying real estate. Now I just watch the values climb inside the asset column and will probably begin selling. I suspect that some of those six little house deals will sell and the $40,000 note will be Rich Dad Poor Dad 105 converted to cash. I need to call my accountant to be prepared for cash and seek ways to shelter it. The point I would like to make is that investments come and go. The market goes up and comes down. Economies improve and crash. The world is always handing you opportunities of a lifetime, every day of your life, but all too often we fail to see them. But they are there. And the more the world changes and the more technology changes, the more opportunities there will be to allow you and your family to be financially secure for generations to come. So why bother developing your financial intelligence? Again, only you can answer that. I know why I continue to learn and develop. I do it because I know there are changes coming. I’d rather welcome change than cling to the past. I know there will be market booms and market crashes. I want to continually develop my financial intelligence because, at each market change, some people will be on their knees begging for their jobs. Others, meanwhile, will take the lemons that life hands them—and we are all handed lemons occasionally—and turn them into millions. That’s financial intelligence. I am often asked about the lemons I have turned into millions. I hesitate using many more examples of personal investments because I am afraid it comes across as bragging or tooting my own horn. That is not my intention. I use the examples only as numerical and chronological illustrations of actual and simple cases. I use the examples because I want you to know that it is easy. And the more familiar you become with the four pillars of financial intelligence, the easier it becomes. Personally, I use two main vehicles to achieve financial growth: real estate and small-cap stocks. I use real estate as my foundation. Day in and day out, my properties provide cash flow and occasional spurts of growth in value. The small-cap stocks are used for fast growth. I do not recommend anything that I do. The examples are just that—examples. If the opportunity is too complex and I do not understand the investment, I don’t do it. Simple math and common sense are all you need to do well financially. Chapter Five: Lesson 5 106 There are five reasons for using examples: 1. To inspire people to learn more. 2. To let people know it is easy if the foundation is strong. 3. To show that anyone can achieve great wealth. 4. To show that there are millions of ways to achieve your goals. 5. To show that it’s not rocket science. In 1989, I used to jog through a lovely neighborhood in Portland, Oregon. It was a suburb that had little gingerbread houses. They were small and cute. I almost expected to see Little Red Riding Hood skipping down the sidewalk on her way to Granny’s. There were “For Sale” signs everywhere. The timber market was terrible, the stock market had just crashed, and the economy was depressed. On one street, I noticed a for-sale sign that was up longer than most. It looked old. Jogging past it one day, I ran into the owner, who looked troubled. “What are you asking for your house?” I asked. The owner turned and smiled weakly. “Make me an offer,” he said. “It’s been for sale for over a year. Nobody even comes by anymore to look at it.” “I’ll look,” I said, and I bought the house a half hour later for $20,000 less than his asking price. It was a cute little two-bedroom home, with gingerbread trim on all the windows. It was light blue with gray accents and had been built in 1930. Inside there was a beautiful rock fireplace, as well as two tiny bedrooms. It was a perfect rental house. I gave the owner $5,000 down for a $45,000 house that was really worth $65,000, except that no one wanted to buy it. The owner moved out in a week, happy to be free, and my first tenant moved in, a local college professor. After the mortgage, expenses, and management fees Rich Dad Poor Dad 107 were paid, I put a little less than $40 in my pocket at the end of each month. Hardly exciting. A year later, the depressed Oregon real estate market had begun to pick up. California investors, flush with money from their still booming real estate market, were moving north and buying up Oregon and Washington. I sold that little house for $95,000 to a young couple from California who thought it was a bargain. My capital gains of approximately $40,000 were placed into a 1031 tax-deferred exchange, and I went shopping for a place to put my money. In about a month, I found a 12-unit apartment house right next to the Intel plant in Beaverton, Oregon. The owners lived in Germany, had no idea what the place was worth, and again, just wanted to get out of it. I offered $275,000 for a $450,000 building. They agreed to $300,000. I bought it and held it for two years. Utilizing the same 1031-exchange process, we sold the building for $495,000 and bought a 30-unit apartment building in Phoenix, Arizona. We had moved to Phoenix by then to get out of the rain, and needed to sell anyway. Like the former Oregon market, the real estate market in Phoenix was depressed. The price of the 30-unit apartment building in Phoenix was $875,000, with $225,000 down. The cash flow from the 30 units was a little over $5,000 a month. The Arizona market began moving up and, a few years later, a Colorado investor offered us $1.2 million for the property. The point of this example is how a small amount can grow into a large amount. Again, it is a matter of understanding financial