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Saturday, 02.04.2012 |
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| Rich Dad's Increase Your Financial IQ |
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Product Details
Notes
AUTHOR'S NOTE
money by itself is not evil, money is just money
it's what you do with it and how you go about obtaining it that matters
your house is a liability, not an asset
with the current housing crisis, people finally understand this better
the old advice is:
- work hard
- save money
- get out of debt
- live below your means
- invest in a well-diversified portfolio of mutual funds
but the rules are different in today's world of finance
financial education is critical for success now
we live in the information age, but there's too much information
information + education = knowledge
we need financial education to process the information correctly
if you save money, you are losing value due to inflation and floating currency
you also need to know the difference between good debt and bad debt
learn how the rich earn more yet pay less in taxes
and understand that Warren Buffett does not diversify, he focuses
INTRODUCTION - DOES MONEY MAKE YOU RICH?
money alone does not make you rich
lottery winners can end up broke
homeowners can lose money in real estate
investors can lose money in the stock market
it's not the assets that make you rich
it's the information relative to the asset that can make you wealthy
lots of people invest in assets without investing in their knowledge
CHAPTER 1 - WHAT IS FINANCIAL INTELLIGENCE
money problems of the poor:
1) not having enough money
2) using credit to supplement money shortages
3) the rising cost of living
4) paying more in taxes the more they make
5) fear of emergencies
6) bad financial advice
7) not enough retirement money
money problems of the rich:
1) having too much money
2) needing to keep it safe and invested
3) not knowing whether people like them, or their money
4) needing smarter financial advisors
5) raising spoiled kids
6) estate and inheritance planning
7) excessive government taxes
money alone does not solve your money problems
giving poor people money does not help them
it actually prolongs the problem and creates more poor people
hard work by itself does not solve money problems
you can earn money, but if you don't manage it, you'll just go into debt
academic education does not solve money problems
you can get a high paying job, but you still need financial intelligence
a job does not solve money problems
millions of people earn just enough to survive
financial intelligence is what's needed to solve money problems
money problems make you smarter if you learn to solve them
not solving money problems can lead to more problems down the line
it's important to address money problems when they are small
poverty is when a person is overwhelmed by problems they can't solve
small problems can lead to bigger problems, and it keeps growing
in 1971, President Nixon took us off the gold standard
the U.S. dollar switched from being money to becoming currency
currency needs to constantly be moving, or it loses value
if it stops moving, it loses value and people stop accepting it
historically, all currencies eventually go to zero
the U.S. dollar has lost 13.2% of its value since Bush took office in 2001
in the old system, it made sense to save money
but you shouldn't save currency or it loses value
a currency's purpose is to acquire assets
those assets should appreciate in value or produce cash flow
the goal is to move currency quickly before it declines in value
prices of gold, oil, housing and stocks go up in price
not because their inherent value is increasing
but because the currency is declining, so it takes more currency to buy them
in 1974, companies began to switch to defined contribution plans
old pension plans were defined benefit, which guaranteed payment
now you only get back what you and your employer contribute
this includes the 401(k), IRA, Keogh, etc.
the greatest fear in America according to USA Today is not terrorism
it's running out of money in retirement
the school system doesn't teach people how to invest for retirement
both Medicare and Social Security are bankrupt
78 million baby boomers will start retiring in 2008
Medicare owes $64 trillion, and Social Security owes $10 trillion
this is more than all the money in the world's stock markets
poor people think they are victims of money
they think if they just had more money, their money problems would be over
but the problem is their attitude toward money problems
they need to fix that first, otherwise they'll just get poorer
the middle class think they can outsmart their money problems
they spend money to go to school to get a secure job
they try to have a buffer against their money problems
they value financial security instead of financial challenges
the problem is that they eventually feel trapped by their job
their goal is then to retire, but they'll have to live cheaper when they do
most of the middle class work to solve the money problems of rich people
they take care of their business, manage their accounting, taxes, etc.
the middle class help the rich, but they don't solve their own money problems
they work at making others richer rather than taking the time to learn
most people play the game of money not to lose, rather than playing to win
are you student of the game of money?
are you dedicated to winning the game?
are you passionate about learning?
are you willing to be the best you can be?
do you want to be as rich as you can be?
