The difference between traditional and financial education
Over the last couple weeks, all across our country, school has been starting for American youths. The start of school is a hectic and exciting time for parents, and a proud one. All good parents want to give their children an advantage in life, and the conventional wisdom is that doing well in school is one of the best advantages you can give a child.
Rarely, however, do we stop and ask, "Why?"
What are our schools teaching our kids? Is it really the information they need to succeed in life? Are they being taught to think for themselves and to solve problems? Or are they being taught to take orders and follow rules? Will they really have an advantage in life?
The answer, one I explore in depth in my latest book, Why “A” Students Work for “C” Students, is that our schools do not prepare our children for success in life—unless they want to be great employees with no knowledge on money, investing, or business.
If we want our children to be successful when it comes to money, we must look for education somewhere else besides our schools.
How most parents think
My mom and dad wanted me to be successful in the E (employee) and S (self-employed) quadrants of the CASHFLOW Quadrant. My dad suggested I go to school, get my PhD, which he did himself, and work for the government or climb the corporate ladder in the E quadrant. My mom, a registered nurse, wanted me to become a medical doctor in the S quadrant.
My mom and dad believed in traditional schools such as colleges, law schools, and medical schools. They valued good grades, degrees, and credentials, such as a law degree or a medical degree.
That is how most parents think.
Thinking differently about education
My rich dad suggested I become a capitalist. That meant I had to study the skills required for success in the B (business) and I (investor) quadrants.
My rich dad believed in education, but not the type of education my poor dad believed in. Rather than go to school, my rich dad signed up for seminars and courses that improved his business and investing skills. He also took personal-development courses. He was not interested in grades or credentials. He wanted real-life skills that gave him strengths and operational skills in the B and I quadrants.
Two types of education
When I was in high school, my rich dad often flew to Honolulu to attend seminars on entrepreneurship and investing. One day, when I told my poor dad that rich dad was going to a class on sales, my poor dad laughed. He could not understand why anyone would want to learn how to sell, especially if the class hours were not applied as credit to an advanced college degree. My poor dad looked down on rich dad, who had never finished high school.
Because I had two dads with differing attitudes on education, I became aware there were two types of education.
Traditional schools were for those who wanted to be successful in the E and S quadrants. But another type of education, financial education, was for those who wanted to be successful in the B and I quadrants.
My story
In 1973, I returned from Vietnam. It was time for me to make up my mind about which dad I was going to follow. Was I going to follow in my poor dad's footsteps and go back to school to become an E or S, or take my rich dad's path and become a B or an I, eventually to become a capitalist?
That year, my rich dad suggested I take classes on real estate investing. He said, "If you want to be a successful capitalist, you must know how to raise capital and how to use debt to make money." I took his advice and attended a three-day workshop on real estate investing. It was the start of my education into the world of capitalists.
A few months later, after looking at over 100 properties, I purchased my first rental property on the island of Maui, using 100 percent debt financing and still putting $25 cash flow in my pocket each month. My real-life education had begun. I was learning to use other people's money (OPM) to make money, a skill a true capitalist must know.
In 1974, my contract with the Marine Corps was up, and I took a job with the Xerox Corporation in Hawaii, not because I wanted to climb the corporate ladder but because Xerox had the best sales-training program. Again, this was all part of my rich dad's financial education program to train me to become a capitalist.
By 1994, Kim and I were financially free, never needing a job or a company or a government retirement plan. Rich dad was correct. My education could set me free—but not education found in traditional schools.
Most likely, you're well versed in traditional education. We all go to school as kids, and most of us attend college. But if you're interested in financial education, sometimes you don't know where to start. That is why Kim and I started The Rich Dad Company, to provide the best financial education through books, interactive tools, conferences, coaching, and classes on business and investing. Even if you don’t take a look at any of the financial education we offer, I encourage you to seek out financial education provided by someone else. It’s that important.
Making money through cash flow versus capital gains
Most people make their money by working a job and collecting a monthly paycheck. People do this because it's what they are taught to do, and it is also feels safe and secure. The rich, however, don't make their money from a job or a salary. Instead, they make their money from their
investments.
The best way to make money is as an investor, but the question is, how do you make that money? If your monthly income as an investor does not come from a job, a salary, or you working, then where does it come from?
It comes from you putting your money to work, instead of you working for money. It comes from investing your money where it will deliver a consistent return. Different investments produce different results. The question is, what results do you want?