statements, investment strategies, a sense of the market, and the laws. If people are not versed in these subjects, then obviously they must follow standard dogma, which is to play it safe, diversify, and only invest in secure investments. The problem with “secure” investments is that they are often sanitized, that is, made so safe that the gains are less. The problem with “secure” investments is that they are often sanitized, that is, made so safe that the gains are less. Chapter Five: Lesson 5 108 Most large brokerage houses will not touch speculative transactions in order to protect themselves and their clients. And that is a wise policy. The really hot deals are not offered to people who are novices. Often, the best deals that make the rich even richer are reserved for those who understand the game. It is technically illegal to offer speculative deals to someone who is considered not sophisticated, but of course it happens. The more sophisticated I get, the more opportunities come my way. Another case for developing your financial intelligence over a lifetime is simply that more opportunities are presented to you. And the greater your financial intelligence, the easier it is to tell whether a deal is good. It’s your intelligence that can spot a bad deal, or make a bad deal good. The more I learn—and there is a lot to learn—the more money I make simply because I gain experience and wisdom as the years go on. I have friends who are playing it safe, working hard at their profession, and failing to gain financial wisdom, which does take time to develop. My overall philosophy is to plant seeds inside my asset column That is my formula. I start small and plant seeds. Some grow; some don’t. Inside our real estate corporation, we have property worth several million dollars. It is our own REIT, or real estate investment trust. The point I’m making is that most of those millions started out as little $5,000 to $10,000 investments. All of those down payments were fortunate to catch a fast-rising market and increase tax-free. We traded in and out several times over a number of years. We also own a stock portfolio, surrounded by a corporation that Kim and I call our “personal mutual fund.” We have friends who deal specifically with investors like us who have extra money each month to invest. We buy high-risk, speculative private companies that are just about to go public on a stock exchange in the United States or Canada. An example of how fast gains can be made are 100,000 shares purchased for 25 cents each before the company goes public. Six months later, the company is listed, and the 100,000 shares now are worth $2 each. If the company is well managed, the price keeps going up, and the stock may go to $20 or more per share. There are years when our $25,000 has gone to a million in less than a year. Rich Dad Poor Dad 109 It is not gambling if you know what you’re doing. It is gambling if you’re just throwing money into a deal and praying. The idea in anything is to use your technical knowledge, wisdom, and love of the game to cut the odds down, to lower the risk. Of course, there is always risk. It is financial intelligence that improves the odds. Thus, what is risky for one person is less risky to someone else. That is the primary reason I constantly encourage people to invest more in their financial education than in stocks, real estate, or other markets. The smarter you are, the better chance you have of beating the odds. The stock plays I personally invested in were extremely high-risk for most people and absolutely not recommended. I have been playing that game since 1979 and have paid more than my share in dues. But if you will reread why investments such as these are high-risk for most people, you may be able to set your life up differently, so that the ability to take $25,000 and turn it into $1 million in a year is low-risk for you. As stated earlier, nothing I have written is a recommendation. It is only used as an example of what is simple and possible. What I do is small potatoes in the grand scheme of things. Yet for the average individual, a passive income of more than $100,000 a year is nice and not hard to achieve. Depending on the market and how smart you are, it could be done in five to 10 years. If you keep your living expenses modest, $100,000 coming in as additional income is pleasant, regardless of whether you work. You can work if you like or take time off if you choose and use the government tax system in your favor, rather than against you. My personal basis is real estate. I love real estate because it’s stable and slow-moving. I keep the base solid. The cash flow is fairly steady and, if properly managed, has a good chance of increasing in value. The beauty of a solid base of real estate is that it allows me to take greater risks, as I do with speculative stocks. It is not gambling if you know what you’re doing. It is gambling if you’re just throwing money into a deal and praying. Chapter Five: Lesson 5 110 If I make great profits in the stock market, I pay my capital-gains tax on the gain and then reinvest what’s left in real estate, again further securing my asset foundation. A last word on real estate: I have traveled all over the world and taught investing. In every city, I hear people say you cannot buy real estate cheap. That is not my experience. Even in New York or Tokyo, or just on the outskirts of the city, prime bargains are overlooked by most people. In Singapore,with their high real estate prices, there are still bargains to be found within a short driving distance. So whenever I hear someone say, “You can’t