There is a Need
Does school prepare children for the real world? "Study hard and get good grades and you will find a high-paying job with great benefits," my parents used to say. Their goal in life was to provide a college education for my older sister and me, so that we would have the greatest chance for success in life. When T finally earned my diploma in 1976-graduating with honors, and near the top of my class, in accounting from Florida State University-my parents had realized their goal. It was the crowning achievement of their lives. In accordance with the "Master Plan," I was hired by a "Big 8" accounting firm, and I looked forward to a long career and retirement at an early age.
My husband, Michael, followed a similar path. We both came from hard-working families, of modest means but with strong work ethics. Michael also graduated with honors, but he did it twice: first as an engineer and then from law school. He was quickly recruited by a prestigious Washington, D.C., law firm that specialized in patent law, and his future seemed bright, career path well-defined and early retirement guaranteed.
Although we have been successful in our careers, they have not turned out quite as we expected. We both have changed positions several times-for all the right reasons-but there are no pension plans vesting on our behalf. Our retirement funds are growing only through our individual contributions.
Michael and I have a wonderful marriage with three great children. As I write this, two are in college and one is just beginning high school. We have spent a fortune making sure our children have received the best education available.
One day in 1996, one of my children came home disillusioned with school. He was bored and tired of studying. "Why should I put time into studying subjects I will never use in real life?" he protested.
Without thinking, I responded, "Because if you don't get good grades, you won't get into college."
"Regardless of whether I go to college," he replied, "I'm going to be rich."
"If you don't graduate from college, you won't get a good job," I responded with a tinge of panic and motherly concern. "And if you don't have a good job, how do you plan to get rich?"
My son smirked and slowly shook his head with mild boredom. We have had this talk many times before. He lowered his head and rolled his eyes. My words of motherly wisdom were falling on deaf ears once again.
Though smart and strong-willed, he has always been a polite and respectful young man.
"Mom," he began. It was my turn to be lectured. "Get with the times! Look around; the richest people didn't get rich because of their educations. Look at Michael Jordan and Madonna. Even Bill Gates, who dropped out of Harvard, founded Microsoft; he is now the richest man in America, and he's still in his 30s. There is a baseball pitcher who makes more than $4 million a year even though he has been labeled `mentally challenged.' "
There was a long silence between us. It was dawning on me that I was giving my son the same advice my parents had given me. The world around us has changed, but the advice hasn't.
Getting a good education and making good grades no longer ensures success, and nobody seems to have noticed, except our children.
"Mom," he continued, "I don't want to work as hard as you and dad do. You make a lot of money, and we live in a huge house with lots of toys. If I follow your advice, I'll wind up like you, working harder and harder only to pay more taxes and wind up in debt. There is no job security anymore; I know all about downsizing and rightsizing. I also know that college graduates today earn less than you did when you graduated. Look at doctors. They don't make nearly as much money as they used to. I know I can't rely on Social Security or company pensions for retirement. I need new answers."
He was right. He needed new answers, and so did I. My parents' advice may have worked for people born before 1945, but it may be disastrous for those of us born into a rapidly changing world. No longer can I simply say to my children, "Go to school, get good grades, and look for a safe, secure job."
I knew I had to look for new ways to guide my children's education.
As a mother as well as an accountant, I have been concerned by the lack of financial education our children receive in school. Many of today's youth have credit cards before they leave high school, yet they have never had a course in money or how to invest it, let alone understand how compound interest works on credit cards. Simply put, without financial literacy and the knowledge of how money works, they are not prepared to face the world that awaits them, a world in which spending is emphasized over savings.
When my oldest son became hopelessly in debt with his credit cards as a freshman in college, I not only helped him destroy the credit cards, but I also went in search of a program that would help me educate my children on financial matters.
One day last year, my husband called me from his office. "I have someone I think you should meet," he said. "His name is Robert Kiyosaki. He's a businessman and investor, and he is here applying for a patent on an educational product. I think it's what you have been looking for."
Just What I Was Looking For
My husband, Mike, was so impressed with CASHFLOW, the new educational product that Robert Kiyosaki was developing, that he arranged for both of us to participate in a test of the prototype. Because it was an educational game, I also asked my 19-year-old daughter, who was a freshman at a local university, if she would like to take part, and she agreed.
About fifteen people, broken into three groups, participated in the test.
Mike was right. It was the educational product I had been looking for. But it had a twist: It looked like a colorful Monopoly board with a giant well-dressed rat in the middle. Unlike Monopoly, however, there were two tracks: one inside and one outside. The object of the game was to get out of the inside track-what Robert called the "Rat Race" and reach the outer track, or the "Fast Track." As Robert put it, the Fast Track simulates how rich people play in real life.
Robert then defined the "Rat Race" for us.
"If you look at the life of the average-educated, hard-working person, there is a similar path. The child is born and goes to school. The proud parents are excited because the child excels, gets fair to good grades, and is accepted into a college. The child graduates, maybe goes on to graduate school and then does exactly as programmed: looks for a safe, secure job or career. The child finds that job, maybe as a doctor or a lawyer, or joins the Army or works for the government. Generally, the child begins to make money, credit cards start to arrive in mass, and the shopping begins, if it already hasn't.
"Having money to burn, the child goes to places where other young people just like them hang out, and they meet people, they date, and sometimes they get married. Life is wonderful now, because today, both men and women work. Two incomes are bliss. They feel successful, their future is bright, and they decide to buy a house, a car, a television, take vacations and have children. The happy bundle arrives. The demand for cash is enormous. The happy couple decides that their careers are vitally important and begin to work harder, seeking promotions and raises. The raises come, and so does another child and the need for a bigger house. They work harder, become better employees, even more dedicated. They go back to school to get more specialized skills so they can earn more money. Maybe they take a second job. Their incomes go up, but so does the tax bracket they're in and the real estate taxes on their new large home, and their Social Security taxes, and all the other taxes. They get their large paycheck and wonder where all the money went. They buy some mutual funds and buy groceries with their credit card. The children reach 5 or 6 years of age, and the need to save for college increases as well as the need to save for their retirement. .
"That happy couple, born 35 years ago, is now trapped in the Rat Race for the rest of their working days. They work for the owners of their company, for the government paying taxes, and for the bank paying off a mortgage and credit cards.
"Then, they advise their own children to `study hard, get good grades, and find a safe job or career.' They learn nothing about money, except from those who profit from their na鴳et? and work hard all their lives. The process repeats into another hard-working generation. This is the `Rat Race'."
The only way to get out of the "Rat Race" is to prove your proficiency at both accounting and investing, arguably two of the most difficult subjects to master. As a trained CPA who once worked for a Big 8 accounting firm, I was surprised that Robert had made the learning of these two subjects both fun and exciting. The process was so well disguised that while we were diligently working to get out of the "Rat Race," we quickly forgot we were learning.
Soon a product test turned into a fun afternoon with my daughter, talking about things we had never discussed before. As an accountant, playing a game that required an Income Statement and Balance Sheet was easy. So I had the time to help my daughter and the other players at my table with concepts they did not understand. I was the first person-and the only person in the entire test group-to get out of the "Rat Race" that day. I was out within 50 minutes, although the game went on for nearly three hours.
At my table was a banker, a business owner and a computer programmer. What greatly disturbed me was how little these people knew about either accounting or investing, subjects so important in their lives. I wondered how they managed their own financial affairs in real life. I could understand why my 19-year-old daughter would not understand, but these were grown adults, at least twice her age.
After I was out of the "Rat Race," for the next two hours I watched my daughter and these educated, affluent adults roll the dice and move their markers. Although I was glad they were all learning so much, I was disturbed by how much the adults did not know about the basics of simple accounting and investing. They had difficulty grasping the relationship between their Income Statement and their Balance Sheet. As they bought and sold assets, they had trouble remembering that each transaction could impact their monthly cash flow. I thought, how many millions of people are out there in the real world struggling financially, only because they have never been taught these subjects?
Thank goodness they're having fun and are distracted by the desire to win the game, I said to myself. After Robert ended the contest, he allowed us fifteen minutes to discuss and critique CASHFLOW among ourselves.
The business owner at my table was not happy. He did not like the game. "I don't need to know this," he said out loud. "I hire accountants, bankers and attorneys to tell me about this stuff."
To which Robert replied, "Have you ever noticed that there are a lot of accountants who aren't rich? And bankers, and attorneys, and stockbrokers and real estate brokers. They know a lot, and for the most part are smart people, but most of them are not rich. Since our schools do not teach people what the rich know, we take advice from these people. But one day, you're driving down the highway, stuck in traffic, struggling to get to work, and you look over to your right and you see your accountant stuck in the same traffic jam. You look to your left and you see your banker. That should tell you something."
The computer programmer was also unimpressed by the game: "I can buy software to teach me this."
The banker, however, was moved. "I studied this in school-the accounting part, that is-but I never knew how to apply it to real life. Now I know. I need to get myself out of the `Rat Race.' "
But it was my daughter's comments that most touched me. "I had fun learning," she said. "I learned a lot about how money really works and how to invest."
Then she added: "Now I know I can choose a profession for the work I want to perform and not because of job security, benefits or howmuch I get paid. If I learn what this game teaches, I'm free to do and study what my heart wants to study. . .rather than study something because businesses are looking for certain job skills. If I learn this, I won't have to worry about job security and Social Security the way most of my classmates already do."
I was not able to stay and talk with Robert after we had played the game, but we agreed to meet later to further discuss his project. I knew he wanted to use the game to help others become more financially savvy, and I was eager to hear more about his plans.
My husband and I set up a dinner meeting with Robert and his wife within the next week. Although it was our first social get-together, we felt as if we had known each other for years.
We found out we had a lot in common. We covered the gamut, from sports and plays to restaurants and socio-economic issues. We talked about the changing world. We spent a lot of time discussing how most Americans have little or nothing saved for retirement, as well as the almost bankrupt state of Social Security and Medicare. Would my children be required to pay for the retirement of 75 million baby boomers? We wondered if people realize how risky it is to depend on a
Robert's primary concern was the growing gap between the haves and have nots, in America and around the world. A self-taught, self-made entrepreneur who traveled the world putting investments together, Robert was able to retire at the age of 47. He came out of retirement because he shares the same concern I have for my own children. He knows that the world has changed, but education has not changed with it. According to Robert, children spend years in an antiquated educational system, studying subjects they will never use, preparing for a world that no longer exists.
"Today, the most dangerous advice you can give a child is `Go to school, get good grades and look for a safe secure job,' " he likes to say. "That is old advice, and it's bad advice. If you could see what is happening in Asia, Europe, South America, you would be as concerned as I am."
It's bad advice, he believes, "because if you want your child to have a financially secure future, they can't play by the old set of rules. It's just too risky."
I asked him what he meant by "old rules?" .
"People like me play by a different set of rules from what you play by," he said. "What happens when a corporation announces a downsizing?"
"People get laid off," I said. "Families are hurt. Unemployment goes
"Yes, but what happens to the company, in particular a public company on the stock exchange?"
"The price of the stock usually goes up when the downsizing is announced," I said. "The market likes it when a company reduces its labor costs, either through automation or just consolidating the labor force in general."
"That's right," he said. "And when stock prices go up, people like me, the shareholders, get richer. That is what I mean by a different set of rules. Employees lose; owners and investors win."