There are two primary outcomes an investor invests for:
Investor income #1: capital gains
Capital gains is the game of buying and selling for a profit. You have to keep buying and selling, buying and selling, and buying and selling...or the game and the income stop.
Capital gains occur, for example, when you buy a share of stock for $20. The stock price goes to $30, and you sell it. Your profit is called capital gains. The same is true with real estate. You buy a single-family house for $100,000. You make some repairs and improvements to the property, and you sell it for $140,000. Your profit is termed capital gains. Any time you sell an asset or investment and make money, your profit is capital gains. Of course, there are also capital losses. This occurs when you lose money on the sale.
The problem with capital gains
Unfortunately, many “flippers”—people who buy a real estate property and quickly turn around and sell it for a profit, or capital gains—got caught when the real estate market turned down. The mindset for many was that the market would continue to go up. When the market reversed and crashed, the properties were no longer worth what the flippers bought them for, and there were no buyers to flip the properties to. This is one reason why we have seen so many foreclosures and people just walking away from homes.
Most investors today are
chasing capital gains in the stock market through stock purchases, mutual funds, and 401(k)s. These investors are hoping and praying the money will be there when they get out. To me, that’s risky.
As long as market prices go up, capital-gains investors win. But when the markets turn down and prices fall, capital-gains investors lose.
Investor income #2: cash flow
Cash flow is realized when you purchase an investment and hold on to it, and every month, quarter, or year that investment returns money to you. Cash-flow investors, unlike capital-gains investors, typically do not want to sell their investments because they want to keep collecting the regular income of cash flow.
If you purchase a stock that pays a dividend, then, as long as you own that stock, it will generate money to you in the form of a dividend. That is called cash flow. To cash flow in real estate, you could purchase a single-family house and, instead of fixing it up and selling it, you rent it out. Every month you collect the rent and pay the expenses, including the mortgage. If you bought it at a good price and manage the property well, you will receive a profit or positive cash flow.
The cash-flow investor is not as concerned as the capital-gains investor whether the markets are up one day or down the next. The cash-flow investor is looking at long-term trends and is not affected by short-term market ups and downs.
The advantage of cash flow investing
The best thing about cash flow is that it money flowing into your pocket on a continual basis whether you're working or not. It is your money working for you. And generally, cash-flow investing is based on fundamentals that aren't as susceptible to market swings like capital-gains investments, which means that even in bad times, money still flows into your pockets.
Additionally, cash flow is what is known as passive income, which is the lowest taxed type of income. This is not always the case with capital gains taxes, which vary depending on the type of asset you've invested in and how long you've owned that asset. In some cases, the taxes can be very high.
As you know, I have recently made two Video Courses explaining the global economy. Here’s the link to the newest one, How The Economy Really Works:
The material I‘ve used in these courses was taken primarily from the three books I’ve written over the past ten years. Here, I’d like to very briefly summarize what I believe to be the most important findings from that decade of work.
An important breakthrough for me came when I read that there had been an automatic adjustment mechanism inherent to the gold standard that ensured that trade between countries balanced. Once I understood that, then the origin of economic bubbles in the post-Bretton Woods world where trade no longer had to balance became clear.
The theme of my first book,
The Dollar Crisis (which was published in 2003), was that the US trade deficit was destabilizing the global economy by blowing the surplus countries (like Japan, Thailand and China) into economic bubbles; and also by blowing the US economy itself into a bubble when the central banks of the surplus countries accumulated (as Foreign Exchange Reserves) the trade surplus dollars entering their countries and then reinvested those dollars into US dollar-denominated assets in the United States. I pointed out that central banks can only accumulate Foreign Exchange Reserves by creating their own fiat money and using it for that purpose. In that way, I highlighted the link between trade deficits, fiat money creation outside the United States and the asset price inflation inside the US when those dollars were reinvested in US dollar-denominated assets.
At that time, it wasn’t generally understood that the growth in Foreign Exchange Reserves reflected the growth in fiat money being created by the central banks accumulating the Reserves. Once it was clear that Foreign Exchange Reserves equaled fiat money creation, then the massive surge in Foreign Exchange Reserves that was then occurring took on an entirely new significance. It revealed an explosion of paper money creation on an unprecedented scale; and it could then be understood what an extraordinary impact that surge in fiat money creation was having on the global economy. It became apparent that the “global savings glut” that Fed Chairman Bernanke had identified as the cause of the global imbalances destabilizing the world was actually a global fiat money glut instead. (Total Foreign Exchange Reserves now amount to $11 trillion, having increased by $9 trillion since 2000.)