CHAPTER 2 - THE FIVE FINANCIAL IQs
Financial IQ #1: Making more money
Financial IQ #2: Protecting your money
Financial IQ #3: Budgeting your money
Financial IQ #4: Leveraging your money
Financial IQ #5: Improving your financial information
financial IQ is a quantitative measurement of financial intelligence
an example is two people with the same income, but one pays less taxes
the person who pays less in taxes has a higher financial IQ
making more money and keeping a greater percentage is IQ #1
this is very different from academic IQ
paying less in taxes is IQ #2
budgeting for a surplus is IQ #3
if you spend everything you make, your financial IQ is lower
having a surplus means you can invest it
but to get that surplus, you need to learn how to budget well
saving money in a bank means a lower financial IQ
investing in mutual funds is slightly higher, but still low
you measure IQ #4 in your return on investment
so if you get a 50% ROI, that's better than 5%
a higher ROI does not mean higher risk if you have more education
IQ #5 is how you learn to increase your financial intelligence
if you turn your money over to someone else, you have a lower financial IQ
a banker or mutual fund manager shouldn't solve your money problems
you want to learn to handle your own money problems
that process will improve your financial IQ
it's not about having financial answers, it about building financial abilities
answers are about the past, abilities are about the future
financial intelligence is not the most important intelligence
but it's important because we all live in the world of money
that's why we should all have financial education
money affects our standard of living, health, and education
in the B and I quadrants, more financial intelligences means more income
you can be a successful doctor and be poor
you can also be a successful schoolteacher and be poor
but you can't be a successful entrepreneur or investor and be poor
success in the B and I quadrants is measured in money
CHAPTER 3 - FINANCIAL IQ #1: MAKING MORE MONEY
take a pay cut in the beginning in exchange for education
invest in yourself to learn how to sell and how to be an entrepreneur
wealth comes from facing your problems and learning to solve them
if your business idea fails, face the problem and learn from it
in 1978, he started his nylon wallet business while working at Xerox
the business took off huge, then failed
in 1981, he had to rebuild it and he got a new idea to license rock bands
eventually pirates copied his ideas and sold for lower prices
he paid a lot to lawyers at first, then joined the pirates
in 1982, MTV got big and his business took off again
in 1984, he sold his share of the rock and roll nylon wallet business
he then started a business education company that failed at first
in 1985, he and his wife were completely broke
but they built up their new business selling education
and by 1994, they sold the business and had passive income from real estate
the CASHFLOW board game was created in 1996
the Rich Dad, Poor Dad book was self-published in 1997
in 1989, his wife Kim started investing in real estate herself
in mid-2000, Oprah had him on her show and book sales took off
in 2007, Kim has over 1000 rental units paying her passive income
most people want the money, but they don't want the process of hard work
but it's the process that makes you rich, not the money itself
if you win the lottery, you might spend it all and end up broke
but if you learn how to make money, you'll never be poor again
if you value a steady paycheck, you have a fear of being broke
but that fear holds you back from learning how to become rich
you must be willing to work for delayed gratification
Warren Buffett said:
"if you can't control your emotions, you can't control your money"
the same thing is true in business
you have to keep pushing when you feel like quitting
overcome your fears and your frustrations to achieve success
look at life as a learning adventure, not just playing it safe
it's not about doing risky or dangerous things
you take calculated risks and you learn from every mistake
it's not just about memorizing old patterns and avoiding any failure
it's about learning to solve problems so you can solve even bigger ones
life is about the joy of learning, not the fear of failing
people in the E and S quadrants work for money
but people in the B and I quadrants work for free, not to be paid
they work to build assets, not for a paycheck
you have to be willing to work for years without getting paid
but in the process, you'll gain invaluable education for your whole life
an E or S works for earned income
a B or I works for passive or portfolio income
earned income is the hardest to protect from financial predators
if you are self-employed and you stop working, will your income stop too?