Robert was describing not only the difference between an employee and employer, but also the difference between controlling your own destiny and giving up that control to someone else.
"But it's hard for most people to understand why that happens," I said. "They just think it's not fair."
"That's why it is foolish to simply say to a child, `Get a good education,' " he said. "It is foolish to assume that the education the school system provides will prepare your children for the world they will face upon graduation. Each child needs more education. Different education. And they need to know the rules. The different sets of rules."
"There are rules of money that the rich play by, and there are the rules that the other 95 percent of the population plays by," he said. "And the 95 percent learns those rules at home and in school. That is why it's risky today to simply say to a child, `Study hard and look for a job.' A child today needs a more sophisticated education, and the current system is not delivering the goods. I don't care how many computers they put in the classroom or how much money schools spend. How can the education system teach a subject that it does not know?"
So how does a parent teach their children, what the school does not? How do you teach accounting to a child? Won't they get bored? And how do you teach investing when as a parent you yourself are risk averse? Instead of teaching my children to simply play it safe, I decided it was best to teach them to play it smart.
"So how would you teach a child about money and all the things we've talked about?" I asked Robert. "How can we make it easy for parents especially when they don't understand it themselves?"
"I wrote a book on the subject, " he said.
"Where is it?"
"In my computer. It's been there for years in random pieces. I add to it occasionally but I've never gotten around to put it all together. I began writing it after my other book became a best seller, but I never finished the new one. It's in pieces."
And in pieces it was. After reading the scattered sections, I decided the book had merit and needed to be shared, especially in these changing times. We agreed to co-author Robert's book.
I asked him how much financial information he thought a child needed. He said it would depend on the child. He knew at a young age that he wanted to be rich and was fortunate enough to have a father figure who was rich and willing to guide him. Education is the foundation of success, Robert said. Just as scholastic skills are vitally important, so are financial skills and communication skills.
What follows is the story of Robert's two dads, a rich one and a poor
one, that expounds on the skills he's developed over a lifetime. The contrast between two dads provides an important perspective. The book is supported, edited and assembled by me. For any accountants who read this book, suspend your academic book knowledge and open your mind to the theories Robert presents. Although many of them challenge the very fundamentals of generally accepted accounting principles, they provide a valuable insight into the way true investors analyze their investment decisions.
When we as parents advise our children to "go to school, study hard and get a good job," we often do that out of cultural habit. It has always been the right thing to do. When I met Robert, his ideas initially startled me. Having been raised by two fathers, he had been taught to strive for two different goals. His educated dad advised him to work for a corporation. His rich dad advised him to own the corporation. Both life paths required education, but the subjects of study were completely different. His educated dad encouraged Robert to be a smart person. His rich dad encouraged Robert to know how to hire smart people.
Having two dads caused many problems. Robert's real dad was the superintendent of education for the state of Hawaii. By the time Robert was 16, the threat of "If you don't get good grades, you won't get a good job" had little effect. He already knew his career path was to own corporations, not to work for them. In fact, if it had not been for a wise and persistent high school guidance counselor, Robert might not have gone on to college. He admits that. He was eager to start building his assets, but finally agreed that the college education would also be a benefit to him.
Truthfully, the ideas in this book are probably too far fetched and radical for most parents today. Some parents are having a hard enough time simply keeping their children in school. But in light of our changing times, as parents we need to be open to new and bold ideas. To encourage children to be employees is to advise your children to pay more than their fair share of taxes over a lifetime, with little or no promise of a pension. And it is true that taxes are a person's greatest expense. In fact, most families work from January to mid-May for the government just to cover their taxes. New ideas are needed and this book provides them.
Robert claims that the rich teach their children differently. They teach their children at home, around the dinner table. These ideas may notbe the ideas you choose to discuss with your children, but thank you for looking at them. And I advise you to keep searching. In my opinion, as a mom and a CPA, the concept of simply getting good grades and finding a good job is an old idea. We need to advise our children with a greater degree of sophistication. We need new ideas and different education. Maybe telling our children to strive to be good employees while also striving to own their own investment corporation is not such a bad idea.
It is my hope as a mother that this book helps other parents. It is Robert's hope to inform people that anyone can achieve prosperity if they so choose. If today you are a gardener or a janitor or even unemployed, you have the ability to educate yourself and teach those you love to take care of themselves financially. Remember that financial intelligence is the mental process via which we solve our financial problems.
Today we are facing global and technological changes as great or even greater than those ever faced before. No one has a crystal ball, but one thing is for certain: Changes lie ahead that are beyond our reality. Who knows what the future brings? But whatever happens, we have two fundamental choices: play it safe or play it smart by preparing, getting educated and awakening your own and your children's financial genius. - Sbaron Lecbter
For a FREE AUDIO REPORT "What My Rich Dad Taught Me About Money" all you have to do is visit our special website at www.richdadbooki.com and the report is yours free.
Rich Dad, Poor Dad
Rich Dad, Poor Dad
As narrated by Robert Kiyosaki
I had two fathers, a rich one and a poor one. One was highly educated and intelligent; he had a Ph.D. and completed four years of undergraduate work in less than two years. He then went on to Stanford University, the University of Chicago, and Northwestern University to do his advanced studies, all on full financial scholarships. The other father never finished the eighth grade.
Both men were successful in their careers, working hard all their lives. Both earned substantial incomes. Yet one struggled financially all his life. The other would become one of the richest men in Hawaii. One died leaving tens of millions of dollars to his family, charities and his church. The other left bills to be paid.
Both men were strong, charismatic and influential. Both men offered me advice, but they did not advise the same things. Both men believed strongly in education but did not recommend the same course of study.
If I had had only one dad, I would have had to accept or reject his advice. Having two dads advising me offered me the choice of contrasting points of view; one of a rich man and one of a poor man.
Instead of simply accepting or rejecting one or the other, I found myself thinking more, comparing and then choosing for myself.
The problem was, the rich man was not rich yet and the poor man not yet poor. Both were just starting out on their careers, and both were struggling with money and families. But they had very different points of view about the subject of money.
For example, one dad would say, "The love of money is the root of all evil." The other, "The lack of money is the root of all evil."
As a young boy, having two strong fathers both influencing me was difficult. I wanted to be a good son and listen, but the two fathers did not say the same things. The contrast in their points of view, particularly where money was concerned, was so extreme that I grew curious and intrigued. I began to start thinking for long periods of time about what each was saying.
Much of my private time was spent reflecting, asking myself questions such as, "Why does he say that?" and then asking the same question of the other dad's statement. It would have been much easier to simply say, "Yeah, he's right. I agree with that." Or to simply reject the point of view by saying, "The old man doesn't know what he's talking about." Instead, having two dads whom I loved forced me to think and ultimately choose a way of thinking for myself. As a process, choosing for myself turned out to be much more valuable in the long run, rather than simply accepting or rejecting a single point of view.
One of the reasons the rich get richer, the poor get poorer, and the middle class struggles in debt is because the subject of money is taught at home, not in school. Most of us learn about money from our parents. So what can a poor parent tell their child about money? They simply say "Stay in school and study hard." The child may graduate with excellent grades but with a poor person's financial programming and mind-set. It was learned while the child was young.
Money is not taught in schools. Schools focus on scholastic and professional skills, but not on financial skills. This explains how smart bankers, doctors and accountants who earned excellent grades in school may still struggle financially all of their lives. Our staggering national debt is due in large part to highly educated politicians and government officials making financial decisions with little or no training on the subject of money.
I often look ahead to the new millennium and wonder what will happen when we have millions of people who will need financial and medical assistance. They will be dependent on their families or the government for financial support. What will happen when Medicare and Social Security run out of money? How will a nation survive if teaching children about money continues to be left to parents-most of whom will be, or already are, poor?
Because I had two influential fathers, I learned from both of them. I had to think about each dad's advice, and in doing so, I gained valuable
insight into the power and effect of one's thoughts on one's life. For example, one dad had a habit of saying, "I can't afford it." The other dad forbade those words to be used. He insisted I say, "How can I afford it?" One is a statement, and the other is a question. One lets you off the hook, and the other forces you to think. My soon-to-be-rich dad would explain that by automatically saying the words "I can't afford it," your brain stops working. By asking the question "How can I afford it?" your brain is put to work. He did not mean buy everything you wanted. He was fanatical about exercising your mind, the most powerful computer in the world. "My brain gets stronger every day because I exercise it. The stronger it gets, the more money I can make." He believed that automatically saying "I can't afford it" was a sign of mental laziness.
Although both dads worked hard, I noticed that one dad had a habit of putting his brain to sleep when it came to money matters, and the other had a habit of exercising his brain. The long-term result was that one dad grew stronger financially and the other grew weaker. It is not much different from a person who goes to the gym to exercise on a regular basis versus someone who sits on the couch watching television. Proper physical exercise increases your chances for health, and proper mental exercise increases your chances for wealth. Laziness decreases both health and wealth.
My two dads had opposing attitudes in thought. One dad thought that the rich should pay more in taxes to take care of those less fortunate. The other said, "Taxes punish those who produce and reward those who don't produce."
One dad recommended, "Study hard so you can find a good company to work for." The other recommended, "Study hard so you can find a good company to buy."
One dad said, "The reason I'm not rich is because I have you kids." The other said, "The reason I must be rich is because I have you kids."
One encouraged talking about money and business at the dinner ,table. The other forbade the subject of money to be discussed over a meal.
One said, "When it comes to money, play it safe, don't take risks." The other said, "Learn to manage risk."
One believed, "Our home is our largest investment and our greatest asset." The other believed, "My house is a liability, and if your house is your largest investment, you're in trouble."
Both dads paid their bills on time, yet one paid his bills first while the other paid his bills last.
One dad believed in a company or the government taking care of you and your needs. He was always concerned about pay raises, retirement plans, medical benefits, sick leave, vacation days and other perks. He was impressed with two of his uncles who joined the military and earned a retirement and entitlement package for life after twenty years of active service. He loved the idea of medical benefits and PX privileges the military provided its retirees. He also loved the tenure system available through the university. The idea of job protection for life and job benefits seemed more important, at times, than the job. He would often say, "I've worked hard for the government, and I'm entitled to these benefits."
The other believed in total financial self-reliance. He spoke out against the "entitlement" mentality and how it was creating weak and financially needy people. He was emphatic about being financially competent.
One dad struggled to save a few dollars. The other simply created investments.
One dad taught me how to write an impressive resume so I could find a good job. The other taught me how to write strong business and financial plans so I could create jobs.
Being a product of two strong dads allowed me the luxury of observing the effects different thoughts have on one's life. I noticed that people really do shape their life through their thoughts.
For example, my poor dad always said, "I'll never be rich." And that prophesy became reality. My rich dad, on the other hand, always referred to himself as rich. He would say things like, "I'm a rich man, and rich people don't do this." Even when he was flat broke after a major financial setback, he continued to refer to himself as a rich man. He would cover himself by saying, "There is a difference between being poor and being broke. - Broke is temporary, and poor is eternal."
My poor dad would also say, "I'm not interested in money," or "Money doesn't matter." My rich dad always said, "Money is power."