By the time I wrote
The Corruption of Capitalism in 2009, I’d worked out that the size of the US Current Account deficit relative to the size of the US Budget deficit was very important as a determinant of the direction of asset prices. Whenever the US Current Account deficit exceeded the size of the Budget deficit – as it did every year between 1996 and 2008 – it created very favorable liquidity conditions that tended to push up the price of stocks, property and other assets in the United States. That’s because the Current Account deficit threw off dollars into the global economy that were accumulated as Foreign Exchange Reserves (through fiat money creation) and then reinvested in US dollar-denominated assets. Therefore, when the Current Account deficit was larger than the Budget deficit, it not only financed the entire Budget deficit, but also resulted in the additional money being invested into other asset classes, causing their prices to inflate, bubble and, ultimately, bust.
I was inspired to write my third book,
The New Depression, when I read Irving Fisher’s brilliant book,
The Purchasing Power of Money, in 2011. I realized then that once the United States stopped backing dollars with gold in 1968, there was no longer any difference between
money and
credit. It became clear that the explosion of credit that followed that break in the link between dollars and gold made the Quantity of Money, that is the Money Supply, irrelevant and that what matters now is the Credit Supply or the Quantity of Credit. I then looked at the growth in Total Credit in the United States back to World War II and discovered that every time Total Credit (adjusted for inflation) grew by less than 2%, the United States went into recession; and that it didn’t come out of recession until there was another surge in credit growth.
Replacing the Quantity Theory of Money with the Quantity Theory of Credit turned out to create a very useful framework for understanding all aspects of the crisis in the global economy that was then underway: its causes, the government’s policy response to the crisis, what was likely to happen next and how that would likely impact asset prices going forward. The cause of the crisis was the inability of the private sector to take on any more debt (or even to repay the debt it already had). The policy response of trillion dollar budget deficits financed with trillions of dollars of fiat money creation was designed to make total credit continue to expand, even though the private sector was bust - because a contraction of credit would have caused a new Great Depression. What would come next would be determined by whether or not Total Credit began to grow by more than 2% (after inflation). Inadequate credit growth would require more fiscal stimulus or fiat money creation, while a surge in credit growth would require less. Asset prices would then tend to rise or fall depending on whether the government increased or decreased its stimulus.
I understood from the beginning that Globalization was very deflationary and that it, therefore, offset the highly inflationary influence of credit and fiat money creation. Without Globalization the rapid, credit-fuelled global growth between 1982 and 2007 would not have been possible.
Eventually, by the time I wrote The New Depression, I concluded that these changes were so profound that, in combination, they had changed the very nature of our economic system. Unlike Capitalism which had been driven by Saving and Investment, our system is driven by Credit Creation and Consumption. Creditism, therefore, is a more appropriate name for our economic system than Capitalism.
It’s the growth of Credit and fiat money (which is simply another form of Credit) that matters now. It’s certain that Credit Growth drives economic growth. In fact, it looks as though our economic system can only survive if credit continues to expand.
Our economy has changed radically during the 45 years since we abandoned gold-backed money in favor of pure fiat money. The mechanics of Creditism – as well as the dangers it poses and the opportunities it may present – are only gradually coming to be understood.
I hope you’ll watch my new course. If you do, you’ll have a better understanding of How The Economy Really Works.
Where Are You?
As I wrote in
Rich Dad Poor Dad, My rich dad often said, “If you are a true investor, it does not matter if the markets are going up or coming down. A true investor does well in any market condition.” In other words, your success is not dependent on the market, but on you.
Success or failure, wealth or poverty, depends solely on how smart the investor is. A smart investor will make millions in the stock market. An amateur will lose millions.
So what kind of investor are you? Below, I’ve listed five levels of investors. In
Rich Dad Poor Dad I write about my real dad. My real dad was very educated, worked hard, and made a good income. However, he held traditional views about money and as a result ended up struggling financially all his life – I call him my poor dad. He was in the first two levels of investors.
In
Rich Dad Poor Dad I also write about my rich dad. My rich dad, (my friend’s dad) did not have a college degree, also worked hard, but he thrived financially. Unlike my poor dad, he had a rich mindset and thought about money very differently and as a result ended up being one of the richest men in Hawaii. My rich dad was a level five investor.
