Wisdom of Rich Dad

The bankruptcy statistics in America are alarming. The past few decades have seen a dramatic rise in the number of people that are unable to pay off their debts, and Congress has recently addressed the issue with legislation that makes it harder to qualify for this status. Following is a list of the most common causes of bankruptcy in America today.

1. Medical Expenses

A study done at Harvard University indicates that this is the biggest cause of bankruptcy, representing 62% of all personal bankruptcies. One of the interesting caveats of this study shows that 78% of filers had some form of health insurance, thus bucking the myth that medical bills affect only the uninsured.

Rare or serious diseases or injuries can easily result in hundreds of thousands of dollars in medical bills – bills that can quickly wipe out savings and retirement accounts, college education funds and home equity. Once these have been exhausted, bankruptcy may be the only shelter left, regardless of whether the patient or his or her family was able to apply health coverage to a portion of the bill or not.

2. Job Loss

Whether due to layoff, termination or resignation, the loss of income from a job can be equally devastating. Some are lucky enough to receive severance packages, but many find pink slips on their desks or lockers with little or no prior notice. Not having an emergency fund to draw from only worsens this situation, and using credit cards to pay bills can be disastrous.

The loss of insurance coverage and the cost of COBRA insurance also drain the job seeker’s already limited resources. Those who are unable to find similar gainful employment for an extended period of time may not be able to recover from the lack of income in time to keep the creditors at bay.

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Couples who are currently married, or who have stayed together at least 10 years, tie their working records — and the resulting Social Security checks — together as long as they both live. In the case of Social Security payments, the result is often better for the couple. Spouses have Social Security claiming options that single people don’t.

Here are a few ways couples can boost their Social Security benefits:

Utilize Spousal Payments

Spouses are entitled to a Social Security payout of up to 50 percent of the higher earner’s check if that amount is higher than benefits based on his or her own working record. Retired couples in which one spouse did not work or had low earnings have the most to gain from this provision. However, low-earning spouses must wait until what the Social Security Administration calls the “full retirement age” to collect the full 50 percent. (For baby boomers born between 1943 and 1954, the full retirement age is 66.)

Benefits are reduced for spouses who collect before their full retirement age. For example, a low-earning spouse whose full retirement age is 66 would only be eligible for 35 percent of the higher earner’s benefit at age 62. The spousal benefit does not increase above 50 percent of the higher earner’s benefit if claiming is delayed beyond the full retirement age.

Claim and Suspend

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Robert Kiyosaki doesn’t hesitate to rock the boat.

To the best-selling author of Rich Dad, Poor Dad, the worst thing you can do with your money is to stash it away in a 401(k).

“The worst advice most people take is that they go to school, they get a job and then they get a 401(k),” said Kiyosaki.

Take that, conventional wisdom!

For Kiyosaki and his team, the financial boogeyman is income taxes.

“Taxes are going up, and taxes are your single largest expense throughout your life,” Kiyosaki said.

And the 401(k) is one of the biggest offenders, said Tom Wheelwright, Kiyosaki’s tax specialist.

“All a 401(k) does is defer or postpone your taxes to a later date,” he said. “A 401(k) really presumes that when you retire, you’re going to be poor. It presumes that you’re going to be in a lower tax bracket than you are today.”

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REITs stand for Real Estate Investment Trusts. They are specialized companies that invest in commercial, industrial, residential and healthcare real estates.

Examples on the Singapore Stock Exchange includes CapitaCommerical Trust (Commercial), Cambridge Industrial REIT (industrial), Saizen REIT (residential) and Parkway Life REIT (healthcare). These companies buy and manage properties including shopping malls, offices, hotels, hospitals.

REITs usually pay a generous dividend because they are required by law to distribute most of their earnings to shareholders. In exchange, they receive tax incentives.

Perhaps, we can view REITs as an instrument to buy and own a small portion of a property, while at the same time shared fundings with many other shareholders to employ someone to manage that piece of property. With REITs, we can invest in real estate with no leverage, no property and no need for any stress in finding tenants and collecting rent from them.

REITs investment generally focus on dividend yield. Also, like any stocks on the exchange, investing REITs can also result in capital gain. The same can be said of investing in real properties. However, because REITs are traded on the stock exchange, it’s liquidity is much higher than the actual property itself.

So how do we choose what types of REITs to invest in? I’m not an expert in it, but I shall share some basics of what I think.

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These days there is no excuse for not knowing how much money you have in your bank account. With the advent of internet banking and now mobile banking from your phone, your bank account details are just a couple of clicks away. Of course, there are some who would rather not know how much money is left in their account! However, if you want to be a good money manager then using the technology that is available now can make a huge difference to how well you look after your hard-earned dollars.

Start by setting up automatic transfers and direct debits. Automatic transfers are a useful way of splitting up your pay into categories to help you manage your money. When you are paid, put some of your pay into an account to cover all your fixed expenses, such as your mortgage or rent, rates, insurance premiums, gym membership etc.

Have another amount going into a savings account that will cover any unexpected expenses as well as holidays and home improvements. Transfer an amount into yet another account that will cover your personal expenses such as hair cuts, beauty treatments, clothes, and the fun stuff (coffees, lunches and nights out). What is left behind should be enough to pay for the necessities such as food, petrol and phone.

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Over the weekend, we had some friends round, who are interested in getting out of the Rat Race and sorting out their finances. They have read my book, and we have gone through their budgets and spending habits and had a good old sort out already – but they are now interested in the next step.

So – we played Cashflow. This is a board game based around the Rich Dad, Poor Dad books by Robert Kiyosaki. In it, you are given a profession, with an income after expenses, and with that – you invest in order to get out of the rat race and fulfil your dream.

The four of us picked our profession cards: I ended up as an airline pilot with a Cashflow of $2,600. One of my friends picked the Janitor Card, with a Cashflow of just $650 a month. This is the lowest earning card in the pack. I predicted that the mild mannered Janitor would win the game: and he did.

In fact – no only did he win the game, the rest of us hadn’t even got out of the Rat Race and onto the Fast Track when he did it.

So – why is that predictable? Why do you not have to have a high income to be wealthy?

Because you do not need a high passive income to live on if your expenses are low! The Janitor may have a low income, but he has low expenses: a small mortgage, not many other debts, and when he has a child, the expenses for the child are relatively low (that game seems to assume that the high income earners clothe their children in Baby Gap and send then to private prep schools).

The janitor needed to get a passive income of just $950 to get out of the Rat Race. I needed a passive income of $6,900 to cover my expenses. So basically – if you can cut your expenses; you can retire on your investments quicker.

Not only does the game show that a High Income is not necessary in order to become wealthy – it also shows you how cutting your expenses can affect your outcome. Some expenses in the game – you cannot alter, but you can choose to pay down things like car loans, credit cards and retail debt. Doing that increases your monthly Cashflow and can have quite a positive impact on your game. It also means of course, that you do not need such a high passive income.

If you are thinking of going into investing in any way seriously – I really recommend playing this game. It’s obviously a highly simplified version of real life, but it does teach you a lot about how things work. You can buy and sell shares, property and businesses; you can get downsized; you can have (expensive) children; you get to waste money on Doodads (Rich Dad’s name for anything that wastes your money – like coffee). It is a fun way to learn the basics and to get your head round what you look for in an investment.

Cashflow is a pretty expensive game, so look around for people running games nights in your area. If you can’t find one – contact me and ill see if I can put your in touch with someone running a game.