The power of our thoughts may never be measured or appreciated, but it became obvious to me as a young boy to be aware of my thoughts and how I expressed myself. I noticed that my poor dad was poor not because of the amount of money he earned, which was significant, but
because of his thoughts and actions. As a young boy, having two fathers, I became acutely aware of being careful which thoughts I chose to adopt as my own. Whom should I listen to-my rich dad or my poor dad?
Although both men had tremendous respect for education and learning, they disagreed in what they thought was important to learn. One wanted me to study hard, earn a degree and get a good job to work for money. He wanted me to study to become a professional, an attorney or an accountant or to go to business school for my MBA. The other encouraged me to study to be rich, to understand how money works and to learn how to have it work for me. "I don't work for money!" were words he would repeat over and over, "Money works for me!"
At the age of 9, I decided to listen to and learn from my rich dad about money. In doing so, I chose not to listen to my poor dad, even though he was the one with all the college degrees.
A Lesson From Robert Frost
Robert Frost is my favourite poet. Although I love many of his poems, my favorite is The Road Not Taken. I use its lesson almost daily:
The Road Not Taken
Two roads diverged in a yellow wood, And sorry I could not travel both And be one traveler, long I stood And looked down one as far as I could To where it bent in the undergrowth;
Then took the other, as just as fair, And having perhaps the better claim, Because it was grassy and wanted wear Though as for that the passing there Had worn them really about the same,
And both that morning equally lay In leaves no step had trodden black. Oh, I kept the first for another day! Yet knowing how way leads onto way, I doubted if I should ever come back.
I shall be telling this with a sigh Somewhere ages and ages hence; Two roads diverged in a wood, and I took the one less traveled by, And that has made all the difference.
And that made all the difference.
Over the years, I have often reflected upon Robert Frost's poem. Choosing not to listen to my highly educated dad's advice and attitude about money was a painful decision, but it was a decision that shaped the rest of my life.
Once I made up my mind whom to listen to, my education about money began. My rich dad taught me over a period of 30 years, until I was age 39. He stopped once he realized that I knew and fully understood what he had been trying to drum into my often thick skull.
Money is one form of power. But what is more powerful is financial education. Money comes and goes, but if you have the education about how money works, you gain power over it and can begin building wealth. The reason positive thinking alone does not work is because most people went to school and never learned how money works, so they spend their lives working for money.
Because I was only 9 years old when I started, the lessons my rich dad taught me were simple. And when it was all said and done, there were only six main lessons, repeated over 30 years. This book is about those six lessons, put as simply as possible as my rich dad put forth those lessons to me. The lessons are not meant to be answers but guideposts. Guideposts that will assist you and your children to grow wealthier no matter what happens in a world of increasing change and uncertainty.
Lesson #1 The Rich Don't Work for Money
Lesson #2 Why Teach Financial Literacy?
Lesson #3 Mind Your own Business
Lesson #4 The History of Taxes and the Power of Corporations
Lesson #5 The Rich Invent Money
Lesson #6 Work to Learn Don't Work for Money
Lesson One: The Rich Don't Work For Money
"Dad, Can You Tell Me How to Get Rich?"
My dad put down the evening paper. "Why do you want to get rich, son?"
"Because today Jimmy's mom drove up in their new Cadillac, and they were going to their beach house for the weekend. He took three of his friends, but Mike and I weren't invited. They told us we weren't invited because we were `poor kids'."
"They did?" my dad asked incredulously.
"Yeah, they did." I replied in a hurt tone.
My dad silently shook his head, pushed his glasses up the bridge of his nose and went back to reading the paper. I stood waiting for an answer.
The year was 1956. I was 9 years old. By some twist of fate, I attended the same public school where the rich people sent their kids. We were primarily a sugar plantation town. The managers of the plantation and the other affluent people of the town, such as doctors, business owners, and bankers, sent their children to this school, grades 1 to 6. After grade 6, their children were generally sent off to private schools. Because my family lived on one side of the street, I went to this school. Had I lived on the other side of the street, I would have gone to a different school, with kids from families more like mine. After grade 6,these kids and I would go on to the public intermediate and high school. There was no private school for them or for me.
My dad finally put down the paper. I could tell he was thinking.
"Well, son," he began slowly. "If you want to be rich, you have to learn to make money."
"How do I make money?" I asked.
"Well, use your head, son," he said, smiling. Which really meant, "That's all I'm going to tell you," or "I don't know the answer, so don't embarrass me."
A Partnership Is Formed
The next morning, I told my best friend, Mike, what my dad had said. As best I could tell, Mike and I were the only poor kids in this school. Mike was like me in that he was in this school by a twist of fate. Someone had drawn a jog in the line for the school district, and we wound up in school with the rich kids. We weren't really poor, but we felt as if we were because all the other boys had new baseball gloves, ,,,y
new bicycles, new everything.
Mom and dad provided us with the basics, like food, shelter, clothes. :, But that was about it. My dad used to say, "If you want something, work for it." We wanted things, but there was not much work available for 9- , year-old boys.
"So what do we do to make money?" Mike asked.
"I don't know," I said. "But do you want to be my partner?"
He agreed and so on that Saturday morning, Mike became my first business partner. We spent all morning coming up with ideas on how to 1'make money. Occasionally we talked about all the "cool guys" at Jimmy's beach house having fun. It hurt a little, but that hurt was good, for it inspired us to keep thinking of a way to make money. Finally, that afternoon, a bolt of lightning came through our heads. It was an idea Mike had gotten from a science book he had read. Excitedly, we shook hands, and the partnership now had a business.
For the next several weeks, Mike and I ran around our neighborhood, knocking on doors and asking our neighbors if they would save their toothpaste tubes for us. With puzzled looks, most adults consented with a smile. Some asked us what we were doing. To which we replied, "We can't tell you. It's a business secret."
My mom grew distressed as the weeks wore on. We had selected a
site next to her washing machine as the place we would stockpile our raw materials. In a brown cardboard box that one time held catsup bottles, our little pile of used toothpaste tubes began to grow.
Finally my mom put her foot down. The sight of her neighbors' , messy, crumpled used toothpaste tubes had gotten to her. "What are you boys doing?" she asked. "And I don't want to hear again that it's a business secret. Do something with this mess or I'm going to throw it out."
Mike and I pleaded and begged, explaining that we would soon have enough and then we would begin production. We informed her that we were waiting on a couple of neighbors to finish using up their toothpaste so we could have their tubes. Mom granted us a one-week extension.
The date to begin production was moved up. The pressure was on. My first partnership was already being threatened with an eviction notice from our warehouse space by my own mom. It became Mike's job to tell the neighbors to quickly use up their toothpaste, saying their dentist wanted them to brush more often anyway. I began to put together the production line.
One day my dad drove up with a friend to see two 9-year-old boys . in the driveway with a production line operating at full speed. There was fine white powder everywhere. On a long table were small milk cartons from school, and our family's hibachi grill was glowing with red hot coals at maximum heat.
Dad walked up cautiously, having to park the car at the base of the driveway, since the production line blocked the carport. As he and his friend got closer, they saw a steel pot sitting on top of the coals, with the toothpaste tubes being melted down. In those days, toothpaste did not come in plastic tubes. The tubes were made of lead. So once the paint was burned off, the tubes were dropped in the small steel pot, melted until they became liquid, and with my mom's pot holders we were pouring the lead through a small hole in the top of the milk cartons.
The milk cartons were filled with plaster-of-Paris. The white powder everywhere was the plaster before we mixed it with water. In my haste, I had knocked the bag over, and the entire area look like it had been hit by a snowstorm. The milk cartons were the outer containers for plaster-of-Paris molds.
My dad and his friend watched as we carefully poured the molten lead through a small hole in the top of the plaster-of-Paris cube.
"Careful," my dad said.
I nodded without looking up.
Finally, once the pouring was through, I put the steel pot down and smiled at my dad.
"What are you boys doing?" he asked with a cautious smile.
"We're doing what you told me to do. We're going to be rich," I said.
"Yup," said Mike, grinning and nodding his head. "We're partners."
"And what is in those plaster molds?" dad asked.
"Watch," I said. "This should be a good batch."
With a small hammer, I tapped at the seal that divided the cube in
half. Cautiously, I pulled up the top half of the plaster mold and a lead nickel fell out."
"Oh, my God!" my dad said. "You're casting nickels out of lead."
"That's right," Mike said. "We doing as you told us to do. We're making money."
My dad's friend turned and burst into laughter. My dad smiled and shook his head. Along with a fire and a box of spent toothpaste tubes, in front of him were two little boys covered with white dust and smiling from ear to ear.
He asked us to put everything down and sit with him on the front step of our house. With a smile, he gently explained what the word "counterfeiting" meant.
Our dreams were dashed. "You mean this is illegal?" asked Mike in a
"Let them go," my dad's friend said. "They might be developing a natural talent."
My dad glared at him.
"Yes, it is illegal," my dad said gently. "But you boys have shown great creativity and original thought. Keep going. I'm really proud of you!"
Disappointed, Mike and I sat in silence for about twenty minutes before we began cleaning up our mess. The business was over on opening day. Sweeping the powder up, I looked at Mike and said, "I guess Jimmy and his friends are right. We are poor."
My father was just leaving as I said that. "Boys," he said. "You're only poor if you give up. The most important thing is that you did something. Most people only talk and dream of getting rich. You've done something. I'm very proud of the two of you. I will say it again.
Keep going. Don't quit."
Mike and I stood there in silence. They were nice words, but we still did not know what to do.
"So how come you're not rich, dad?" I asked.
"Because I chose to be a schoolteacher. Schoolteachers really don't think about being rich. We just like to teach. I wish I could help you, but I really don't know how to make money."
Mike and I turned and continued our clean up.
"I know," said my dad. "If you boys want to learn how to be rich, don't ask me. Talk to your dad, Mike."
"My dad?" asked Mike with a scrunched up face.
"Yeah, your dad," repeated my dad with a smile. "Your dad and I have the same banker, and he raves about your father. He's told me several times that your father is brilliant when it comes to making money."
"My dad?" Mike asked again in disbelief. "Then how come we don't have a nice car and a nice house like the rich kids at school?"
"A nice car and a nice house does not necessarily mean you're rich or you know how to make money," my dad replied. "Jimmy's dad works for the sugar plantation. He's not much different from me. He works for a company, and I work for the government. The company buys the car for him. The sugar company is in financial trouble, and Jimmy's dad may soon have nothing. Your dad is different Mike. He seems to be building an empire, and I suspect in a few years he will be a very rich man."
With that, Mike and I got excited again. With new vigor, we began cleaning up the mess caused by our now defunct first business. As we were cleaning, we made plans on how and when to talk to Mike's dad. The problem was that Mike's dad worked long hours and often did not come home until late. His father owned warehouses, a construction company, a chain of stores, and three restaurants. It was the restaurants that kept him out late.
Mike caught the bus home after we had finished cleaning up. He was going to talk to his dad when he got home that night and ask him if he would teach us how to become rich. Mike promised to call as soon as he had talked to his dad, even if it was late.
The phone rang at 8:30 p.m.
"OK," I said. "Next Saturday." And put the phone down. Mike's dad had agreed to meet with Mike and me.
At 7:30 Saturday morning, I caught the bus to the poor side of town.
The Lessons Begin:
"I'll pay you 10 cents an hour. "
Even by 1956 pay standards, 10 cents an hour was low.