Take a few minutes, be honest with yourself and determine which investor level you are at. Before you can reach your dreams you’ve got to be honest with where you are starting from.
Are You at Investor Level 1?
If there is nothing in your asset column with no income coming in from your investments and you have too many liabilities, then you are starting at the bottom level, ground zero.
If you are deeply in bad debt, your best investment might be to get out of bad debt.
There is nothing wrong with being deeply in bad debt, unless you do nothing. After I lost my first business, I was nearly a million dollars in debt. It took me almost five years to reach zero. In many ways, learning from my mistakes and taking responsibility for my mistakes was the best education I could have asked for. If I had not learned from my mistakes, I would not be where I am today.
Are You at Investor Level 2?
If you are a saver, be very careful, especially if you are saving money in a bank or in a retirement plan. In general, savers are losers.
Saving is often a strategy for people who do not want to learn anything. You see, it takes no financial intelligence to save. You can train a monkey to save money.
The risk in saving is that you learn little. And if your savings are wiped out, either by market decline or devaluation of the money supply, you wind up without money and without education.
Remember that the U.S. dollar has lost 95 percent of its value since 1971. It will not take long to lose the rest of its value.
As stated, a person can even lose money saving gold if they buy gold at the wrong price.
I suggest taking a few courses on investing, either in stocks or real estate, and see if anything interests you.
If nothing interests you, then keep saving.
Remember that the bond market is the biggest market in the world simply because most people and businesses are savers, not investors. This may sound strange to savers, but the bond market and banks need borrowers.
Are You at Investor Level 3?
This level is similar to Level 2, except that this level invests in riskier instruments, such as stocks, bonds, mutual funds, insurance, and exchange-traded funds.
Again, the risk with this level is that, if everything is lost, the investor loses everything—and learns nothing.
If you are ready to move out of Level 3, invest in your financial education and take control of your money, then Level 4 is a good level or you.
Are You at Investor Level 4?
If you are here as a professional investor, congratulations. Very few people invest the time to learn and manage their own money. The key to success at Level 4 is lifelong learning, great teachers, great coaches, and like-minded friends.
Level-4 investors take control of their lives, knowing that their mistakes are their opportunities to learn and to grow.
The fear of investing does not frighten them. It challenges them.
Are You at Investor Level 5?
To me, being a capitalist investor at level 5 is like being at the top of the world. Literally, the world is your oyster. The world has no borders. In this world of high-speed technology, it is easier than ever to be a capitalist in a world of plenty.
If you are at this level, keep learning and keep giving. Remember that true capitalists are generous because a successful capitalist knows you must give more to receive more.
It’s Your Choice
One great thing about freedom is the freedom to choose to live the life you want to live.
t’s your choice but you can’t do it alone. That’s why I have my Rich Dad Coaches and have Rich Dad World.
Here’s Help
If you are not at level four or five, I’d encourage you to get free access to the Rich Dad World PowerPack. It includes my Choose to be Rich home study course, some new webinars by my financial coaches, and many other tools that will help you go through the process of thinking, learning and doing differently with your money until you are on your way to financial freedom.
You can start your journey to freedom and empower yourself by signing up to get your FREE
Rich Dad World PowerPack, which includes sections of my best-selling book,
Rich Dad Poor Dad!
“Rich Dad World’s goal is to increase your financial IQ, and bring you a world of possibilities, a world of learning, a world of understanding. A take charge world, where you’ll be equipped to take command of your finances and live a Rich life.”
Using time, not money, to calculate how much you need to be financially free
If you (or you and your partner/spouse) stopped working today, how long could you survive financially?
That is a crucial question and one that most people will never calculate. This is why, when the unexpected happens—like a job layoff, an illness, or a divorce—so many people are not prepared. This is one reason why so many people are struggling in this economy. It’s at the time of the unexpected event that most people, for the first time, are forced to face the truth of where they are and how long they can survive financially.
What do you need to live on?
Most people calculate what they want and need in terms of money. “I need $1 million to live on for the rest of my life.” When you talk with financial planners, they talk to you about your nest egg, how much money you will have to set aside to retire.
However, there is a better way to answer the question. Instead of measuring your wealth in terms of money, it's better to measure your wealth in terms of time—what I call the Wealth Number.
The two-part question
In terms of discovering your Wealth Number, there are two important parts to the question, "If you (or you and your partner/spouse) stopped working today, how long could you survive financially?"
