Lesson 2 Why we have to teach our children about finance?
Most people don’t realize that:
in life, it’s not how much money you make,
it’s how much money you keep and how it thrives.
It is like planting a tree.
Initially, you will have to spend a lot of effort to take care of it, until one day,
when the roots have penetrated deep into the ground,
the tree is big enough to grow on its own, you will not need to spend to fertilize.
Or you have to take care tree, you still be able to enjoy the sweet fruit seasons.
In order for your money tree to grow,
you must have a lot of financial knowledge to know how to properly care for it.
When starting to learn how to get rich.
Mike and I were still kids, so rich dad came up with a simple way to teach us.
Over the years, he drew drawings and used simple words to help Mike and I understand the jargon and movement of money.
Years later he started adding numbers.
Although simple, these drawings have contributed to guiding two small children in a huge financial arithmetic problem,
forming a deep and solid foundation…
Rule 1. You must know the difference between assets and liabilities and to be rich you must buy assets.
It sounds ridiculously simple,
but most people don’t realize how profound it is,
because they don’t know what the difference is between an asset and a liability.
“Rich people earn assets.
Poor and middle-class people only collect liabilities,
but they think they have earned assets.”
When rich dad explained this to Mike and me,
we thought he was joking.
We were waiting for a secret to getting rich,
and yet you answered like that.
It was so simple that we had to pause for a long time to think about it.
“You mean all we need to know is: what is an asset,
then go get it and then we’ll be rich?” I asked suspiciously.
Rich dad nodded.
“It’s as simple as that.”
“If it’s that simple,
why can’t other people get rich?” I asked again.
Rich dad smiled.
“Because people don’t know the difference between assets and liabilities.”
“Why are adults so stupid?
If it’s such a simple but important thing,
why wouldn’t people want to find out?”
It took rich dad a few minutes to explain to us what assets and liabilities are.
As an adult, I find this difficult to explain to other adults.
Why? Because adults are wiser.
In nearly every case, most adults don’t grasp the simplicity of an idea
because they were educated differently.
And a smart adult often feels demeaned
when he has to pay attention to overly simple concepts. Rich dad believed in the best rule:
“Keep It Simple” so he tried to make things simple for the two of us.
He said: “The things that define a property are not words but numbers.
And if you can’t read numbers, you won’t be able to identify a fortune in the mess.”
the problem is not the numbers themselves,
but what the numbers say.
Like words, the problem is not with the words themselves,
but with the stories they tell.
“If you want to become rich,
you must be able to read and understand numbers.”
Rich dad repeated it to us a thousand times:
“Rich people earn assets.
Poor and middle-class people only earn liabilities.”
The box above is the Income Statement,
also known as the Profit and Loss Statement.
It measures income and expenses, money in and out.
The box below is the Balance Sheet.
It is so called because it requires a balance between assets and liabilities.
The main reason for financial struggles is simply
because people don’t know the difference between an asset and a liability.
The main cause of confusion is because of the definition of these two words.
The more you try to look up the dictionary,
the more confusion you will only get.
Rich dad said to the two of us simply:
“Properties put money in your pockets,
liabilities put money out of your pockets.“
If you want to be rich, buy property.
If you want to become poor, buy liabilities.
Because of this inability to tell the difference,
so many people get into financial trouble.
Both “illiteracy” and “number blindness” are the causes of financial difficulties.
If people are in financial trouble,
there is something they don’t understand: either words or numbers.
The rich get rich because they are “literate” in a variety of fields than those who are struggling financially.
So, if you want to be rich and keep it,
you need to be financially savvy,
both in words and in numbers.
Arrows in the diagram represent cash turnover.
It’s just numbers that tell a lot.
Words alone don’t say much.
It’s a story about calculation.
When it comes to financial statements,
reading the numbers means looking at the plot,
the story telling the whereabouts of the cash flow.
In 80% of families, the financial story is not happy not
because they do not make money,
but because they use money to buy liabilities, not assets.
The diagrams above show cash flow in the lives of the poor,
the middle class,
and the rich.
It is the cash wheel that is telling the story,
the story of how a person uses his money,
what he does after holding the money in his hand.
People often say, “I’m in debt, so I have to go make money.”
But having a lot of money doesn’t usually solve the real problem,
it just makes things worse.
Money makes tragic human mistakes obvious.
That’s why it’s common for people to enjoy an unexpected fortune,
such as inheriting a fortune, getting a raise or winning the lottery,
sooner or later they’ll end up in a financial mess like that,
initially, if not worse than at first.
Money just highlights the cash flow pattern in your head.
If you normally use up everything you have,
it is almost certain that a raise will lead to an increase in spending.
We often make money with our career skills
and most students leave school without any financial skills,
so even though millions of educated people successfully pursue their careers,
they still encounter problems,
a lot of financial difficulties.
They work hard but are not rich.
What’s lacking in their education is not how to make money,
but how to use it, once you’ve earned it, what to do with it.