Michael and I met with his dad that morning at 8 o'clock. He was already busy and had been at work for more than an hour. His construction supervisor was just leaving in his pickup truck as I walked up to his simple, small and tidy home. Mike met me at the door.
"Dad's on the phone, and he said to wait on the back porch," Mike said as he opened the door.
The old wooden floor creaked as I steppedacross the threshold of this aging house. There was a cheap mat just inside the door. The mat was there to hide the years of wear from countless footsteps that the floor had supported. Although clean, it needed to be replaced.
I felt claustrophobic as I entered the narrow living room, which was filled with old musty overstuffed furniture that today would be collector's items. Sitting on the couch were two women, a little older than my mom. Across from the women sat a man in workman's clothes. He wore khaki slacks and a khaki shirt, neatly pressed but without starch, and polished work books. He was about 10 years older than my dad; I'd say about 45 years old. They smiled as Mike and I walked past them, heading for the kitchen, which lead to the porch that overlooked the back yard. I smiled back shyly.
"Who are those people?" I asked.
"Oh, they work for my dad. The older man runs his warehouses, and the women are the managers of the restaurants. And you saw the construction supervisor, who is working on a road project about 50 miles from here. His other supervisor, who is building a track of houses, had already left before you got here."
"Does this go on all the time?" I asked.
"Not always, but quite often," said Mike, smiling as he pulled up a chair to sit down next to me.
"I asked him if he would teach us to make money," Mike said.
"Oh, and what did he say to that?" I asked with cautious curiosity.
"Well, he had a funny look on his face at first, and then he said he would make us an offer."
"Oh," I said, rocking my chair back against the wall; I sat there
perched on two rear legs of the chair.
Mike did the same thing.
"Do you know what the offer is?" I asked.
"No, but we'll soon find out."
Suddenly, Mike's dad burst through the rickety screen door and onto the porch. Mike and I jumped to our feet, not out of respect but because we were startled.
"Ready boys?" Mike's dad asked as he pulled up a chair to sit down
We nodded our heads as we pulled our chairs away from the wall to sit in front of him.
He was a big man, about 6 feet tall and 200 pounds. My dad was taller, about the same weight, and five years older than Mike's dad. They sort of looked alike, though not of the same ethnic makeup. Maybe their energy was similar.
"Mike says you want to learn to make money? Is that correct, Robert?"
I nodded my head quickly, but with a little intimidation. He had a lot of power behind his words and smile.
"OK, here's my offer. I'll teach you, but I won't do it classroom-style. You work for me, I'll teach you. You don't work for me, I won't teach you. I can teach you faster if you work, and I'm wasting my time if you just want to sit and listen, like you do in school. That's my offer. Take it or leave it."
"Ah…… may I ask a question first?" I asked.
"No. Take it or leave it. I've got too much work to do to waste my time. If you can't make up you mind decisively, then you'll never learn to make money anyway. Opportunities come and go. Being able to know when to make quick decisions is an important skill. You have an opportunity that you asked for. School is beginning or it's over in ten seconds," Mike's dad said with a teasing smile.
"Take it," I said. `
"Take it," said Mike.
"Good," said Mike's dad. "Mrs. Martin will be by in ten minutes. After I'm through with her, you ride with her to my superette and you can begin working. I'll pay you 10 cents an hour and you will work for three hours every Saturday."
"But I have a softball game today," I said.
Mike's dad lowered his voice to a stern tone. "Take it or leave it," he
"I'll take it," I replied, choosing to work and learn instead of playing softball.
30 Cents Later
By 9 a.m. on a beautiful Saturday morning, Mike and I were working for Mrs. Martin. She was a kind and patient woman. She always said that Mike and I reminded her of her two sons who were grown and gone. Although kind, she believed in hard work and she kept us working. She was a task master. We spent three hours taking canned goods off the shelves and, with a feather duster, brushing each can to get the dust off, and then re-stacking them neatly. It was excruciatingly boring work.
Mike's dad, whom I call my rich dad, owned nine of these little superettes with large parking lots. They were the early version of the 7-11 convenience stores. Little neighborhood grocery stores where people bought items such as milk, bread, butter and cigarettes. The problem was, this was Hawaii before air conditioning, and the stores could not close its doors because of the heat. On two sides of the store, the doors had to be wide open to the road and parking lot. Every time a car drove by or pulled into the parking lot, dust would swirl and settle in the store.
Hence, we had a job for as long as there was no air conditioning.
For three weeks, Mike and I reported to Mrs. Martin and worked our three hours. By noon, our work was over, and she dropped three little dimes in each of our hands. Now, even at the age of 9 in the mid-1950s, 30 cents was not too exciting. Comic books cost 10 cents back then, so I usually spent my money on comic books and went home.
By Wednesday of the fourth week, I was ready to quit. I had agreed to work only because I wanted to learn to make money from Mike's dad, and now I was a slave for 10 cents an hour. On top of that, I had not seen Mike's dad since that first Saturday.
"I'm quitting," I told Mike at lunchtime. The school lunch was miserable. School was boring, and now I did not even have my Saturdays to look forward to. But it was the 30 cents that really got to me.
This time Mike smiled.
"What are you laughing at?" I asked with anger and frustration.
"Dad said this would happen. He said to meet with him when you were ready to quit."
"What?" I said indignantly. "He's been waiting for me to get fed up?"
"Sort of," Mike said. "Dad's kind of different. He teaches differently from your dad. Your mom and dad lecture a lot. My dad is quiet and a man of few words. You just wait till this Saturday. I'll tell him .you're ready."
"You mean I've been set up?"
"No, not really, but maybe. Dad will explain on Saturday."
Waiting in Line on Saturday
I was ready to face him and I was prepared. Even my real dad was angry with him. My real dad, the one I call the poor one, thought that my rich dad was violating child labor laws and should be investigated.
My educated poor dad told me to demand what I deserve. At least 25 cents an hour. My poor dad told me that if I did not get a raise, I was to quit immediately.
"You don't need that damned job anyway," said my poor dad with indignity.
At 8 o'clock Saturday morning, I was going through the same rickety door of Mike's house.
"Take a seat and wait in line," Mike's dad said as I entered. He turned and disappeared into his little office next to a bedroom.
I looked around the room and did not see Mike anywhere. Feeling awkward, I cautiously sat down next to the same two women who where there four weeks earlier. They smiled and slid across the couch to make room for me.
Forty-five minutes went by, and I was steaming. The two women had met with him and left thirty minutes earlier. An older gentleman was in there for twenty minutes and was also gone.
The house was empty, and I sat out in his musty dark living room on a beautiful sunny Hawaiian day, waiting to talk to a cheapskate who exploited children. I could hear him rustling around the office, talking on the phone, and ignoring me. I was now ready to walk out, but for some reason I stayed.
Finally, fifteen minutes later, at exactly 9 o'clock, rich dad walked out of his office, said nothing, and signaled with his hand for me to enter his dingy office.
"I understand you want a raise or you're going to quit," rich dad said as he swiveled in his office chair.
"Well, you're not keeping your end of the bargain," I blurted out nearly in tears. It was really frightening for a 9-year-old boy to confront a grownup.
"You said that you would teach me if I worked for you. Well, I've worked for you. I've worked hard. I've given up my baseball games to work for you. And you don't keep your word. You haven't taught me anything. You are a crook like everyone in town thinks you are. You're greedy. You want all the money and don't take care of your employees. You make me wait and don't show me any respect. I'm only a little boy, and I deserve to be treated better."
Rich dad rocked back in his swivel chair, hands up to his chin, somewhat staring at me. It was like he was studying me.
"Not bad," he said. "In less than a month, you sound like most of my employees."
"What?" I asked. Not understanding what he was saying, I continued with my grievance. "I thought you were going to keep your end of the bargain and teach me. Instead you want to torture me? That's cruel. That's really cruel."
"I am teaching you," rich dad said quietly.
"What have you taught me? Nothing!" I said angrily. "You haven't even talked to me once since I agreed to work for peanuts. Ten cents an hour. Hah! I should notify the government about you.
We have child labor laws, you know. My dad works for the government, you know."
"Wow!" said rich dad. "Now you sound just like most of the people who used to work for me. People I've either fired or they've quit."
"So what do you have to say?" I demanded, feeling pretty brave for a little kid. "You lied to me. I've worked for you, and you have not kept your word. You haven't taught me anything."
"How do you know that I've not taught you anything?" asked rich dad calmly.
"Well, you've never talked to me. I've worked for three weeks, and you have not taught me anything," I said with a pout.
"Does teaching mean talking or a lecture?" rich dad asked.
"Well, yes," I replied.
"That's how they teach you in school," he said smiling. "But that is not how life teaches you, and I would say that life is the best teacher of all. Most of the time, life does not talk to you. It just sort of pushes you around. Each push is life saying, `Wake up. There's something I want you to learn.' "
"What is this man talking about?" I asked myself silently. "Life pushing me around was life talking to me?" Now I knew I had to quit my job. I was talking to someone who needed to be locked up.
"If you learn life's lessons, you will do well. If not, life will just continue to push you around. People do two things. Some just let life push them around. Others get angry and push back. But they push back against their boss, or their job, or their husband or wife. They do not know it's life that's pushing."
I had no idea what he was talking about.
"Life pushes all of us around. Some give up. Others fight. A few learn the lesson and move on. They welcome life pushing them around. To these few people, it means they need and want to learn something. They learn and move on. Most quit, and a few like you fight."
Rich dad stood and shut the creaky old wooden window that needed repair. "If you learn this lesson, you will grow into a wise, wealthy and happy young man. If you don't, you will spend your life blaming a job, low pay or your boss for your problems. You'll live life hoping for that big break that will solve all your money problems."
Rich dad looked over at me to see if I was still listening. His eyes met mine. We stared at each other, streams of communication going between us through our eyes. Finally, I pulled away once I had absorbed his last message. I knew he was right. I was blaming him, and I did ask to learn. I was fighting.
Rich dad continued. "Or if you're the kind of person who has no guts, you just give up every time life pushes you. If you're that kind of person, you'll live all your life playing it safe, doing the right things, saving yourself for some event that never happens. Then, you die a boring old man. You'll have lots of friends who really like you because you were such a nice hard-working guy. You spent a life playing it safe, doing the right things. But the truth is, you let life push you into submission. Deep down you were terrified of taking risks. You really wanted to win, but the fear of losing was greater than the excitement of winning. Deep inside, you and only you will know you didn't go for it. You chose to play it safe."
Our eyes met again. For ten seconds, we looked at each other, only pulling away once the message was received.
"You've been pushing me around" I asked.
"Some people might say that," smiled rich dad. "I would say that I just gave you a taste of life."
"What taste of life?" I asked, still angry, but now curious. Even ready to learn.
"You boys are the first people that have ever asked me to teach them how to make money. I have more than 150 employees, and not one of them has asked me what I know about money. They ask me for a job and a paycheck, but never to teach them about money. So most will spend the best years of their lives working for money, not really understanding what it is they are working for."
I sat there listening intently.
"So when Mike told me about you wanting to learn how to make money, I decided to design a course that was close to real life. I could talk until I was blue in the face, but you wouldn't hear a thing. So I decided to let life push you around a bit so you could hear me. That's why I only paid you 10 cents."