- If you stopped working today…
That means there are no more paychecks. For whatever reason, you can no longer work for a business or job, so no income is coming in from those sources.
- How long could you survive financially?
We’re talking about survival at your current standard of living, not if you downsized your house, sold your car and rode the bus, stopped eating out, and so forth. Given your current level of expenses, how long would your money last?
Defining terms
For our purposes in calculating your Wealth Number, your money consists of your savings, CDs, retirement accounts, liquid stocks (stocks you could sell today), physical gold and silver you have in your possession—anything that can be converted into cash today. It does not include selling your jewelry, your furniture, or your second car, for example, because that would lower your current standard of living. It does include cash flow from dividends, rental real estate, and other investments that produce income without your effort.
If you have done this calculation for yourself before, then I encourage you to do it again now. Why? Your finances are dynamic; they are continually changing. You may come up with a similar answer, or you may be surprised by your new outcome.
Do the math
Your wealth number = Your available money / Your monthly expenses
Note: It’s easy to lie to yourself about how much you actually spend on monthly expenses. Include all your expenses because you want to expand your financial means to meet the lifestyle you desire, not live below that lifestyle.
Once you do the math and divide how much money you have available by your monthly expenses, you end up with your wealth number. What does that mean?
Your wealth number is measured in time—in this case, in months. So if your wealth number is 24, that means 24 months. If your number is 6, that equates to 6 months. And what does that mean? Your wealth number is the number of months you could survive if you (or both you and your partner) stopped working today.
So, what’s your number?
Welcome to reality
For most, this calculation is sobering. It brings you and your money face to face. It is the most realistic and telling demonstration of exactly where you stand today financially.
For a lot of people, their number is 3 or less. That means they could only survive without paychecks for three months or less. They are pretty much living paycheck to paycheck. Some actually have a negative number, which means they are spending more every month than they are bringing in.
It really doesn’t matter what your number is. Your number is simply your number. You don’t need to make it right or wrong or continually stress over it. It is what it is. Period. Now you know. Now you know something that most people will never take the time to figure out. And most importantly, now that you know, you can take action and change it if you choose.
Look at your finances. If you are unhappy, or even upset and disturbed, about that number in front of you—good. That just means
it’s time to get to work.
Why financial education takes you beyond the 401(k)
Most of these so-called experts are not really investors in the true sense of the word—the big I quadrant in the
CASHFLOW Quadrant. Most are instead in the E quadrant, working for a paycheck, or self-employed financial advisors in the S quadrant working for fees and commissions. Most "experts" can't afford to stop working simply because they don't have investments working for them.
Money doesn't mean financial intelligence
To be clear, this is not a poor person or a rich person problem. Both the rich and the poor give their money to these "experts." This is because having a lot of money doesn't make you financially intelligent. There are many high-paid employees who have no idea how to manage their money, and many who lose a lot of money because of it. That's why Warren Buffett said, "Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."
If people don't have a sound financial education, they can't tell if a financial advisor is a salesperson or a con artist, a fool or a genius. There is nothing wrong with being a salesperson. We all have something to sell. Yet, to quote Buffett again, "Never ask an insurance salesman if you need insurance." When it comes to money, there are many people desperate enough to tell and sell you anything, just to get your money.
Deductive reasoning
Interestingly, the vast majority of investors never meet the person taking their money. In most of the Western world, employees simply have their money automatically deducted from their paycheck into retirement plans like a 401(k), the same way the tax departments collect taxes.
Retirement plans like the 401(k) go by different names in different countries. For instance, in Australia, they are called superannuation plans, and in Canada, they are known as RRSPs. But they all share one thing in common, your employer takes money out of your paycheck and hands it over to a broker you've most likely never met to manage one of the most important things for your future—your retirement.
And they're all possibly the worst way to invest.
Why 401(k)s are the worst investments
I say the 401(k) is the possibly worst way to invest for retirement for the following reasons:
- Taxes work against you with a 401(k): Long-term capital gains are taxed at a lower rate of around 15%. But the 401(k) gains are taxed at the ordinary earned income tax rate, which is much higher and the highest taxation rate of the three types of income: Ordinary earned, portfolio, and passive. And, if you want to take money out of your 401(k) early, you'll have to pay a 10% penalty too.
- You have no insurance if there is a stock-market crash: To drive a car, I must have insurance in case there is a crash. When I invest in real estate, I have insurance in case of a fire or other loses. Yet the 401(k) investor has no insurance to prevent losses from market crashes.