if so, you're in the S quadrant, not in the B quadrant
you should be able to stop working and still have your business run on its own
the middle class struggle because they work for a paycheck
to make more money, they have to work harder or for longer hours
but the rich get richer because their assets grow on their own
if you have a higher financial IQ, you will acquire better assets
those assets will then grow at an even faster rate because of your intelligence
a higher financial IQ means you work less to make more money
remember that problems will never go away
each time you find a solution, a new problem will pop up
understand that the process of solving these problems will make you rich
if learn to solve your own problems, you can also solve problems for others
people want to get paid for doing nothing
but in business, you'll get paid according to the value you provide
people form unions to have bargaining power for better wages
but businesspeople believe you need to produce a better product
if you solve more problems, or bigger problems, you'll get more money
some people think businesspeople are greedy
but it's the employee who wants to be paid more for doing less that's greedy
labor unions are one of the reasons that jobs are moving overseas
CHAPTER 4 - FINANCIAL IQ #2: PROTECTING YOUR MONEY
financial IQ #1 is generally measured in gross dollars
but financial IQ #2 is measured in percentages
the idea is to pay the least percentage of your income in taxes
some of the most dangerous financial predators appear to be on your side
bureaucrats, bankers, brokers, businesses,
brides/beaus, brothers-in-law, and barristers
bureaucrats:
taxes are our single largest expense
in 1943, the government began to take taxes directly out of paychecks
alternative minimum tax (AMT) was created in 1970
this affects high income people, but not smart businesspeople
Republicans are not necessarily better than Democrats with money
Democrats will tax and spend, but Republicans will borrow and spend
everyone wants to share the wealth, as long as it's not their wealth
the company pays 7.4% to Social Security for the employee
but if they didn't have to, they could give this money to the employee
so really, you should factor in that amount as the taxes you're paying too
same thing with matching 401(k) contributions
that's really just your money that the company is adding
it's part of your total compensation package which is all your money
bankers:
401(k) plans aren't required to disclose their fees
for every dollar you save, the banks are allowed to loan out $20
this is usury, they charge a higher interest on the loans than on savings
don't save money, borrow currency to acquire assets
brokers:
they are salespeople, not rich people
brokers don't have money, so why would you trust them with yours
learn a lot on your own so you can tell a good broker from a bad one
look for a broker who is a student of their profession
they should also invest in what they sell, not just sell it
build a long term relationship, not just a single transaction
brokers often make their money as a percentage of each deal
businesses:
poor people buy products that lose value, and they pay for them over time
that makes them even poorer because they have to keep paying
and the things they buy aren't assets, so they don't make money from them
become a customer of businesses that can make you richer
brides and beaus:
think about your exit strategy at the beginning
at least setup your businesses in separate legal entities
brothers-in-law:
make sure you do your will, trusts, and any estate planning
barristers:
lawyers will sue you whenever they can take your money
keep nothing of value in your name
buy personal liability insurance immediately
hold assets of value in legal corporate entities
a financially intelligent person wants a low paycheck
they want the bulk of their money in royalties or dividends
the Federal Reserve Bank was formed in 1913
it's not a government entity
it's a bank owned by the richest people in the world
it's easier to change yourself than to change the system
CHAPTER 5 - FINANCIAL IQ #3: BUDGETING YOUR MONEY
don't just live below your means, expand your means
a budget is a plan for the coordination of resources and expenditures
instead of cutting back on spending, focus on increasing your income
most people cut expenses, increase debt, or sell assets
but this can make the problem worse
the best way to increase income is to learn to sell (yourself or a product)
this will give you a budget surplus instead of a budget deficit
people in the E quadrant have little to no control over:
taxes, Social Security, pensions, and mortgage payments
government agencies are not rewarded for saving money
if they don't spend all of their budget, it gets cut the following year
so the system encourages people to operate on a budget deficit
there are two ways to expand a business: investment or acquisition
when a company buys back its own stock, it doesn't know where to spend
the stock price will go up, but the company may have stopped growing
so when there's a stock repurchase, you may want to sell that stock
the other possibility is when the leadership thinks the stock is cheap
that's a good sign, then you may want to buy more stock
budget tip #1: a budget surplus is an expense
most people prioritize things in this order:
1) get a high-paying job
2) make the mortgage and car payments
3) pay bills on time
4) save, tithe, and invest
instead, you should put saving and investing as the second highest