"So what is the lesson I learned from working for only 10 cents an hour?" I asked. "That you're cheap and exploit your workers?"
Rich dad rocked back and laughed heartily. Finally, after his laughing stopped, he said, "You'd best change your point of view. Stop blaming me, thinking I'm the problem. If you think I'm the problem, then you have to change me. If you realize that you're the problem, then you can change yourself, learn something and grow wiser. Most people want everyone else in the world to change but themselves. Let me tell you, it's easier to change yourself than everyone else."
"I don't understand," I said.
"Don't blame me for your problems," rich dad said, growing impatient.
"But you only pay me 10 cents."
"So what are you learning?" rich dad asked, smiling.
"That you're cheap," I said with a sly grin.
"See, you think I'm the problem," said rich dad.
"But you are."
"Well, keep that attitude and you learn nothing. Keep the attitude
that I'm the problem and what choices do you have?"
"Well, if you don't pay me more or show me more respect and teach me, I'll quit."
"Well put," rich dad said. "And that's exactly what most people do. They quit and go looking for another job, better opportunity, and higher pay, actually thinking that a new job or more pay will solve the problem. In most cases, it won't."
"So what will solve the problem?" I asked. "Just take this measly 10 cents an hour and smile?"
Rich dad smiled. "That's what the other people do. Just accept a paycheck knowing that they and their family will struggle financially. But that's all they do, waiting for a raise thinking that more money will solve the problem. Most just accept it, and some take a second job working harder, but again accepting a small paycheck."
I sat staring at the floor, beginning to understand the lesson rich dad was presenting. I could sense it was a taste of life. Finally, I looked up and repeated the question. "So what will solve the problem?"
"This," he said tapping me gently on the head. "This stuff between your ears."
It was at that moment that rich dad shared the pivotal point of view that separated him from his employees and my poor dad-and led him to eventually become one of the richest men in Hawaii while my highly educated, but poor, dad struggled financially all his life. It was a singular point of view that made all the difference over a lifetime.
Rich dad said over and over, this point of view, which I call Lesson No. 1.
"The poor and the middle class work for money." "The rich have money work for them."
On that bright Saturday morning, I was learning a completely different point of view from what I had been taught by my poor dad. At the age of 9, I grew aware that both dads wanted me to learn. Both dads encouraged me to study…… but not the same things.
My highly educated dad recommended that I do what he did. "Son, I want you to study hard, get good grades, so you can find a safe, secure job with a big company. And make sure it has excellent benefits." My rich dad wanted me to learn how money works so I could make it work for me. These lessons I would learn through life with his guidance, not because of a classroom.
My rich dad continued my first lesson, "I'm glad you got angry about working for 10 cents an hour. If you had not gotten angry and had gladly accepted it, I would have to tell you that I could not teach you. You see, true learning takes energy, passion, a burning desire. Anger is a big part of that formula, for passion is anger and love combined. When it comes to money, most people want to play it safe and feel secure. So passion does not direct them: Fear does."
"So is that why they'll take a job with low par?" I asked.
"Yes," said rich dad. "Some people say I exploit people because I don't pay as much as the sugar plantation or the government. I say the people exploit themselves. It's their fear, not mine."
"But don't you feel you should pay them more?" I asked.
"I don't have to. And besides, more money will not solve the problem. Just look at your dad. He makes a lot of money, and he still can't pay his bills. Most people, given more money, only get into more debt."
"So that's why the 10 cents an hour," I said, smiling. "It's a part of the lesson."
"That's right," smiled rich dad. "You see, your dad went to school and got an excellent education, so he could get a high-paying job. Which he did. But he still has money problems because he never learned anything about money at school. On top of that, he believes in working for money."
"And you don't?" I asked.
"No, not really," said rich dad. "If you want to learn to work for money, then stay in school. That is a great place to learn to do that. But if you want to learn how to have money work for you, then I will teach you that. But only if you want to learn."
"Wouldn't everyone want to learn that" I asked.
"No," said rich dad. "Simply because it's easier to learn to work for money, especially if fear is your primary emotion when the subject of money is discussed."
"I don't understand," I said with a frown.
"Don't worry about that for now. Just know that it's fear that keeps most people working at a job. The fear of not paying their bills. The fear of being fired. The fear of not having enough money. The fear of
starting over. That's the price of studying to learn a profession or trade, and then working for money. Most people become a slave to money…… and then get angry at their boss."
"Learning to have money work for you is a completely different course of study?" I asked.
"Absolutely," rich dad answered, "absolutely."
We sat in silence on that beautiful Hawaiian Saturday morning. My friends would have just been starting their Little League baseball game. But far some reason, I was now thankful I had decided to work for 10 cents an hour. I sensed that I was about to learn something my friends would not learn in school.
"Ready to learn?" asked rich dad.
"Absolutely," I said with a grin.
"I have kept my promise. I've been teaching you from afar," my rich dad said. "At 9 years old, you've gotten a taste of what it feels like to work for money. Just multiply your last month by fifty years and you will have an idea of what most people spend their life doing."
"I don't understand," I said.
"How did you feel waiting in line to see me? Once to get hired and once to ask for more money?"
"Terrible," I said.
"If you choose to work for money, that is what life is like for many people," said rich dad.
"And how did you feel when Mrs. Martin dropped three dimes in your hand for three hours' work?"
"I felt like it wasn't enough. It seemed like nothing. I was disappointed," I said.
"And that is how most employees feel when they look at their paychecks. Especially after all the tax and other deductions are taken out. At least you got 100 percent."
"You mean most workers don't get paid everything?" I asked with amazement.
"Heavens no!" said rich dad. "The government always takes its share first."
"How do they do that." I asked.
"Taxes," said rich dad. "You're taxed when you earn. You're taxed when you spend. You're taxed when you save. You're taxed when you die."
"Why do people let the government do that to them?"
"The rich don't," said rich dad with a smile. "The poor and the middle class do. I'll bet you that I earn more than your dad, yet he pays more in taxes."
"How can that be?" I asked. As a 9-year-old boy, that made no sense to me. "Why would someone let the government do that to them?"
Rich dad sat there in silence. I guess he wanted me to listen instead of jabber away at the mouth.
Finally, I calmed down. I did not like what I had heard. I knew my dad complained constantly about paying so much in taxes, but really did nothing about it. Was that life pushing him around?
Rich dad rocked slowly and silently in his chair, just looking at me.
"Ready to learn?" he asked.
I nodded my head slowly.
"As I said, there is a lot to learn. Learning how to have money work for you is a lifetime study. Most people go to college for four years, and their education ends. I already know that my study of money will continue over my lifetime, simply because the more I Find out, the more I find out I need to know. Most people never study the subject. They go to work, get their paycheck, balance their checkbooks, and that's it. On top of that, they wonder why they have money problems. Then, they think that more money will solve the problem. Few realize that it's their lack of financial education that is the problem."
"So my dad has tax problems because he doesn't understand money?" I asked, confused.
"Look," said rich dad. "Taxes are just one small section on learning how to have money work for you. Today, I just wanted to find out if you still have the passion to learn about money. Most people don't. They want to go to school, learn a profession, have fun at their work, and earn lots of money. One day they wake up with big money problems, and then they can't stop working. That's the price of only knowing how to work for money instead of studying how to have money work for you. So do you still have the passion to learn?" asked rich dad.
I nodded my head.
"Good," said rich dad. "Now get back to work. This time, I will pay you nothing."
"What?" I asked in amazement.
"You heard me. Nothing. You will work the same three hours every
Saturday, but this time you will not be paid 10 cents per hour. You said you wanted to learn to not work for money, so I'm not going to pay you anything."
I couldn't believe what I was hearing.
"I've already had this conversation with Mike. He's already working, dusting and stacking canned goods for free. You'd better hurry and get back there."
"That's not fair," I shouted. "You've got to pay something."
"You said you wanted to learn. If you don't learn this now, you'll grow up to be like the two women and the older man sitting in my living room, working for money and hoping I don't fire them. Or like your dad, earning lots of money only to be in debt up to his eyeballs, hoping more money will solve the problem. If that's what you want, I'll go back to our original deal of 10 cents an hour. Or you can do what most people grow up to do. Complain that there is not enough pay, quit and go looking for another job."
"But what do I do?" I asked.
Rich dad tapped me on the head. "Use this," he said. "If you use it well, you will soon thank me for giving you an opportunity, and you will grow into a rich man."
I stood there still not believing what a raw deal I had been handed. Here I came to ask for a raise, and now I was being told to keep working for nothing.
Rich dad tapped me on the head again and said, "Use this. Now get out of here and get back to work."
LESSON #l: The Rich Don't Work For Money
I didn't tell my poor dad I wasn't being paid. He would not have understood, and I did not want to try to explain something that I did not yet understand myself.
For three more weeks, Mike and I worked for three hours, every Saturday, for nothing. The work didn't bother me, and the routine got easier. It was the missed baseball games and not being able to afford to buy a few comic books that got to me.
Rich dad stopped by at noon on the third week. We heard his truck pull up in the parking lot and sputter when the engine was turned off. He entered the store and greeted Mrs. Martin with a hug. After finding out how things were going in the store, he reached into the ice-cream freezer, pulled out two bars, paid for them, and signalled to Mike and me.
"Let's go for a walk boys."
We crossed the street, dodging a few cars, and walked across a large grassy field, where a few adults were playing softball. Sitting down at a remote picnic table, he handed Mike and me the ice-cream bars.
"How's it going boys?"
"OK," Mike said.
I nodded in agreement.
"Learn anything yet?" rich dad asked.
Mike and I looked at each other, shrugged our shoulders and shook our heads in unison.
Avoiding One of Life's Biggest Traps
"Well, you boys had better start thinking. You're staring at one of life's biggest lessons. If you learn the lesson, you'll enjoy a life of great freedom and security. If you don't learn the lesson, you'll wind up like Mrs. Martin and most of the people playing softball in this park. They work very hard, for little money, clinging to the illusion of job security, looking forward to a three-week vacation each year and a skimpy pension after forty-five years of work. If that excites you, I'll give you a raise to 25 cents an hour."
"But these are good hard-working people. Are you making fun of them?" I demanded.
A smile came over rich dad's face.
"Mrs. Martin is like a mother to me. I would never be that cruel. I may sound cruel because I'm doing my best to point something out to the two of you. I want to expand your point of view so you can see something. Something most people never have the benefit of seeing because their vision is too narrow. Most people never see the trap they are in."
Mike and I sat there uncertain of his message. He sounded cruel, yet we could sense he was desperately wanting us to know something.
With a smile, rich dad said, "Doesn't that 25 cents an hour sound good? Doesn't it make your heart beat a little faster."
I shook my head "no," but it really did. Twenty five cents an hour would be big bucks to me.
"OK, I'll pay you a dollar an hour," rich dad said, with a sly grin.
Now my heart was beginning to race. My brain was screaming,
"Take it. Take it." I could not believe what I was hearing. Still, I said nothing.
"OK, $2 an hour."
My little 9-year-old brain and heart nearly exploded. After all, it was 1956 and being paid $2 an hour would have made me the richest kid in the world. I couldn't imagine earning that kind of money. I wanted to say "yes." I wanted the deal. I could see a new bicycle, new baseball glove, and adoration of my friends when I flashed some cash. On top of that, Jimmy and his rich friends could never call me poor again. But somehow my mouth stayed silent.
