Wisdom of Rich Dad

I have by now understand that to achieve my financial freedom, I need to build up mu passive income.  Only when my passive income is greater than my expenses and liabilities, I can then do not have to work in order to survive.

Robert Kiyosaki suggested that I can build up my passive income by investing into income generating asset class such as business, real estate or paper assets (See this post where Robert Kiyosaki explained about these income generating assets).

Of the 3, I personally fancy paper assets.  Investing into business and real estate seems to me to require more effort for me to be familiar with the business domain and the real estate market.  And with paper assets, it seems to be more straightforward and easier to buy and sell. 

In the paper asset class, I usually deal with stocks and shares.  I buy and sell with the objective of capital gain.  And of course, I do not profit everytime.  However, recently, I came across a short article from fool.com that talks about investing into stocks for dividends instead of just for capital gain.  With the dividends pay to me, my investment risk into the stock will be reduced.  Seems to me this is the better way to earn from stocks investment.

Finding the best dividend stocks takes some legwork and careful analysis. But here is some points on how to find the best long-term winners from fool.com:

1. Avoid the Highest Dividend Stocks — You can’t pick stocks by dividend yield alone. Above-normal dividends are often a red flag for a company in distress. Studies have consistently shown that you will earn higher long-term returns by avoiding risky stocks with overly high dividends.
2. Beware the “Dividend Time Bombs” — Not all dividends are created equal. Even if a company has a generous dividend, it must be able to maintain it. A “doomed-to-be-cut” dividend can be worse than no dividend at all. Once a dividend is cut, it’s likely to make the share price fall also.
3. Cash Is King — Free cash flow (FCF) is the true health of the business. Find the companies that generate tons of it. Even in the worst of times, those flush with greenbacks have options. Firms with cash can buy back their shares to raise stock prices, make their debt payments, increase dividends, and buy other profitable businesses. That’s why cash flow is the single most important factor that determines value in the marketplace.
4. Don’t Focus on Income without Growth — Only growing businesses are truly healthy. So cash flow needs to be strong enough to not only pay a healthy dividend but also generate enough cash to grow and stay strong strategically.
5. Don’t Forget Value — An investment’s total yield depends on both the dividend amount and the stock price. Stocks of companies making real products and real profits often don’t make the headlines. So dividend stocks can also be a great source of hidden value. Finding value by focusing on dividends first can help you avoid catching the “falling knives” that trap some value investors.
6. Have a Longer-Term Focus — Many brokerage houses make investment recommendations based on a very short-term view of the world — often a maximum 12-month timeframe. Individual investors should have at least a three- to five-year view when considering investments. More time helps you fully realize the true power of compounding dividends.

Robert Kiyosaki explaining about Cashflow 202 game in this video.

Cashflow 101 game is about the fundamentals while Cashflow 202 is about fundamental and technical financial skills.  Cashflow 202 is more difficult and is more close to the real life investing situations.

Financial knowledge is the key to your financial freedom. 

This was the major message that I got from Robert Kiyosaki’s book “Rich Dad, Poor Dad”.  It is of this concern that there is a general lack of financial knowledge among the population that drove Robert Kiyosaki to write the book. 

Between both gender, I suspect the rate of financial literacy is lower for the female gender.  Why is this so?

A possible reasoning, which Erin Yoshimura described concisely on Denver Post blog:

But learning about investments is like learning to speak a new language which my brain is not wired to do.

Traditionally, women left the financial decisions to their husbands, mostly because they were the bread-winners in the family. Even though that dynamic has changed considerably today, many women still haven’t taken charge of their money for many valid reasons, or, as these authors point out — excuses. Not enough time, not smart enough, too busy taking care of family/parents, not enough money are some common reasons.

Erin then give reasons why women should not rely solely on their husband to handle their financials. 

The sobering statistics show that:

• 50% of marriages end in divorce and the women are left to support themselves and their children
• A year after divorce, a woman’s standard of living drops 73%
• About 7 out of 10 women will at some time in their life live in poverty
• Married baby boomers can expect to outlive their spouses an average of 15 years and will need to support themselves during those years
• Of the elderly who live in poverty, 75% are women and 80% of these women were not poor when their husbands were alive
• Women earn about 74 cents to every dollar that a man makes
• 80% of women said that they’d rely on social security in retirement
• 2/3 of women haven’t talked to their husbands about life insurance and wills

There you have it, woman!  Take charge of your financials if you want to become financial free.  Educate yourself and accumulate your financial knowledge in small manageable steps.  There are many examples of woman who started with little financial knowledge and little money and they are able to successfully build up their wealth.  Stop finding excuses and start learning today.

OK, you have read Robert Kiyosaki’s “Rich Dad, Poor Dad” and “Cashflow Quadrant”.  You understood that to achieve your financial success, you would want to be an investor (I Quadrant of the Cashflow Quadrant). 