do that here,” pointing at me, I remind them that maybe the real statement is, “I don’t know how to do that here—yet.” Great opportunities are not seen with your eyes. They are seen with your mind. Most people never get wealthy simply because they are not trained financially to recognize opportunities right in front of them. I am often asked, “How do I start?” In the final chapter of this book, I offer 10 steps that I followed on the road to my financial freedom. But always remember to have fun. When you learn the rules and the vocabulary of investing and begin to build your asset column, I think you’ll find that it’s as fun a game as you’ve ever played. Sometimes you win and sometimes you learn. But have fun. Most people never win because they’re more afraid of losing. That is why I found school so silly. In school we learn that mistakes are bad, and we are punished for making them. Yet if you look at the way humans are designed to learn, we learn by making mistakes. We learn to walk by falling down. If we never fell down, we would never walk. The same is true for learning to ride a bike. I still have scars on my knees, but today I can ride a bike without thinking. The same is true for getting rich. Unfortunately, the main reason most people are not rich is because they are terrified of losing. Winners are Great opportunities are not seen with your eyes. They are seen with your mind. Rich Dad Poor Dad 111 not afraid of losing. But losers are. Failure is part of the process of success. People who avoid failure also avoid success. I look at money much like my game of tennis. I play hard, make mistakes, correct, make more mistakes, correct, and get better. If I lose the game, I reach across the net, shake my opponent’s hand, smile, and say, “See you next Saturday.” There are two kinds of investors: 1. The first and most common type is a person who buys a packaged investment. They call a retail outlet, such as a real estate company, a stockbroker, or a financial planner, and they buy something. It could be a mutual fund, a REIT, a stock or a bond. It is a clean and simple way of investing. An analogy would be a shopper who goes to a computer store and buys a computer right off the shelf. 2. The second type is an investor who creates investments. This investor usually assembles a deal in the same way a person who buys components builds a computer. I do not know the first thing about putting components of a computer together, but I do know how to put pieces of opportunities together, or know people who know how. It is this second type of investor who is the more professional investor. Sometimes it may take years for all the pieces to come together. And sometimes they never do. It’s this second type of investor that my rich dad encouraged me to be. It is important to learn how to put the pieces together, because that is where the huge wins reside, and sometimes some huge losses if the tide goes against you. If you want to be the second type of investor, you need to develop three main skills. Chapter Five: Lesson 5 112 1. Find an opportunity that everyone else missed. You see with your mind what others miss with their eyes. For example, a friend bought this rundown old house. It was spooky to look at. Everyone wondered why he bought it. What he saw that 

we did not was that the house came with four extra empty lots. He discovered that after going to the title company. After buying the house, he tore the house down and sold the five lots to a builder for three times what he paid for the entire package. He made $75,000 for two months of work. It’s not a lot of money, but it sure beats minimum wage. And it’s not technically difficult. 2. Raise money. The average person only goes to the bank. This second type of investor needs to know how to raise capital, and there are many ways that don’t require a bank. To get started, I learned how to buy houses without a bank. It was the learned skill of raising money, more than the houses themselves, that was priceless. All too often I hear people say, “The bank won’t lend me money,” or “I don’t have the money to buy it.” If you want to be a type-two investor, you need to learn how to do that which stops most people. In other words, a majority of people let their lack of money stop them from making a deal. If you can avoid that obstacle, you will be millions ahead of those who don’t learn those skills. There have been many times I have bought a house, a stock, or an apartment building without a penny in the bank. I once bought an apartment house for $1.2 million. I did what is called “tying it up,” with a written contract between seller and buyer. I then raised the $100,000 deposit, which bought me 90 days to raise the rest of the money. Why did I do it? Simply because I knew it was worth $2 million. I never raised the money. Instead,the person who put up the $100,000 gave me $50,000 Rich Dad Poor Dad 113 for finding the deal, took over my position, and I walked away. Total working time: three days. Again, it’s what you know more than what you buy. Investing is not buying. It’s more a case of knowing. 3. Organize smart people. Intelligent people are those who work with or hire a person who is more intelligent than they are. When you need advice, make sure you choose your advisor wisely. There is a lot to learn, but the rewards can be astronomical. If you do not want to learn those skills, then being a type-one investor is highly recommended. It is what you know that is your greatest wealth. It is what you do not know that is your greatest risk. There is always risk, so learn to manage risk instead of avoiding it