Maybe my brain had overheated and blown a fuse. But deep down, I badly wanted that $2 an hour.
The ice cream had melted and was running down my hand. The ice-cream stick was empty, and under it was a sticky mess of vanilla and chocolate that ants were enjoying. Rich dad was looking at two boys staring back at him, eyes wide open and brains empty. He knew he was testing us, and he knew there was a part of our emotions that wanted to take the deal. He knew that each human being has a weak and needy part of their soul that can be bought. And he knew that each human being also had a part of their soul that was strong and filled with a resolve that could never be bought. It was only a question of which one was stronger. He had tested thousands of souls in his life. He tested souls every time he interviewed someone for a job.
"OK, $5 an hour."
Suddenly there was a silence from inside me. Something had changed. The offer was too big and had gotten ridiculous. Not too many grownups in 1956 made more than $5 an hour. The temptation disappeared, and a calm set in. Slowly I turned to my left to look at Mike. He looked back at me. The part of my soul that was weak and needy was silenced. The part of me that had no price took over. There was a calm and a certainty about money that entered my brain and my soul. I knew Mike had gotten to that point also.
"Good," rich dad said softly. "Most people have a price. And they have a price because of human emotions named fear and greed. First, the fear of being without money motivates us to work hard, and then once we get that paycheck, greed or desire starts us thinking about all the wonderful things money can buy. The pattern is then set."
"What pattern?" I asked.
"The pattern of get up, go to work, pay bills, get up, go to work, pay bills…… Their lives are then run forever by two emotions, fear and greed. Offer them more money, and they continue the cycle by also increasing their spending. This is what I call the Rat Race."
"There is another way?" Mike asked.
"Yes," said rich dad slowly. "But only a few people find it."
"And what is that way?" Mike asked.
"That's what I hope you boys will find out as you work and study with me. That is why I took away all forms of pay."
"Any hints?" Mike asked. "We're kind of tired of working hard, especially for nothing."
"Well, the first step is telling the truth," said rich dad.
"We haven't been lying." I said.
"I did not say you were lying. I said to tell the truth," rich dad came
"The truth about what?" I asked.
"How you're feeling," rich dad said. "You don't have to say it to anyone else. Just yourself."
"You mean the people in this park, the people who work for you, Mrs. Martin, they don't do that?" I asked.
"I doubt it," said rich dad. "Instead, they feel the fear of not having money. Instead of confronting the fear, they react instead of think. They react emotionally instead of using their heads," rich dad said, tapping us on our heads. "'Then, they get a few bucks in their hands, and again the emotion of joy and desire and greed take over, and again they react, instead of think."
"So their emotions do their thinking," Mike said.
"That's correct," said rich dad. "Instead of telling the truth about how they feel, they react to their feeling, fail to think. They feel the fear, they go to work, hoping that money will soothe the fear, but it doesn't. That old fear haunts them, and they go back to work, hoping again that money will calm their fears, and again it doesn't. Fear has them in this trap of working, earning money, working, earning money, hoping the fear will go away. But every day they get up, and that old fear wakes up with them. For millions of people, that old fear keeps them awake all night, causing a night of turmoil and worry. So they get up and go to work, hoping that a paycheck will kill that fear gnawing at their soul. Money is running their lives, and they refuse to tell the truth about that.
Money is in control of their emotions and hence their souls."
Rich dad sat quietly, letting his words sink in. Mike and I heard what he said, but really did not understand fully what he was talking about. I just knew that I often wondered why grownups hurried off to work. It did not seem like much fun, and they never looked that happy, but something kept them hurrying off to work.
Realizing we had absorbed as much as possible of what he was talking about, rich dad said, "I want you boys to avoid that trap. That is really what I want to teach you. Not just to be rich, because being rich does not solve the problem."
"It doesn't?" I asked, surprised.
"No, it doesn't. Let me finish the other emotion, which is desire. Some call it greed, but I prefer desire. It is perfectly normal to desire something better, prettier, more fun or exciting. So people also work for money because of desire. They desire money for the joy they think it can buy. But the joy that money brings is often short lived, and they soon need more money for more joy, more pleasure, more comfort, more security. So they keep working, thinking money will soothe their souls that is troubled by fear and desire. But money cannot do that."
"Even rich people?" Mike asked.
"Rich people included," said rich dad. "In fact, the reason many rich people are rich is not because of desire but because of fear. They actually think that money can eliminate that fear of not having money, of being poor, so they amass tons of it only tofind out the fear gets worse. They now fear losing it. I have friends who keep working even though they have plenty. I know people who have millions who are more afraid now than when they were poor. They're terrified of losing all their money. The fears that drove them to get rich got worse. That weak and needy part of their soul is actually screaming louder. They don't want to lose the big houses, the cars, the high life that money has bought them. They worry about what their friends would say if they lost all their money. Many are emotionally desperate and neurotic, although they look rich and have more money."
"So is a poor man happier?" I asked.
"No, I don't think so," replied rich dad. "The avoidance of money is just as psychotic as being attached to money."
As if on cue, the town derelict went past our table, stopping by the large rubbish can and rummaging around in it. The three of us watched him with great interest, when before we probably would have just ignored him.
Rich dad pulled a dollar out of his wallet and gestured to the older man. Seeing the money, the derelict came over immediately, took the bill, thanked rich dad profusely and hurried off ecstatic with his good fortune.
"He's not much different from most of my employees," said rich dad. "I've met so many people who say, `Oh, I'm not interested in money.' Yet they'll work at a job for eight hours a day. That's a denial of truth. If they weren't interested in money, then why are they working? That kind of thinking is probably more psychotic than a person who hoards money."
As I sat there listening to my rich dad, my mind was flashing back to the countless times my own dad said, "I'm not interested in money." He said those words often. He also covered himself by always saying, "I work because I love my job."
"So what do we do?" I asked. "Not work for money until all traces of fear and greed are gone?"
"No, that would be a waste of time," said rich dad. "Emotions are what make us human. Make us real. The word `emotion' stands for energy in motion. Be truthful about your emotions, and use your mind and emotions in your favor, not against yourself."
"Whoa!" said Mike.
"Don't worry about what I just said. It will make more sense in years to come. just be an observer, not a reactor, to your emotions. Most people do not know that it's their emotions that are doing the thinking. Your emotions are your emotions, but you have got to learn to do your own thinking."
"Can you give me an example?" I asked.
"Sure," replied rich dad. "When a person says, `I need to find a job,' it's most likely an emotion doing the thinking. Fear of not having money generates that thought."
"But people do need money if they have bills to pay," I said.
"Sure they do," smiled rich dad. "All I'm saying is that it's fear that is all too often doing the thinking."
"I don't understand," said Mike.
"For example," said rich dad. "If the fear of not having enough money arises, instead of immediately running out to get a job so they can earn a few bucks to kill the fear, they instead might ask themselves this question. `Will a job be the best solution to this fear over the long run?' In my opinion, the answer is `no.' Especially when you look over a person's lifetime. A job is really a short-term solution to a long-term problem."
"But my dad is always saying, `Stay in school, get good grades, so you can find a safe, secure job.' I spoke out, somewhat confused.
"Yes, I understand he says that," said rich dad, smiling. "Most people recommend that, and it's a good idea for most people. But people make that recommendation primarily out of fear."
"You mean my dad says that because he's afraid?"
"Yes," said rich dad. "He's terrified that you won't be able to earn money and won't fit into society. Don't get me wrong. He loves you and wants the best for you. And I think his fear is justified. An education and a job are important. But it won't handle the fear. You see, that same fear that makes him get up in the morning to earn a few bucks is the fear that is causing him to be so fanatical about you going to school."
"So what do you recommend?" I asked.
"I want to teach you to master the power of money. Not be afraid of it. And they don't teach that in school. If you don't learn it, you become a slave to money."
It was finally making sense. He did want us to widen our views. To . see what Mrs. Martin could not see, his employees could not see, or my dad for that matter. He used examples that sounded cruel at the time, but I've never forgotten them. My vision widened that day, and I could begin to see the trap that lay ahead for most people.
"You see, we're all employees ultimately. We just work at different levels," said rich dad. "I just want you boys to have a chance to avoid the trap. The trap caused by those two emotions, fear and desire. Use them in your favor, not against you. That's what I want to teach you. I'm not interested in just teaching you to make a pile of money. That won't handle the fear or desire. If you don't first handle fear and desire, and you get rich, you'll only be a high-paid slave."
"So how do we avoid the trap?" I asked.
"The main cause of poverty or financial struggle is fear and ignorance, not the economy or the government or the rich. It's selfinflicted fear and ignorance that keeps people trapped. So you boys go to school and get your college degrees. I'll teach you how to stay out of the trap."
The pieces of the puzzle were appearing. My highly educated dad had a great education and a great career. But school never told him how to handle money or his fears. It became clear that I could learn different and important things from two fathers.
"So you've been talking about the fear of not having money. How does the desire of money affect our thinking?" Mike asked.
"How did you feel when I tempted you with a pay raise? Did you notice your desires rising?"
We nodded our heads.
"By not giving in to your emotions, you were able to delay your reactions and think. That is most important. We will always have emotions of fear and greed. From here on in, it is most important for you to use those emotions to your advantage and for the long term, and not simply let your emotions run you by controlling your thinking. Most people use fear and greed against themselves. That's the start of ignorance. Most people live their lives chasing paychecks, pay raises and job security because of the emotions of desire and fear, not really questioning where those emotion-driven thoughts are leading them. It's just like the picture of a donkey, dragging a cart, with its owner dangling a carrot just in front of the donkey's nose. The donkey's owner may be going where he wants to go, but the donkey is chasing an illusion. Tomorrow there will only be another carrot for the donkey."
"You mean the moment I began to picture a new baseball glove, candy and toys, that's like a carrot to a donkey?" Mike asked.
"Yeah. And as you get older, your toys get more expensive. A new car, a boat and a big house to impress your friends," said rich dad with a smile. "Fear pushes you out the door, and desire calls to you. Enticing you toward the rocks. That's the trap."
"So what's the answer," Mike asked.
"What intensifies fear and desire is ignorance. That is why rich people with lots of money often have more fear the richer they get. Money is the carrot, the illusion. If the donkey could see the whole picture, it might rethink its choice to chase the carrot."
Rich dad went on to explain that a human's life is a struggle between ignorance and illumination.
He explained that once a person stops searching for information and knowledge of one's self, ignorance sets in. That struggle is a moment-to-moment decision-to learn to open or close one's mind.
"Look, school is very, very important. You go to school to learn a skill or profession so as to be a contributing member of society. Every culture needs teachers, doctors, mechanics, artists, cooks, business people, police officers, firefighters, soldiers. Schools train them so our culture can thrive and flourish," said rich dad. "Unfortunately, for many people, school is the end, not the beginning."
There was a long silence. Rich dad was smiling. I did not comprehend everything he said that day. But as with most great teachers, whose words continue to teach for years, often long after they're gone, his words are still with me today.