You have some money, you want to invest.  What kind of investments would you go for?  High return investments which also carry high risk or low risk investments which has lower return?  Well, it depends on your risk tolerance level. 

Matthew Paulson has this to say about risk and investing.

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by Matthew Paulson

If you’re a savvy investor, you are naturally going to seek out the best interest rate on your money. If we were looking at interest rates and nothing else, we would head down to Vegas and put all of our money on double zeros, because after all it pays out 37 to 1! Of course we don’t do this because there’s too much risk involved. Other people are more focused on security, and choose to keep their money where there is no chance of losing it. This doesn’t mean we should go put it under a mattress though, because you are earning nothing in interest, and if the house were to go up in flames; all that money would be gone. Your financial life should not be devoid of any risk, but it should not take unreasonable amounts of risk either, it’s a matter of making sure the risks we take are reasonable, and appropriate.

There are some people who put way too much risk into their financial lives. They will do things such as buy a rental with zero money down, speculate in single stocks, invest in new companies, trade in currencies, borrow too much money, and not keep enough around for emergencies. If you let too much risk into your life, you are going find yourself in a world of hurt because things do not always turn out perfectly. Your rental could go un-rented, your investments could fail, and you could find yourself flat broke and possibly homeless.

There are also some people who don’t let enough risk into their lives. They invest in CD’s because they are guaranteed, settle for low paying secure jobs, and are unwilling to try new businesses or take another job. These people over insure themselves just incase something happens. These people end up losing a lot of money because they refuse to accept any risk.

So how much risk is appropriate? It is okay to take some risk in your financial life, but don’t take too much. Investing in things such as mutual funds is just fine to do, because even though there is some risk involved, they average 10% to 15% over long periods of time. You probably want to avoid extremely risky investments, such as unproven businesses, futures, options and the like. You will also want to avoid underperforming investments such as simple savings accounts and not investing the money at all.

You’ll want some reasonable insurance such as life, health, long-term care, and automobile, but you want to avoid gimmick insurances such as identity theft, credit life, and cancer insurance. It is fine to borrow some money here and there for things such as a mortgage, but don’t let your debt to income ratio be too high, because then you will be paying far too much as a percentage of your income in payments.

It’s all about optimizing the amount of risk you have. It can be done mathematically with the term Beta, that’s beyond most of our mathematical abilities. Accept some risk in your life, but not too much. Be reasonable!

Robert Kiyosaki and Donald Trump are interviewed on CBS News by Harry Smith on their new book called “Why We Want You To Be Rich”.  In the interview, they talked about the motivation behind them in co-authoring this book, and what is the message they are trying to get out to people.

 

Click on the image above and it will take you to the CBS News video.

In the interview, Harry Smith introduced Robert Kiyosaki as Robert Kiyosaka.

 

Robert Kiyosaki says that there is good debt and there is bad debt.  The difference between the good debt and the bad debt is the motivation behind the borrowing of money.  When you borrow money to use for investment that will bring about generating profit or income for you, that is good debt.  Bad debt is brought about by using the money on doodads (stuffs which do not produce income) or liabilities (eg, big cars, expensive jewellery).

Bad debt has been becoming a society concern in the US, where credit card debt is on the rise.  When you knowingly or unknowingly gets into credit card debt, what measures will you take in trying to pay them off?  Cut down on the cup of latte from Starbucks?

Seattle Times reports of how one 26 year-old guy did the extreme to pay off his credit card debt.  Andy Bussell, 26, a student at California State University, Fullerton, chalked up $10,000 in credit card debt in July 2005.  The debt drives him to live in his pickup for the past 19 months.

California State University, Fullerton, senior Andy Bussell heads home — to a white Toyota Tacoma with a twin-size mattress in the truck bed, a camper shell for protection and black curtains for privacy.

The 26-year-old has been living in his truck for nearly 19 months, skirting rules against sleeping in vehicles while otherwise living the life of a mainstream student. What started out as a way to save some cash has turned into a journey of self-reliance and independence.

The odyssey began in 2005. Bussell was working full time as a “Mac genius” at the Apple Store in Newport Beach, sharing a $1,600-per-month apartment. He had racked up more than $10,000 in credit-card debt and was struggling to pay for school and save money. So on July 29, 2005, he started living in his truck, with the goal of lasting one year.

“Even though I had a good job, I was tired of living paycheck to paycheck and not making any headway with my credit cards,” he said. “I’ve learned that I can push myself, break down my own boundaries. I’ve been able to learn that I can change and adapt to different kinds of situations.”

The credit-card debt, which was part of the reason for his decision to live in a vehicle, is nearly paid off.

Living at the back of the truck for 19 months!  That is what I called determination to get out of debt!  Bravo!