Wisdom of Rich Dad

For as long as there have been entrepreneurs, they have always used certain business principles to build multi-million companies. Then, about 12 years ago, these business principles were popularized and became known as the “Cash Flow Quadrant” by the best selling financial education author, Robert Kiyosoki in his book “Rich Dad Poor Dad”. Together with Donald Trump, they said “The only way to amass true wealth is having your own business and/or investing wisely.”

World wide, the true wealthy have mastered wealth in two ways. They own a business and are also investing their way to wealth so they don’t always have to work for their money. Obviously, the goal here is to have their money work for them so they don’t have to work as hard at the business. It is not a new paradigm, rather it’s been used by entrepreneurs forever but the great majority of the population have never caught that vision nor have most colleges and universities.

Historically, and it remains true to this day, we’ve all been taught to work for our paycheck by being employed by someone else or a big corporation or having a profession. Also, we’ve been taught to take advantage of our employer’s retirement plan and other fringe benefits and when we are old and gray, our retirement funds and medical plans will take care of us. Read the rest of this entry »

Are you buying rounds at the bar on payday, feeling generous? Everybody wants your money, you know. The government takes its share before you even get it. You can change that.

You are so square. Thinking and doing the same thing over and over again. You are used to it. Let me shed some light. Our workmanship is divided in four categories, according to the author and entrepreneur Robert Kiyosaki of The Cash-Flow Quadrant. It is divided in four boxes.

On the left side is the box named “e” as in employee, and the other is named “s” as in self-employed or small business owner. This side receive earned income, working for money. The right side boxes are “b” as in business owner and “i” as in investor. This side receive cash-flow from a portfolio of income streams. They practically work for free due to future rewards.

How does your financial life look like? You have chosen security. The monthly paycheck always slipping through your fingers. It becomes expenses on your balance sheet. The expenses are food, clothes, telephone, costs for sustenance and so on. Interest from loans is a big one. The next month you are at it again. Playing the same game. The rat-race. It is never going to end.

This is insanity and indicates a low financial intelligence. This can not be safe nor secure! Even a well paid work can make you poor. The assets you think you have are in fact liabilities, taking money from your pockets instead of placing them there. Take a good look at your balance sheet and get a grip on how the money flows in your life. Earned money is difficult to protect and are high-taxed income.

It could be like this. The “b” and “i” people gain financial freedom through systems built on other peoples money and other peoples time. These people work for passive or portfolio income containing investments, stocks and mutual funds. Tax reliefs, allowances and higher financial intelligence are important benefits. The most important thing is the mindset, which is a challenge for “e” and “s” people.

What do you want? Financial literacy and knowledge eliminates the obstacles. If you want to get out of the rat-race you have to change your attitudes, habits and social life. Get a mentor. The importance of socializing with people that are where you want to be is crucial. Income and expenses must be in control. Your boss is never going to make you rich. A new job is not the solution. Are you ready? Do you have the guts to jump to the other side?

We all want to know how to make money, so the question is – why isn’t it easier? We all know time is money, but we have no time and have no money! What on earth is wrong?

Let’s use Robert Kiyosaki’s model. He simplifies the money-making world into four basic categories of types of activity.

1. People who work for others and exchange their freedom – their hours – for money. We know that as a JOB. Just Over Broke and living from pay check to pay check. Why do you suppose it is that the employer knows how to make more money than the employee? We can also conclude that within this group there are people who work VERY hard. Now, if hard work were the secret to success, then manual laborers would be higher on the list. NO, hard work does not earn money.

2. There is another group – the employers who have people working for them. There is a snag though. Many employers find they work extremely long hours and they belong to the business – having very little, or no, free time to enjoy the fruits of their labor.

3. The next is the self employed person. They also have the issue of trading dollars for hours. How many of them can walk away from the business and see it prosper in their absence? See what I mean.

All three of these groups suffer the old and dramatic problem of hours versus money. Some have lots of time and no money. Some have lots of money, but no time. None of the above has both time and money.

4. Group four has it all. These are the people who invest. They invest in such a way that in their presence, or in their absence, they still make money. Now that is living free! Typically, they own real estate, have investments; but a new breed has been born with the internet explosion.

There are many entrepreneurs who make a very nice living using automated systems on the internet. These systems mean that the person can work a few hours a week, or a month and still make a very nice living.

Most of them work from a home office; no commuting for them, and NO boss! Many work in network marketing. Now, I know, network marketing has a tarnished image, but why? Because, so many tried and failed… Let’s get real now. How many new businesses fail? 95% fail. So, if 95% of people try network marketing and fail, why is the system maligned? It’s NO different from reality in business. The reason may be that people think only the guys at the top get all the money. Wait a minute! Who gets all the money in any business? The guys at the top! So, again I ask why network marketing should be badly thought of? I say, that if the company has good training and repeat sales products, then go for it!

I would also add that both Kiyosaki and Donald Trump speak highly of the concept of network marketing. Guess what my preferred business choice is.

You got it – network marketing. And do you know why?

- Low start up cost
- Low fixed costs
- Flexible hours
- Passive income
- Unlimited potential

It is true that income is slow to come at first it is not usually fast money – but what if we can show how to make money from Day One?