pay yourself first, and come up short on the bills and other expenses
now use the situation as motivation to increase your income
swallow your pride and do whatever is necessary to make more money
they saved a year's worth of expenses in gold and silver ETFs
it's better to face the problem of not enough money as early as possible
that forces you to come up with ways to solve the problem
budget tip #2: the expense column is a crystal ball
you can see a person's future by how they spend their time and money
also see if expenses are being turned into assets or just lost
budget tip #3: let your assets pay for your liabilities
don't be cheap and say you can't afford it
instead ask yourself how can you afford it
all you have to do is create an asset, and use that to pay for the liability
remember that assets put money into your pocket, liabilities take it out
budget tip #4: spend to get rich
if you do well as an employee, you may get a pay cut and more work
that's not a reason to quit, you have to learn to do more with less
consider it a challenge to get stronger and smarter with money
when people criticize you, use it as motivation and turn it into results
think of problems as challenges that are opportunities to grow
don't fight about money with your spouse
learn about yourselves and your financial attitudes
they now allocate about 80% of their income directly into assets
CHAPTER 6 - FINANCIAL IQ #4: LEVERAGING YOUR MONEY
invest your money in something you can control
if you have control, then you can safely leverage
that gives you greater wealth, in less time, with little risk
the idea of leverage is to do more with less
net worth is not a good measure of wealth
most people think if the value of their house goes up, they have more money
but net worth is based on opinions, not facts
you only know the true price of your house when it's actually sold to a buyer
net worth may also include possession that decline in value, like cars
if the dollar goes down, your house appears to be worth more
but really, it's just that it takes more dollars to buy the exact same house
so you didn't actually make any money, you just lost purchasing power
U.S. politics are based on "feel-good economics"
they don't care if we are going into debt as long as consumers feel good
the value of a rental unit is based on the rent a tenant is willing to pay
if you improve the property, you can charge more rent in the marketplace
you can't just increase the rent without reason, or your tenants will leave
they have other choices in the competitive marketplace
the echo boomers are just entering college
there are 73 million of them
a lot of these people will be renting
higher return does not require higher risk if you have control
it's only when you have no control that leverage may add more risk
bad investors may have poorly run properties that are losing money
you can come in and manage things better to get more control
this turns it into a good investment because of your skills and knowledge
there are many types of leverage
most people invest in paper assets where they have no control
you don't need to take more risk in order to get higher returns
an example is your own business, where you have control
the key to getting lower risk is having higher financial intelligence
start small and work to learn, not to make money initially
most people including financial advisors only have 1:1 leverage
they get paid for their work, but they don't build systems
with real estate, you can have help from many people:
the tenants help pay for your monthly costs
the bank loans you money to buy a bigger property
the tax department gives you tax breaks on your income
leverage can be risky if you have no control
an example is stock options
if you don't have the education and skills, you can lose money fast
flipping real estate in a down market can also be risky
Warren Buffett says "diversification is protection against ignorance"
if you know what you're doing, you should focus, not diversify
rather than just diversifying, you learn to hedge your investments
but you can't buy insurance on stocks, and banks won't loan you money
a lot of people invest for capital gains, but that's hoping for appreciation
investing for cash flow is much less risky
the key is to use leverage for a higher return on investment
stock traders and real estate flippers are investing for capital gains
they are in the S quadrant, not the I quadrant
they have to actively work to get returns and they are taxed higher
others invest in savings or bonds for cash flow income
tax-free municipal bonds are safe but provide a low return
the same is often true in real estate with triple net leases (NNN)
hedge funds will try to use supercomputers to find a slight market pattern
then they'll bet millions of dollars to gain 1%
this is a very risky form of high leverage
sometimes the stock market announces that program trading has been halted
that's basically stopping the computers from all buying or selling at once
because that can cause the market to crash
computerized trading adds volatility and can create artificial demand
good partners are important in any business deal
bad partners might not be bad people, just not the right people for this deal
financing in any deal is also very important
you can give someone their price if you get your terms
the person with the better plan wins
sometimes you can make a deal for a high price, but pay slowly over time