- The 401(k) is for people who are planning to be poor when they retire: That is why financial planners often say, "When you retire, you'll be taxed at a lower tax rate." They assume you'll make less money when you retire and thus be in a lower tax bracket.
TIME magazine is on my side. TIME has run a number of articles over the years questioning the wisdom of putting so many people's retirement at risk through 401(k)s. They've been predicting that millions won't have enough money to retire after a lifetime of handing money over to strangers. A typical 401(k) plan takes 80 percent of the profits. The investor may receive only 20 percent, if they're lucky. The investor puts up 100 percent of the risk and the money. The 401(k) company puts up no money but gets the majority of profits.
So, why are 401(k)s so popular? They're easy, for one. But the main reason is that those who run these plans make a lot of money off your money. Those who run these plans don't get paid by how much money they make you. They get paid by how much money you turn over to them in the long run. Thus the old line, "Invest for the long-term in a well-diversified portfolio of stocks, bonds, and mutual funds."
The reality is that real investors do not park their money. They move their money. It is a strategy known as the velocity of money. A true investor's money is always moving, acquiring new assets, and then moving on to acquire even more assets. Only amateurs park their money.
There are much better ways to invest for your retirement, but they require financial education. I encourage you to
start building your financial education and learning about better, more sophisticated ways to prepare for retirement.
Capitalism died in World War I. The Government manages the economy now. In order to understand where the economy is headed and what that will mean for the direction of stocks, bonds, property and commodities, it’s necessary to understand how the government manages it.
This 2-hour Course deals with the present. It explains how our economic system works now. It’s divided into 11 short lectures.
Course Outline
- Lecture 1: What’s Changed?
- Lecture 2: Don’t Call It Capitalism
- Lecture 3: Who’s In Charge?
- Lecture 4: GDP 101
- Lecture 5: Budget Deficits
- Lecture 6: Where Does The Government Get And Spend The Money?
- Lecture 7: Interest Rates, Inflation and Globalization
- Lecture 8: Monetary Policy and Net Worth
- Lecture 9: Trade Deficits and Their Impact On Asset Prices
- Lecture 10: Credit Growth Drives Economic Growth
- Lecture 11: Summing Up A Decade Of Work
Take a look at sample Lectures 1 and 2.
I am offering the Course to the Rich Dad Community for $25, a 75% discount to the normal price. To buy the course at that price, follow the step-by-step instructions at the bottom of this message.
If you can afford to pay $25 for this course, I hope you will. However, if you can’t afford to spend $25 right now, e-mail me at rduncan35@hotmail.com and I will send it to you for FREE.
Thank you very much for your continued interest in my work.
Richard
To subscribe to the Course for $25 go to:
Click on “Take This Course $25”.
If you already have an Udemy account, Login. If not, Signup: Input your name, e-mail address, and a new password that you create for Udemy. You can pick any password you like. It will be your Udemy password.
After that, you should be able to watch the Course. Let me know if there’s a problem.
What Is Your Financial Truth?
Financial freedom starts with knowing where your money is today
What are you doing with your money? Where is your money going? How is your money spent each month? Are you being wise with your money?
These are all questions that we should have answers to off the top of our head. But the reality is that most of the time we don’t. Partly this is because we all lead busy lives and it’s hard to stay on top of our finances. But sometimes it’s also because we know deep down that we’re not making good financial decisions, but we don’t want to face the truth of it.
It’s so easy to lie to ourselves about what we really spend on eating out, clothes, or vacations. And it’s easy to pretend our investments are making money—or at least breaking even.
It can be uncomfortable to face the facts and learn that you’re actually spending more every month than you’re making, or that the money you placed in that mutual fund, which the “experts” told you would make 10 percent, actually lost 20 percent last year.
Jamie’s story
Jamie got a surprise when she took a closer look at her finances.
One day my husband and I were having a conversation about our future and planning for retirement. We have no savings, no investments, we don’t own any properties, and we live paycheck to paycheck. We are both very naive when it comes to finances and have absolutely no knowledge about investing or creating financial security.