"I've been a little cruel today," said rich dad. "Cruel for a reason. I want you to always remember this talk. I want you to always think of Mrs. Martin. I want you always to think of the donkey. Never forget, because your two emotions, fear and desire, can lead you into life's biggest trap, if you're not aware of them controlling your thinking. To spend your life living in fear, never exploring your dreams, is cruel. To work hard for money, thinking that money will buy you things that will make you happy is also cruel. To wake up in the middle of the night terrified about paying bills is a horrible way to live. To live a life dictated by the size of a paycheck is not really a life. Thinking that a job will make you feel secure is lying to yourself. That's cruel, and that's the trap I want you to avoid, if possible. I've seen how money runs people's lives. Don't let that happen to you. Please don't let money run your life."
A softball rolled under our table. Rich dad picked it up and threw it back.
"So what does ignorance have to do with greed and fear?" I asked.
"Because it is ignorance about money that causes so much greed and so much fear," said rich dad. "Let me give you some examples. A doctor, wanting more money to better provide for his family, raises his fees. By raising his fees, it makes health care more expensive for everyone. Now, it hurts the poor people the most, so poor people have worse health than those with money.
"Because the doctors raise their rates, the attorneys raise their rates. Because the attorneys' rates have gone up, schoolteachers want a raise, which raises our taxes, and on and on and on. Soon, there will be such a horrifying gap between the rich and the poor that chaos will break out and another great civilization will collapse. Great civilizations collapsed when the gap between the haves and havenots was too great. America is on the same course, proving once again that history repeats itself, because we do not learn from history. We only memorize historical dates and names, not the lesson.
"Aren't prices supposed to go up?" I asked.
"Not in an educated society with a well-run government. Prices should actually come down. Of course, that is often only true in theory. Prices go up because of greed and fear caused by ignorance. If schools taught people about money, there would be more money and lower prices, but schools focus only on teaching people to work for money, not how to harness money's power."
"But don't we have business schools?" Mike asked. "Aren't you encouraging me to go to business school for my master's degree?"
"Yes," said rich dad. "But all too often, business schools train employees who are sophisticated bean counters. Heaven forbid a bean counter takes over a business. All they do is look at the numbers, fire people and kill the business. I know because I hire bean counters. All they think about is cutting costs and raising prices, which cause more problems. Bean counting is important. I wish more people knew it, but it, too, is not the whole picture," added rich dad angrily.
"So is there an answer?" asked Mike.
"Yes," said rich dad. "Learn to use your emotions to think, not think with your emotions. When you boys mastered your emotions, first by agreeing to work for free, I knew there was hope. When you again resisted your emotions when I tempted you with more money, you were again learning to think in spite of being emotionally charged. That's the first step."
"Why is that step so important" I asked.
"Well, that's up to you to find out. If you want to learn, I'll take you boys into the briar patch. That place where almost everyone else avoids. I'll take you to that place where most people are afraid to go. If you go with me, you'll let go of the idea of working for money and instead learn to have money work for you."
"And what will we get if we go with you. What if we agree to learn from you? What will we get?" I asked.
"The same thing Briar Rabbit got," said rich dad. "Freedom from the Tar Baby."
"Is there a briar patch?" I asked.
"Yes," said rich dad. "The briar patch is our fear and our greed. Going into our fear and confronting our greed, our weaknesses, our neediness is the way out. And the way out is through the mind, by choosing our thoughts."
"Choosing our thoughts?" Mike asked, puzzled.
"Yes. Choosing what we think rather than reacting to our emotions. Instead of just getting up and going to work to solve your problems, just because the fear of not having the money to pay your bills is scaring you. Thinking would be taking the time to ask yourself a question. A question like, `Is working harder at this the best solution to this problem?' Most people are so terrified at not telling themselves the truth-that fear is in control-that they cannot think, and instead run out the door. Tar baby is in control. That's what I mean by choosing your thoughts."
"And how do we do that?" Mike asked.
"That's what I will be teaching you. I'll be teaching you to have a choice of thoughts to consider, rather than knee-jerk reacting, like gulping down your morning coffee and running out the door.
"Remember what I said before: A job is only a short-term solution to a long-term problem. Most people have only one problem in mind, and it's short term. It's the bills at the end of the month, the Tar Baby. Money now runs their lives. Or should I say the fear and ignorance about money. So they do as their parents did, get up every day and go work for money. Not having the time to say, `Is there another way?' Their emotions now control their thinking, not their heads."
"Can you tell the difference between emotions thinking and the head thinking?" Mike asked.
"Oh, yes. I hear it all the time," said rich dad. "I hear things like, `Well, everyone has to work.' Or `The rich are crooks.' Or `I'll get another job. I deserve this raise. You can't push me around.' Or `I like this job because it's secure.' Instead of, `Is there something I'm missing here?' which breaks the emotional thought, and gives you time to think clearly."
I must admit, it was a great lesson to be getting. To know when someone was speaking out of emotions or out of clear thought. It was a lesson that served me well for life. Especially when I was the one speaking out of reaction and not from clear thought.
As we headed back to the store, rich dad explained that the rich really did "make money." They did not work for it. He went on to explain that when Mike and I were casting 5-cent pieces out of lead, thinking we were making money, we were very close to thinking the way the rich think. The problem was that it was illegal for us to do it. It was legal for the government and banks to do it, but not us. He explained that there are legal ways to make money and illegal ways.
Rich dad went on to explain that the rich know that money is an illusion, truly like the carrot for the donkey. It's only out of fear and greed that the illusion of money is held together by billions of people thinking that money is real. Money is really made up. It was only because of the illusion of confidence and the ignorance of the masses that the house of cards stood standing. "In fact," he said, "in many ways the donkey's carrot was more valuable than money."
He talked about the gold standard that America was on, and that each dollar bill was actually a silver certificate. What concerned him was the rumor that we would someday go off the gold standard and our dollars would no longer be silver certificates.
"When that happens, boys, all hell is going to break loose. The poor, the middle class and the ignorant will have their lives ruined simply because they will continue to believe that money is real and that the company they work for, or the government, will look after them."
We really did not understand what he was saying that day, but over the years it made more and more sense.
Seeing What Others Miss
As he climbed into his pickup truck, outside of his little convenience store, he said, "Keep working boys, but the sooner you forget about needing a paycheck, the easier your adult life will be. Keep using your brain, work for free, and soon your mind will show you ways of making money far beyond what I could ever pay you. You will see things that other people never see. Opportunities right in front of their noses. Most people never see these opportunities because they're looking for money and security, so that's all they get. The moment you see one opportunity, you will see them for the rest of your life. The moment you do that, I'll teach you something else. Learn this, and you'll avoid one of life's biggest traps. You'll never, ever, touch that Tar Baby."
Mike and I picked up our things from the store and waved goodbye to Mrs. Martin. We went back to the park, to the same picnic bench, and spent several more hours thinking and talking.
We spent the next week at school, thinking and talking. For two more weeks, we kept thinking, talking, and working for free.
At the end of the second Saturday, I was again saying goodbye to Mrs. Martin and looking at the comic-book stand with a longing gaze. The hard thing about not even getting 30 cents every Saturday was that I didn't have any money to buy comic books. Suddenly, as Mrs. Martin was saying goodbye to Mike and me, I saw something she was doing that I had never seen her do before. I mean, I had seen her do it, but I never took notice of it.
Mrs. Martin was cutting the front page of the comic book in half. She was keeping the top half of the comic book cover and throwing the rest of the comic book into a large brown cardboard box. When I asked her what she did with the comic books, she said, "I throw them away. I give the top half of the cover back to the comic-book distributor for credit when he brings in the new comics. He's coming in an hour."
Mike and I waited for an hour. Soon the distributor arrived and I asked him if we could have the comic books. To which he replied, "You can have them if you work for this store and do not resell them."
Our partnership was revived. Mike's mom had a spare room in the basement that no one used. We cleaned it out, and began piling hundreds of comic books in that room. Soon our comic-book library was open to the public. We hired Mike's younger sister, who loved to study, to be head librarian. She charged each child 10 cents admission to the library, which was open from 2:30 to 4:30 p.m. every day after school. The customers, the children of the neighborhood, could read as many comics as they could in two hours. It was a bargain for them since a comic costs 10 cents each, and they could read five or six in two hours.
Mike's sister would check the kids as they left, to make sure they weren't borrowing any comic books. She also kept the books, logging in how many kids showed up each day, who they were, and any comments they might have. Mike and I averaged $9.50 per week over a threemonth period. We paid his sister $1 a week and allowed her to read the comics for free, which she rarely did since she was always studying.
Mike and F kept our agreement by working in the store every Saturday and collecting all the comic books from the different stores. We kept our agreement to the distributor by not selling any comic books. We burned them once they got too tattered. We tried opening a branch office, but we could never quite find someone as dedicated as Mike's sister we could trust.
At an early age, we found out how hard it was to find good staff.
Three months after the library first opened, a fight broke out in the room. Some bullies from another neighborhood pushed their way in and started it. Mike's dad suggested we shut down the business. So our comic-book business shut down, and we stopped working on Saturdays at the convenience store. Anyway, rich dad was excited because he had new things he wanted to teach us. He was happy because we had learned our first lesson so well. We had learned to have money work for us. By not getting paid for our work at the store, we were forced to use our imaginations to identify an opportunity to make money. By starting our own business, the comic-book library, we were in control of our own finances, not dependent on an employer. The best part was that our business generated money for us, even when we weren't physically there. Our money worked for us. Instead of paying us money, rich dad had given us so much more.
Lesson Two:Why Teach Financial Literacy?
In 1990, my best friend, Mike, took over his father's empire and is, in fact, doing a better job than his dad did. We see each other once or twice a year on the golf course. He and his wife are wealthier than you could imagine. Rich dad's empire is in great hands, and Mike is now grooming his son to take his place, as his dad had groomed us.
In 1994, I retired at the age of 47, and my wife, Kim, was 37. Retirement does not mean not working. To my wife and me, it means that barring unforeseen cataclysmic changes, we can work or not work, and our wealth grows automatically, staying way ahead of inflation. I guess it means freedom. The assets are large enough to grow by themselves. It's like planting a tree. You water it for years and then one day it doesn't need you anymore. It's roots have gone down deep enough. Then, the tree provides shade for your enjoyment.
Mike chose to run the empire and I chose to retire.
Whenever I speak to groups of people, they often ask what I would recommend or what could they do? "How do they get started?" "Is there a good book I would recommend?" "What should they do to prepare their children?" "What is the secret to success?" "How do I make millions?" I am always reminded of this article I was once given. It goes as follows.
THE RICHEST BUSINESSMEN
In 1923 a group of our greatest leaders and richest businessmen held a meeting at the Edgewater Beach hotel in Chicago. Among them were Charles Schwab, head of the largest independent steel company; Samuel Instill, president of the world's largest utility; Howard Hopson, head of the largest gas company; Ivar Kreuger president of the International Match Co., one of the world's largest companies at that time; Leon Frazier, president of the Bank of International Settlements; Richard Whitney, president of the New York Stock Exchange; Arthur Cotton and Jesse Livermore, two of the biggest stock speculators; and Albert Fall, a member of President Harding's cabinet. Twenty five years later nine of them (those listed above) ended as follows. Schwab died penniless after living for five years on borrowed money. Instill died broke living in a foreign land. Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall were just released from prison. Fraser and Livermore committed suicide.
