Wisdom of Rich Dad

One of the key lessons we learn in life is that it is important to save. There is a big difference though, between what we learn and what we do and many people find saving difficult.

Those people who feel guilty about not saving will be interested in a concept being promoted by Robert Kiyosaki, author of Rich Dad, Poor Dad, who suggests that savers are losers. Before all non-savers get too comfortable with that proposition, his point is not that everyone should spend rather than save. Saving implies putting money away on a regular basis into a bank account where it will earn interest and slowly increase in value with compound interest.

There are three reasons why you could argue that people who save are losers.

• Firstly, the return on your savings is reduced because you pay tax on the interest earned.
• Secondly, over time, the effect of inflation will reduce the purchasing power of your money. In other words, if you save $100 and choose to spend it ten years from now, you will not be able to buy as much with your money as you can today.
• Thirdly, bank deposits offer a low rate of return when compared with other investments. That is because bank deposits are seen to be less risky than other investments.

The point made by Kiyosaki is that if you really want to get ahead financially, you are better to invest rather than save.

Investing in growth assets such as property and shares or investing in a business of your own should give you better protection against tax and inflation, and a higher return over the long term.

In my view, the best approach is to do a little of everything; invest for a good return, save for security and spend to enjoy life.

Robert Kiyosaki likes real estate investing is because real estate touches each part of his financial statement.

Starting with his best-selling book Rich Dad Poor Dad and continued in many of his subsequent books, Robert explains how real estate gives cash flow to his income statement and on the expense side of the income statement he’s able to deduct the property’s depreciation as an expense.

When seen from the balance sheet, he’s able to gain appreciation on the asset side and the leverage provided by the bank rounds out the liability side of the balance sheet.

Through a property management company you can also access the four parts of the financial statement.  Here’s how:

Balance Sheet:  Asset-side

Every property producing monthly rent is an asset.  It is possible to sell the rights to manage the property to another property manager for a lump sum of money.

Balance Sheet:  Liability-side

Robert uses his banker’s money aka leverage in order to purchase a large property with only a small percentage as a down payment.  When the property goes up in value he is able to keep the entire appreciation amount without having to share it with the bank.  He can use leverage and still get the benefit of 100% of the appreciation.
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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?

Robet Kiyosaki (Rich Dad, Poor Dad) is interviewed by NewsMax.tv and explains how investors can protect themselves from inflation.  Silver is a bargain today he mentions.  He reminds us who is really controlling the country too and it isn’t Obama.

What is the first thing that comes to mind when we talk about “Investing”?

I believe to most it simply means money making money! Doesn’t that sounds exciting and attractive.

However, it is time for the reality check, not all investments make money. In fact, many investments lose money.

So, it is quite amazing that since investments lose most of the time, shouldn’t the first thing that comes to mind when mentioning “investing” be losing money.

That is why, the first step before even considering investing is to determine how willing you are to accept loses and still sleep well at night. No point to start investing only to find yourself affecting your physical and mental health when the investment takes a turn for the worse. You will be better off placing your investment in a fixed deposit and look for other more suitable ways to generate wealth.

The next step is the amount you can afford to lose. Set aside an emergency fund for a rainy day, the rule of thumb is about 6 months of your income, this amount must be kept in a liquid asset like cash, do not invest it in illiquid assets like property.

For the remainder you wish to use to invest, determine the amount you intend to lose the use of it for a period suitable of that investment asset. For example, if you have any intention to use it for short term goals (within 3 years) like purchasing a car or your wedding, do not go into stocks/shares and risk having to liquidate at a loss during a bear market when you urgently need the funds.

Instead of the common advice of risk / reward, think more holistically of risk / loss / reward. For example, if you invest $10, it is often advertised only the good side, a probability of 50% to make $5 profit. However, the picture is not complete. You also need to consider the risk of 50% chance to lose $10! Would you still take this investment? Definitely NO! Even the casino gives better odds than this. This is similar to the deal those who invested in the lehman related minibonds got.

To summarize, think of all your potential losses before jumping on the investment bandwagon.

1. Loss of sleep due to losses
2. Loss of use in an emergency
3. Loss of other opportunities it could be used for
4. Loss vs Reward vs Risk

This may be a “wet blanket” article, but it is better to be prepared than to learn it the hard way after you started investing. Focusing on losses and practicing proper money managing techniques like stop losses and good exit strategies, the winnings will subsequently follow.

Happy investing by analyzing the potential losses first.