We were expecting to receive our tax return soon, so we talked about opening an individual retirement account (IRA). We knew absolutely nothing about this except that people opened these to save money for retirement. We went to our bank to open an IRA. They were more than happy to assist us. We sat down with the regular bank teller and went through the steps with little-to-no explanation of what this process means and what really happens with our money. I was a little concerned that someone in the financial advising area did not come out and speak with us to make sure we fully understood what we were doing. They were quick to take our $500 and have us sign papers. Even so, after the process, we walked out of the bank thinking we had made the right decision and that our financial future was going to be great.
A year later, I was working on my financial statement with a mentor and we discussed the IRA. I pulled out our statement and showed her that we had made 41 cents last year. She responded, “You know that is a return on your money of about zero. Silver went up 31 cents in the past 24 hours, and 75% in the last year.”
What an eye opener! I thought the 41 cents was what it was supposed to be. I thought I was doing well! My husband and I are now getting ourselves educated through books, seminars, and mentors. We play the CASHFLOW 101 game often with our entire family. We are determined to be financially free together.
When you read Jamie’s story, do you see echoes of your financial reality? Do you feel powerless and unequipped to make good financial decisions? Do you have a hard time knowing what the right financial direction is for you? You’re not alone.
The truth shall set you free
An old and wise saying is, “The truth shall set you free.” What this means is that only when we’re honest with ourselves and our situation, will we be free to start making changes. Until then, we just hide and hope for the best, which usually leads to the worst.
When it comes to money, the truth will set you free. Not only do you have to know where you are financially, but you also need to understand what “where you are” means in this financial world. Jamie thought that where she was, earning a 41-cent annual return on $500, was a good investment.
The truth is that was not a good place to be financially. There are investments that any woman can participate in that will earn much greater returns… as long as you know what you’re doing.
Some steps to take
Today is the day to start being honest with where you are financially and to start learning new truths about money and investing. Here are some great steps to take towards being financially free.
- Tell yourself the truth about any and all income that comes into your household.
- Be brutally honest about your expenses. What exactly do you spend every month? This is not a matter of your numbers looking good (although we women do like looking good). It’s a matter of knowing where you are—period. Important: If you enjoy eating out every night, then financial freedom for you had better include eating out every night. Financial independence means having the money to live the life you want, not just having enough to survive. Financial independence is not living below your means. I would rather expand my means and have my money work hard for me so that I can create the financial life I want for myself and my family. Being honest about your expenses now is important, because this sets you up to have the financial future you desire.
- Ask these questions: What investments do I own? Do I have stocks, bonds, mutual funds, retirement plans, real estate (other than your home), business investments, gold, or silver? What do I have that is making me money without me working for it? What price did I pay for the investments? What is happening with that investment today? It’s not uncommon to not want to open that investment-fund statement when you’re guessing it may be worth a lot less than you put into it. Look at every statement. That one action alone can be a valuable eye-opener.
Why the path to true financial freedom means financial education
My poor dad often said, "Investing is risky."
My rich dad often said, "Being financially uneducated is risky."
Most people know they should invest. The problem is that most people, like my poor dad, believe that investing is risky. The reality is that it's not—if you are financially educated, have experience, and have good guidance.
In today's economy, it's much more risky to rely on your employer for your well being than it is to become financially educated and to invest your money wisely. It's also risky to put your money in the bank and collect interest that barely covers inflation...and if inflation really takes off, you'll actually lose money. As many people learned over the last decade, it's risky to consider your personal home as your primary investment. And it's risky to put all your hope in a broker and a 401(k) for your retirement investments.
Today, if you want to be financially secure and free, you must learn to invest.
The consequences of investing poorly
Learning to invest is important because it's the key to financial freedom. Five things happen to those who don't know how to invest, who do not invest, and who invest poorly.
- They work hard all their lives
- They worry about money all their lives
- They depend on others, such as family, a company pension, or the government to take care of them
- The boundaries of their lives are defined by money
- They don't know what true freedom is
Investing is true freedom
My rich dad said, "You will never know true freedom until you achieve financial freedom." By this he meant that learning to invest is more important than learning a profession. Unfortunately, learning a profession is what most education in our schools is built to do. Our schools are good at training employees but not investors who understand how money works. The result is an army of people who are afraid of money and investing, and who, for their living, rely on those who understand money and investing, like their employer or their landlord.
Rich dad also said, "When you learn a profession, let's say to be a doctor, you learn how to work for money. Learning to invest is learning how to have money work for you. The moment you have money work for you, you have your ticket to freedom."