then if you have good plans, the property might be worth much more later
good management is important to any property
you want to maximize your control of partners, financing, and management
then you can use good debt as leverage
when measuring ROI, don't include capital gains until you actually sell
otherwise you just want to measure your cash flow
your cash flow is some percentage of your total investment
internal rate of return can include things like:
passive income, depreciation, amortization, and appreciation
most people aren't born with tons of money
no one is born with financial intelligence to do big deals
but the select few will learn on small deals and learn from small failures
dream big, and do it with your spouse
that will keep your marriage rich, young, and fun
in the information age, knowledge is leverage
you don't need money to make money if you build up your financial IQ
CHAPTER 7 - FINANCIAL IQ #5: IMPROVING YOUR INFORMATION
he went to Vietnam in 1966 and 1972
information can make the difference in business and life
even in the third world, people text message while riding a donkey cart
poor people often have obsolete or erroneous information
the industrial age said to have a good education to get a high paying job
the agrarian age said that land is the basis of all wealth
the four ages of humanity:
1) hunter-gatherer age, nature provided wealth, hunt and gather food
everyone was poor, so there was just one class
2) agrarian age, land provided wealth, grow seeds and raise livestock
royalty owned land, so there were two classes, the rich and the peasants
3) industrial age, resources like oil gave wealth, nonagricultural land was okay
the middle class was created, so there were now three classes
4) information age, information provides wealth, leveraged by technology
now there are four classes, poor, middle class, rich, and super-rich
it's much easier to get rich today
you don't need to conquer lands or build huge factories
information and technology today is often free and readily available
the difficult thing is now too much information
learn to sort, categorize, discard and process vast information
the military puts a lot of effort into classifying information
1) time - know when information is relevant and for how long
2) credibility - understand your source and their expertise
3) classification - how close are you to the inside
4) relative information - watch trends and make predictions
5) deceptive information - verify the truth and watch out for false leads
know the difference between facts and opinions
valuations of success and net worth can often be opinions of others
pay attention to your answers to questions and see if they're logical
a capital gains investor often invests based on opinion
but a cash flow investor can sometimes invest based on the facts
look for ways to gain control over an asset
a fact is something that can be verified with actual proof
rules are necessary, but you must have enough information about the rules
gold is priced in international markets
in global markets, the price is the same all over the world
real estate is priced in a local market
remember that information is just information
intelligence is the ability to take information and make it meaningful
information can change quickly, so you need to constantly update yourself
silver may be a good commodity to invest in for the long term trend
a real estate crash is good for landlords, not for sellers
also pay attention to demographics and related trends
the less liquid an investment is, the more trend information you'll need
if you see multiple high-rise construction cranes, it may be time to sell
stocks and commodities often alternate in 20 year cycles
1960-1980, stocks were down and commodities were up
1980-2000, stocks were up and commodities were down
it's not the asset that makes you rich, it's your knowledge and information
real estate is a good investment only if you are a good investor
CHAPTER 8 - THE INTEGRITY OF MONEY
integrity is soundness, incorruptibility, and completeness
each system must be operating for the whole thing to have integrity
symptoms of low financial integrity:
low income, crippling taxes, high expenses, excessive debt,
bankruptcy, foreclosure, increased crime, violence, sadness, despair
all five financial IQs are important for overall integrity
the problem is when people don't admit they have a problem
they know something is wrong, but they don't want to deal with it
they don't have a personal financial statement
and they aren't working on increasing their financial intelligence
a business should have a core competence in a niche
if you are not a brand, you are a commodity
brands have more intrinsic value
the difference between small business and big business is leverage
professionals are their own product, so they can't leverage their time
musicians often fail to leverage the distribution of their CD
you want to build a business that is expandable to get more leverage
you also want predictability through known cycles and intrinsic value
look at the five financial IQs and figure out which ones you need to work on
they're all related, but focus on improving one at a time
take your time and learn a little every day
most real estate is not a good investment
look at lots of properties and analyze their intrinsic value
creativity plus integrity can make you rich
be prepared for the coming storm
CHAPTER 9 - DEVELOPING YOUR FINANCIAL GENIUS
people focus and strive to be the best in a sport or hobby