What is the downside to Network Marketing? Many, many people suffer initially because of high rejection. They chase people and hear too many NOs. And they spend fortunes buying leads and advertising. The problem is in the posture – trying to sell family and friends on an idea. But people don’t like to be sold. They like to buy an idea. It’s the selling that creates the rejection.

Something struck me while reading Robert Kiyosaki’s latest book, “The Conspiracy of the Rich“. As usual, his new books always have resemblance in terms of content to his previous books. But I did not remember coming across this concept while reading “Rich Dad Poor Dad” or “Cash Flow Quadrant”. Maybe this is what people mean by learning new things from revisiting books that you have read. The concept that I am talking about is ”investing for cash flow” rather than the commonly accepted “investing for capital gains”.

Investing for cash flow means that you are investing in assets that will generate a regular and sizeable income stream to your wealth. While for capital gains, you buy an asset that will go up in price in the future. Robert is saying that most people invest for capital gains which is more risky due to the uncertainty of the future. This is especially so in the stock market where the probability of losing the value of the assets during a market crash is too high. Rich Dad’s analogy will be the game of Monopoly where every player aims to increase cash flow by owning more properties, houses and hotels and collecting rent from them. There is no aim of capital gain involved.

As he gave a few examples vaguely, I am not clear what are good cash flow generating assets to invest in. Robert’s cash flow assets are:

1) Business
2) Real Estate – rental collected every month
3) Oil – Partner of oil drilling. A discovery will entitle a part of the oil and gas sold monthly
4) Royalties – from his books, games and financial education products

Out of the 4 cash flow generating assets, it seems like real estate is more likely the choice for ordinary investors, at least for me. Firstly, it enables you to get the biggest loan from the bank which translates to biggest leverage that you can ever get from controlling an asset. Secondly, the interest for the debt is the lowest. Thirdly, there is potential capital gains alongside with regular cash flow.

Other than the four examples, I cannot really think of what other good cash flow generating assets available for investment.

Dividends from stocks? You probably have to own alot of stocks to generate a decent cash flow.

Coupon payments from bonds?

Lend money and collect interest via Prosper?

Are there other good cash flow assets you can think of?

What makes rich gets richer? We notice that the rich keeps on getting richer while some of the poor gets poorer. Kiyosaki continued his teachings on his “Rich Dad Guide to Investing”. If you are not familiar, there’s this one rule originated by the Italian Economist Vilfredo Pareto in 1897 called “Pareto’s Principle or 80/20 Rule” also known as the Principle of Least Effort.

In business, we can apply it and we can say: put most of our efforts on the 20% of things that bring in 80% of the income in our business. Kiyosaki agreed with the 80/20 Rule for overall success in all areas but not for money. He went on to say that when it comes to money, he believed in the 90/10 Rule.

He noticed that 10% of people had 90% of the money. In the world of show business, 10% of the actors and actresses had 90% of the money. In the world of sports, 10% of the athletes made 90% of the money. The same 90/10 Rule applies to the world of investing. That is, 10% of the investors gained 90% of the wealth in the world. Would you want to be included in that 10% that owned 90% of the wealth?

Kiyosaki differentiated between an average investor vs. rich investor or commonly known as the 90/10 investor with regards to their thinking. This is also what makes the rich even richer. Let’s look how rich investor thinks.

Most investors say, “don’t take risks,” the rich investor takes risks. The world is full of risks and this is also applicable to the world of investing. We all know that a high return involves a high risk. And the higher the returns, the more profitable the investment is. The rich investor thinks about how to improve his skills so he can take more risks. While most investors lives in fear of stock market crashes, the rich investor looks forward to market crashes as an avenue or opportunity to make more money. Read the rest of this entry »

In his third or fourth “Rich Dad Poor Dad” book, Robert Kiyosaki expresses the advantages of investing in real estate by describing another type of cash flow quadrant.

This cash flow quadrant describes the four ways to generate money through investing in real estate.

They are: depreciation, tax benefits, rental-income, and appreciation.

I like this model as it is simple to understand and remember.

Let’s define each one a little bit more clearly:

• Depreciation – This is, thanks to Alan Greenspan, the amount structure loses in value over time, assuming no improvements have been done to it. Residential real estate, for example, is considered to fully depreciate its value in 27 1/2 years. So, for the purpose of taxes, an investor may choose to take that depreciation as a deduction. If the structure is worth $200,000, it’s depreciation for the year is $7273.
• Tax benefits – Anyone who holds a mortgage for property knows that all that mortgage interest is tax deductible. Similarly, when acquiring additional properties, the mortgage interest from those properties are also deductible, as well as improvements made to that real estate.
• Rental income – When we put a tenant into a property, be it residential, commercial or industrial, we usually receive an amount of rent associated with that occupancy. Hopefully that rent will cover the mortgage payment with some money left over.
• Appreciation – We all know that although we take depreciation at tax time, the property itself is actually appreciating in value as cities and populations grow. Typically, unless a major economic or whether related disaster occurs, real estate only increases in value. That is why banks and other lending institutions are willing to lend most, if not all the money to purchase properties.