Learning to invest
My poor dad didn't know how to make money work for you him. He spent his whole life working for money. He was a good man and a hard worker, but he struggled financially all his life. If he had been my only example on money, I would have grown up to be like him. Thankfully, my best friend's dad, my rich dad, taught me much different things about money and investing.
One way he did this was through the game Monopoly. Over and over again, he'd say, "One of the great formulas for wealth is found in this game: four green houses, one read hotel."
Monopoly is a cash flow game. For example, having one green house on a property you own could make you $10 when someone lands on it. Then, two houses could make you $20. Three could make you $30. And a hotel could make you $50. Basically, more green houses and red hotels means more cash flow. It’s a simple game, but an important lesson.
Valuable investing lessons from my rich dad
My rich dad played Monopoly in real life, and he often took his son and me to see his real life houses and hotels. Watching my rich dad, I learned many valuable lessons about investing, some of which are:
- Investing is not risky
- Investing is fun
- Investing can make you very, very rich
- Investing can set you free from the struggle of earning for a living and worrying about money
In other words, if you are financially educated, you can build a pipeline of cash flow for life by investing—a pipeline that produces cash in good times and bad times, in markets that both boom and bust.
Don't risk your future by believing the lie that investing is risky. It's not, and you can be free. Today, I encourage you to begin your financial education and to move from the risky life of an employee to the financially free life of an investor. Read some books, attend a seminar, find a coach and a mentor, and start small by applying the lessons you learn. That is the path to financial freedom.
Why investing takes knowing where you are and where you want to go.
In October 2010, Robert and I sailed a new 58-foot Beneteau sailboat from Los Angeles, California to Honolulu, Hawaii with four friends. Even though I had almost zero experience sailing, I figured this was an once-in-a-lifetime opportunity and I took it.
I had never been so far out on a boat that I could not see land. I wasn’t sure how I would respond or what to expect. One thing was glaringly apparent once we were out of port and under full sail—you never, even for one second, stand still!
Depending on the winds and the waves, the boat was either on a slant to the left (port) or a slant to the right (starboard), and sometimes it was a back-and-forth motion. I was always grabbing onto something to keep my balance. Everything I take for granted on land was now a task to be mastered at sea—washing my face, clearing dishes off the table, carrying a glass of wine up five steps—all took extreme concentration and balance.
While sailing, I was always on guard because the boat, the foundation I was standing on and my only physical safety could shift at any time. I could never be complacent or assume that things would remain calm. I was never standing still, always moving to keep my balance.
Nothing happens until something moves
Albert Einstein once said, “Nothing happens until something moves.”
As women, we seem to be constantly looking for balance in our lives. While many think balance is a stillness, a calmness, I think balance takes constant movement. If you’re standing still, then there is no movement. When an unexpected event occurs, you’re thrown off your feet. So one of the keys to dealing with whatever comes at you is to always keep moving.
Know where you are...and where you're going
Your financial statements never stand still. They constantly change. Often, when we venture into the uncharted waters of
financial freedom, we can feel like things are always shifting as we lose sight of the coastline. Things we thought would be easy become hard. Keeping our balance becomes a difficult task. In those times, it's important to know where we are and where we're going. Much like my time on the boat was rocky, I knew it was worth it because the voyage was fun...and we were going to Hawaii.
To know where you are today is a snapshot in time, but you have to take that initial picture and apply it to where you want to go. It is the foundation for your voyage, for where you want to go. To have a strong foundation requires:
- Knowing what makes up the foundation you have
- Getting rid of whatever makes the foundation weaker
- Building and adding what will make your foundation stronger
No matter where you are on your own financial journey, you need to do a complete financial assessment of where you are today. I review my income, expenses, and cash flow twice a month. Yet, when the financial waves rock my boat, I easily can, and sometimes do, lose track of where I am today when it comes to my investments, assets, and accessible sources of money. In those times, it's vital that I take stock of where I am, where I'm going, and to keep moving forward.
Pick a point and go
Where do you want to be financially? Pick a point and go! If it's a business, start building it. If it's an investment, start learning everything you can and building your financial foundation to jump at opportunities as they come.
The reality is that we'll all get tossed back and forth on our financial journey. But if we keep moving forward, even if we lose our balance here and there, we'll make it to our destination. So, today, get moving and keep moving. That's my version of a balanced life.
P.S. - Speaking of knowing where you're going, a GPS is always helpful. I developed my GPS (Guide to Phenomenal Success) to help you on your journey to financial freedom.
Learn more about the GPS here.
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