but they diversify and avoid education when it comes to their finances
hedge funds have people with academic intelligence
but they are all trained the same way so they buy the same things
that means they may all sell at the same time, causing a crash
this is not financial intelligence
to really diversify, you must be in more than paper assets
you should have stocks, bonds, and mutual funds
but also real estate, private business, and commodities
Howard Gardner talks about seven intelligences:
1) linguistic
2) logical-mathematical
3) musical
4) bodily-kinesthetic
5) spatial
6) interpersonal
7) intrapersonal
intrapersonal intelligence lets you control your emotions
left brain:
reading, writing, speaking, and logic
linguistic, logical-mathematical, and interpersonal
writer, scientist, lawyer, accountant, schoolteacher
right brain:
pictures, art, music, creativity, imagination
musical, spatial
designer, architect, musician
subconscious brain:
react, fight, flee, freeze
intrapersonal, bodily-kinesthetic
police officer, ER doctor, firefighter, soldier, entrepreneur
ability to choose fight mode rather than fear mode
choose your subconscious state of mind before using your left and right brain
most people will say they want to be rich, that's from their left brain
but their subconscious will be afraid, or think they don't deserve it
the school system encourages fear of failure
they say if you don't get good grades, you won't get a good job
smart students are afraid to change careers later on
they say they've been doing their job for too long
and they don't think they can make as much if they change now
traditional education focuses only on the left brain
so you know what to do but your subconscious is too scared to do it
in the same way, many people graduate with academic skills
but they lack the financial education and creative spirit
many people invest using only the left brain
hedge funds run computer simulations and leverage millions
but these quant funds all run the same algorithms, they aren't creative
Warren Buffett says you have to think for yourself
too many high IQ people mindlessly imitate
A students often work for C students, and B students work for the government
our brains are programmed to imitate what we see others do
poor people speak a poor person's dialect
they talk about "government programs, welfare, and assistance"
the middle class say "diversify and live below your means"
the rich talk about the fun of making money and watching it grow
imitation works subconsciously
so if you project bad vibes, other people react in the same way
the key is to change your perception of yourself
then everyone else will subconsciously adjust to your new perception
people in school place value on degrees
this is left brain intelligence
people in corporations place value on job titles
this limits creativity and thinking outside the box
rich people value freedom, wealth, relationships, and value created
what is your measurement of success?
where do you have the best chance of winning?
is your brain being trained to win?
are your brains working together or are they working against you?
our schools do not teach much about money
and they don't strengthen the subconscious mind
so people don't gain a financial education
and they don't learn how to be creative and take appropriate risk
note that you can't argue with someone's subconscious beliefs
you can explain exactly how to get rich
but if they have an internal fear, they won't accept the logic
they'll just be too scared to take action even if they know what to do
or they will argue their irrational view just so they don't look stupid
poor people often defend their right to be poor
they say they'd rather be happy than rich
or that people are greedy or corrupt if they make money
similarly, employees will defend their position illogically
if you explain how they are paying high taxes, they say you have to pay tax
if you talk about better investments, they say those are too risky
these attitudes are the result of the subconscious and can't be changed
it's no use arguing with someone, because it's not logical, it's fear
find an environment that can help you grow and become richer
surround yourself with A students and smart people
in business, you take tests all the time, but they are real world tests
you'll constantly have to solve problems
but instead of being academic problems, these are business challenges
and they require more creativity rather than just left brain skills
learn to raise capital from customers, investors, and employees
get your customers to buy your products
get your investors to give you money
get your employees to make at least 10x more than you pay them
many MBA students are uncomfortable being entrepreneurs
they think more like CEOs who are really employees
continually upgrade your environment as you grow
this will let you continue to challenge yourself
train your left brain to understand the subject at hand
engage your right brain to come up with creative solutions
and keep your subconscious brain excited rather than fearful
CHAPTER 10 - DEVELOPING YOUR FINANCIAL IQ
courage is often more important than skills and experience
it takes courage to discover, develop, and donate your genius to the world
Ayn Rand said wealth is the product of man's capacity to think
be willing to receive feedback and interpret it
if you are working harder and not earning more, this is feedback
it's all useful information if you pay attention and learn from it
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