That’s called financial capacity,
what do you do with money once you’ve earned it,
how do you keep it from being taken over,
how long you keep it,
how the money will work for you ?
Most of the financial difficulties people face are because they don’t understand cash flow.
A person can be well-educated,
successful in his career but still don’t understand anything about finance.
These people often have to work more than necessary
because they have learned to work hard,
but have not learned to force money to work for them.
The story of a financial dream become a financial dream.
The movie about hard workers already has a template.
After getting married, the young couple immediately rented an apartment to live in.
The problem was that the apartment was too cramped,
so they decided they had to save up to buy the house of their dreams and maybe have kids.
They now have two sources of income and they begin to focus on their careers.
Their income began to increase.
The number one expense for most people is taxes:
income tax, value-added tax on consumption, purchases of goods, etc.
As income increases, expenses increase, so will liabilities.
It can be demonstrated by going back to the example of a young couple.
As a result of their increased income, they decide to buy the house of their dreams.
Once they have a home, they will have to pay a new tax called the property tax.
Then they buy a new car, new furniture,
and new tools to match their new home.
Then they were startled to find that the liabilities column was full of mortgages and credit cards.
At this point, they fell into the Rat Race trap.
Then a child was born.
They work more.
More money and higher taxes,
called income tax.
That process repeats itself.
A credit card was sent.
They use it.
A loan company called and said their biggest “asset”,
the house, was overvalued.
The company offers a bill consolidation loan
and says it’s better to pay off high-interest debt with their credit card.
Besides, the income from their roof is a tax deduction.
They followed that, and sighed in relief.
The credit cards have been paid.
Now they pool the consumer debt into a mortgage.
The amount to be paid went down
because they extended the debt to 30 years.
Neighbors called to ask them to go shopping,
because there was a sale.
An opportunity to save some money.
They say to themselves,
“I won’t buy anything. I just went to see it.”
But as soon as they see something,
they take out their credit card.
I often meet such couples.
The names are different but the financial situation is the same.
Their spending habits have forced them to earn other sources of income.
They don’t know that it is the way they spend their money that is the main cause of their financial struggles.
Everything is due to lack of financial knowledge
and cannot distinguish between assets and liabilities.
The poor and the middle-class very often allow money to control them.
Every morning they simply wake up and go to work,
forgetting to ask themselves if what they are doing is meaningful or not.
Not knowing much about money,
most people let the fearsome power of money control them.
People often do something because others do the same.
They adapt without asking questions.
They mindlessly repeat what they hear,
ideas like “a home is an asset”,
“a home is your biggest investment”,
“find a secure job”. “,
“don’t risk it”…
When Mike and I were 16 years old,
we started working for Mike’s father after school and every weekend.
We often sat with Mike’s father while he received bankers,
lawyers, accountants, brokers, investors, managers and laborers…
Father Mike did not follow the crowd.
He had his own thoughts and he hated saying,
“We have to because everyone else does.”
He also doesn’t like words like “impossible.”
If you want him to do something, simply say,
“I don’t think you can do it.”
As we sat at his meetings,
Mike and I learned many things.
Mike’s father didn’t do much in school,
but he was well versed in finance and eventually succeeded.
He often told us, “A smart man hires people who are smarter than he is.”
We began to understand why rich dad told us:
schools are designed to make good workers, not great bosses.
When I was 16, I probably had a much better financial background than my parents.
One day, my biological father said that our house was his biggest investment.
And so a not so fun debate broke out
when I said that putting money into the house we were in was not a good investment.
The following graphs illustrate the cognitive differences
between rich dad and poor dad on housing.
One thinks the house is an asset,
the other thinks it is a liability.
I remember when I drew these diagrams for my father
and showed him the direction of a cash flow,
the dependent costs of owning a home.
A big house means big expenses,
and cash flow will continue to go out through the expense column.
I know that for many people,
a nice home is their biggest investment,
even though it’s not an asset but a liability,
because it makes more money out of pocket.
However, many people will disagree with me
because a beautiful house is very emotional.
And when it comes to money,
strong emotions cloud financial intelligence.
1. When it comes to housing,
I mean: most people have to work all their lives to pay for a home they never actually own.
In other words, after many years, most people want to buy a new home,
each purchase leading to a debt that lasts many years while the debt on the previous home is still unpaid.
2. Homes don’t always appreciate in value.
The biggest loss is that you lose opportunities.
If you invest all your money in the house,
you are forced to work harder
because the money will continue to move through the expense column instead of adding to the asset column,
which is the classic cycle pattern, cash from middle-class families.
If a young couple initially puts a lot of money into the asset column,
their later years will be easier, especially when the children reach school age.
Their assets will grow and can help them control expenses.
Often, owning a home is like taking on a home valued debt and increasing your expenses.
To summarize, the end result of deciding to own an expensive home instead of starting a portfolio,
will impact an individual in at least three ways:
1. It takes time, while other assets may increase in value.
2. Loss of some capital, because that money can be invested
instead of having to pay maintenance costs directly related to the house.
3. Lost training opportunities.
People often think of a house, savings and a pension plan as all they have in the asset column.
By not investing, they lose their investment experience
and will never be able to become “sophisticated investors.”
I’m not saying you don’t buy a house.
I mean, understand the difference between an asset and a liability.
When I wanted a bigger house, I had to first buy some properties
so that I could generate enough cash flow to pay for the house.
My biological father’s personal financial statements are the best testament to a man’s life in the Rat Race.
His expenses always seem to keep up with his income,
not allowing him to invest in this one property
As a result, his liabilities, such as mortgages or credit card debt,
were larger than his assets.
The following pictures are worth more than a thousand words:
In contrast, rich dad’s personal financial statement reflected the results of a life spent investing and minimizing liabilities:
Reviewing rich dad’s financial statements will help you understand
why the rich get richer and richer.
The asset column generates more income than is necessary for expenses,
and these are reinvested in the asset column.
The asset column will grow more and more and so the income will be more and more.
As a result, the rich get richer,
middle-class people always face endless financial difficulties
because their main income is wages,
and when wages increase, so does taxes.
And when wages increase, their expenses also tend to increase by the balance,
hence the phrase “Rat Race.”
They see the house as their biggest asset when it’s actually a liability,
instead of having to invest their money in assets that can actually generate income.
The stereotype of the house as an investment
and the philosophy that rising wages mean you can buy a bigger house,
or spend more,
is the foundation for a debt-ridden society like this nowadays.
The process of rising costs pushes many families into ever-greater debts
and more uncertain financial situations,
even though they may be getting a promotion at work and being paid more than usual.
The tragedy here is that the lack of initial financial literacy created the risks faced by the middle class.
The reason they want to be safe is because their financial position is so fragile.
Their balance sheet is not balanced.
They bear the burden of so many liabilities without any real assets that generate income.
Usually, their only source of income is salary.
Their livelihood depends on the bosses.
So when it’s their turn to “deal” life,
these people are not able to seize the good opportunities.
They want to be safe simply
because they are working hard paying the highest taxes and carrying loads of debt…
As I said earlier, the most important rule is knowing the difference between assets and liabilities.
Once you understand these differences,
focus all your efforts on buying properties that generate income.
That is the best way to start the road to riches.
Just like that, your asset column will increase.
Try to keep your liabilities and expenses down,
and you’ll have more money to put into your asset column.
Soon your asset base will be so strong that you can think of investing.
The middle class calls investing “risky.”
In fact, the investment itself is not risky at all.
It is the lack of financial intelligence and simple financial knowledge that causes the risk.
If you do what most people do. In general your job will look like this:
1. Feed the owner.
Most salaried people make their owners or shareholders richer.
Your efforts and success will make the owner more successful and have more money.
2. Feed the authority.
The government gets its share of your salary before you even see it.
By trying to work harder, you are simply increasing the amount of tax you have to pay to the government.
3. Feed the bank. After paying taxes,
the next biggest expense is usually credit cards.
The problem is that when you try to work harder,
the three precepts take away a larger share of your efforts.
Therefore, you must learn how your efforts can directly increase profits for yourself and your family.
|Finance statement of Poor|
|Asset||List of Liabilities
|Finance statement of Rich|
|Wage and passive incomes|
|List of Assets
Once you’ve decided to focus your mind on taking care of your own business,
how do you define a goal?
For most people,
they have to keep their jobs and rely on wages to earn their fortune.
As assets grow, how will they measure success?
When do people realize that they already have money?
As soon as I learned the definitions of assets and liabilities,
I created my own definition of having money.
I actually borrowed this definition from a friend named Buckminster Fuller.
He said: “Money is the ability of a person to survive in the next few days…”
or in other words, if you stop working today, how long will you survive?
Cash availability is a measure of cash flow on the asset column versus the expense column.
Let’s take a small example.
Let’s say the cash flow on my asset column is $1,000 a month.
My monthly expenses are $2,000. So what is my cash capacity?
Back to Buckminster Fuller’s definition.
If I consider a month of 30 days,
I will only have enough money to consume for half a month.
When reaching if the cash flow on the asset column is $2,000 a month,
I will become money.
That means I’m not rich yet, but I have money.
Now every month I will have new income arising from properties that can solve my monthly expenses problem.
If I want to increase my expenses,
I must first increase the cash flow from my assets to be able to maintain this cash flow.
Notice that at this point, I am no longer dependent on salary.
I must focus on and must succeed in building the asset column that has made me financially prosperous.
If I quit my job today, I can still cover my monthly expenses thanks to my asset’s cash flow.
The next goal is to have some extra cash in the cash flow to invest back into the asset column.
The more money invested in the asset column,
the more it will grow.
And as long as I keep my expenses lower than the cash generated from these assets,
I will become richer,
with more and more income coming from sources other than my own labor.
Rich people buy property
Middle-class people buy liabilities they think are assets
The poor have only expenses