I doubt if anyone can say what really happened to these men. If you look at the date, 1923, it was just before the 1929 market crash and the Great Depression, which I suspect had a great impact on these men and their lives. The point is this: Today we live in times of greater and faster change than these men did. I suspect there will be many booms and busts in the next 25 years that will parallel the ups and downs these men faced. I am concerned that too many people are focused too much on money and not their greatest wealth, which is their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve problems, I am afraid those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.
Most people fail to realize that in life, it's not how much money you make, it's how much money you keep. We have all heard stories of lottery winners who are poor, then suddenly rich, then poor again. They win millions and are soon back to where they started. Or stories of professional athletes, who, at the age of 24, are earning millions of dollars a year, and are sleeping under a bridge by age 34. In the paper this morning, as I write this, there is a story of a young basketball player who a year ago had millions. Today, he claims his friends, attorney and accountant took his money, and now he works at a car wash for minimum wage.
He is only 29. He was fired from the car wash because he refused to take off his championship ring as he was wiping off the cars, so his story made the newspaper. He is appealing his termination, claiming hardship and discrimination and that the ring is all he has left. He claims that if you take that away, he'll crumble.
In 1997, I know so many people who are becoming instant millionaires. It's the Roaring '20s one more time. And while I am glad people have been getting richer and richer, I only caution that in the long run, it's not how much you make, it's how much you keep, and how many generations you keep it.
So when people ask, "Where do I get started?" or "Tell me how to get rich quick," they often are greatly disappointed with my answer. I simply say to them what my rich dad said back to me when I was a little kid. "If you want to be rich, you need to be financially literate."
That idea was drummed into my head every time we were together. As I said, my educated dad stressed the importance of reading books, while my rich dad stressed the need to master financial literacy.
If you are going to build the Empire State Building, the first thing you need to do is dig a deep hole and pour a strong foundation. If you are going to build a home in the suburbs, all you need to do is pour a 6-inch slab of concrete. Most people, in their drive to get rich, are trying to build an Empire State Building on a 6-inch slab.
Our school system, having been created in the Agrarian Age, still believes in homes with no foundation. Dirt floors are still the rage. So kids graduate from school with virtually no financial foundation. One day, sleepless and deep in debt in suburbia, living the American Dream, they decide that the answer to their financial problems is to find a way to get rich quick.
Construction on the skyscraper begins. It goes up quickly, and soon, instead of the Empire State Building, we have the Leaning Tower of Suburbia. The sleepless nights return.
As for Mike and me in our adult years, both of our choices were possible because we were taught to pour a strong financial foundation when we were just kids.
Now, accounting is possibly the most boring subject in the world. It also could be the most confusing. But if you want to be rich, long term, it could be the most important subject. The question is, how do you take a boring and confusing subject and teach it to kids? The answer is, make it simple. Teach it first in pictures.
My rich dad poured a strong financial foundation for Mike and me. Since we were just kids, he created a simple way to teach us. For years he only drew pictures and used words. Mike and I understood the simple drawings, the jargon, the movement of money, and then in later years, rich dad began adding numbers. Today, Mike has gone on to master much more complex and sophisticated accounting analysis because he has had to. He has a billion-dollar empire to run. I am not as sophisticated because my empire is smaller, yet we come from the same simple foundation. In the following pages, I offer to you the same simple line drawings Mike's dad created for us. Though simple, those drawings helped guide two little boys in building great sums of wealth on a solid and deep foundation.
Rule One. You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know. It is Rule No. 1. It is the only rule. This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability.
"Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets"
When rich dad explained this to Mike and me, we thought he was kidding. Here we were, nearly teenagers and waiting for the secret to getting rich, and this was his answer. It was so simple that we had to stop for a long time to think about it.
"What is an asset?" asked Mike.
"Don't worry right now," said rich dad. "Just let the idea sink in. If you can comprehend the simplicity, your life will have a plan and be financially easy. It is simple; that is why the idea is missed."
"You mean all we need to know is what an asset is, acquire them and we'll be rich?" I asked.
Rich dad nodded his head. "It's that simple."
"If it's that simple, how come everyone is not rich?" I asked.
Rich dad smiled. "Because people do not know the difference
between an asset and a liability."
I remember asking, "How could adults be so silly. If it is that simple, if it is that important, why would everyone not want to find out?"
It took our rich dad only a few minutes to explain what assets and liabilities were.
As an adult, I have difficulty explaining it to other adults. Why? Because adults are smarter. In most cases, the simplicity of the idea escapes most adults because they have been educated differently. They have been educated by other educated professionals, such as bankers, accountants, real estate agents, financial planners, and so forth. The difficulty comes in asking adults to unlearn, or become children again. An intelligent adult often feels it is demeaning to pay attention to simplistic definitions.
Rich dad believed in the KISS principle-"Keep It Simple Stupid"-so he kept it simple for two young boys, and that made the financial foundation strong.
So what causes the confusion? Or how could something so simple be so screwed up? Why would someone buy an asset that was really a liability. The answer is found in basic education.
We focus on the word "literacy" and not "financial literacy." What defines something to be an asset, or something to be a liability are not words. In fact, if you really want to be confused, look up the words "asset" and "liability" in the dictionary. I know the definition may sound good to a trained accountant, but for the average person it makes no sense. But we adults are often too proud to admit that something does not make sense.
As young boys, rich dad said, "What defines an asset is not words but numbers. And if you cannot read the numbers, you cannot tell an asset from a hole in the ground."
"In accounting," rich dad would say, "it's not the numbers, but what the numbers are telling you. It's just like words. It's not the words, but the story the words are telling you.
Many people read, but do not understand much. It's called reading comprehension. And we all have different abilities when it comes to reading comprehension. For example, I recently bought a new VCR. It came with an instruction book that explained how to program the VCR. All I wanted to do was record my favorite TV show on Friday night. I nearly went crazy trying to read the manual. Nothing in my world is more complex than learning how to program my VCR. I could read the words, but I understood nothing. I get an "A" for recognizing the words. I get an "F" for comprehension. And so it is with financial statements for most people.
"If you want to be rich, you've got to read and understand numbers." If I heard that once, I heard it a thousand times from my rich dad. And I also heard, "The rich acquire assets and the poor and middle class acquire liabilities."
Here is how to tell the difference between an asset and a liability. Most accountants and financial professionals do net agree with the definitions, but these simple drawings were the start of strong financial foundations for two young boys.
To teach pre?teen boys, rich dad kept everything simple, using as many pictures as possible, as few words as possible, and no numbers for years.
"This is the Cash Flow pattern of an asset."
| | Expense |
| Assets | Liabilities |
| | |
The above box is an Income Statement, often called a Profit and Loss Statement. It measures income and expenses. Money in and money out. The bottom diagram is the Balance Sheet. It is called that because it is
supposed to balance assets against liabilities. Many financial novices don't know the relationship between the Income Statement and the Balance Sheet. That relationship is vital to understand.
The primary cause of financial struggle is simply not knowing the difference between an asset and a liability. The cause of the confusion is found in the definition of the two words. If you want a lesson in confusion, simply look up the words "asset" and "liability" in the dictionary.
Now it may make sense to trained accountants, but to the average person, it may as well be written in Mandarin. You read the words in the definition, but true comprehension is difficult.
So as I said earlier, my rich dad simply told two young boys that "assets put money in your pocket." Nice, simple and usable.
"This is Cash Flow pattern of a liability."
| Expense |
| Assets | Liabilities |
| | |
Now that assets and liabilities have been defined through pictures, it may be easier to understand my definitions in words.
An asset is something that puts money in my pocket.
A liability is something that takes money out of my pocket.
This is really all you need to know. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities. It's not knowing the difference that causes most of the financial struggle in the real world.
Illiteracy, both in words and numbers, is the foundation of financial struggle. If people are having difficulties financially, there is something that they cannot read, either in numbers or words. Something is misunderstood. The rich are rich because they are more literate in different areas than people who struggle financially. So if you want to be rich and maintain your wealth, it's important to be financially literate, in words as well as numbers.
The arrows in the diagrams represent the flow of cash, or "cash flow." Numbers alone really mean little. Just as words alone mean little. It's the story that counts. In financial reporting, reading numbers is looking for the plot, the story. The story of where the cash is flowing. In 80 percent of most families, the financial story is a story of working hard in an effort to get ahead. Not because they don't make money. But because they spend their lives buying liabilities instead of assets.
For instance, this is the cash flow pattern of a poor person, or a young person still at home:
Job (provides income)-> Expenses(Taxes Food Rent Clothes Fun Transportation)
This is the cash flow pattern of a person in the middle class:
Job (provides income)-> Expenses(Taxes Food Mortgage Clothes Fun Transportation)
Liability (Mortgage Consumer loans Credit Cards)
This is the cash flow pattern of a wealthy person:
Assets(stocks bonds notes real estate intellectual property)->income (dividends interest rental income royalties)
All of these diagrams were obviously oversimplified. Everyone has living expenses, the need for food, shelter and clothing.
The diagrams show the flow of cash through a poor, middle class or wealthy person's life. It is the cash flow that tells the story. It is the story of how a person handles their money, what they do after they get the money in their hand.
The reason I started with the story of the richest men in America is to illustrate the flaw in the thinking of so many people. The flaw is that money will solve all problems. That is why I cringe whenever 1 hear people ask me how to get rich quicker. Or where do they start? I often hear, "I'm in debt so I need lo make more money."
But more money will often not solve the problem; in fact, it may actually accelerate the problem. Money often makes obvious our tragic human flaws. Money often puts a spotlight on what we do not know. That is why, all too often, a person who comes into a sudden windfall of cash-let's say an inheritance, a pay raise or lottery winnings-soon returns to the same financial mess, if not worse than the mess they were in before they received the money. Money only accentuates the cash flow pattern running in your head. If your pattern is to spend everything you get, most likely an increase in cash will just result in an increase in spending. Thus, the saying, "A fool and his money is one big party," I have said many times that we go to school to gain scholastic skills and professional skills, both important. We learn to make money with our professional skills. In the 1960s, when I was in high school, if someone did well in school academically, almost immediately people assumed this bright student would go on to be a medical doctor. Often no one asked the child if they wanted to be a doctor. It was assumed. It was the profession with the promise of the greatest financial reward.
Today, doctors are facing financial challenges I would not wish on my worst enemy; insurance companies taking control of the business, managed health care, government intervention, and malpractice suits, to name a few. Today, kids want to be basketball stars, golfers like Tiger Woods, computer nerds, movie stare, rock stars, beauty queens, or traders on Wall Street. Simply because that is where the fame, money and prestige is. That is the reason it is so hard to motivate kids in school today. They know that professional success is no longer solely linked to academic success, as it once was.
Because students leave school without financial skills, millions of educated people pursue their profession successfully, but later find themselves struggling financially. They work harder, but don't get ahead. What is missing from their education is not how to make money, but how to spend money-what to do after you make it. It's called financial aptitude-what you do with the money once you make it, how to keep people from taking it from you, how long you keep it, and how hard that money works for you. Most people cannot tell why they struggle financially because they don't understand cash flow. A person can be highly educated, professionally successful and financially illiterate. These people often work harder than they need to because they learned how to work hard, but not how to have their money work for them.
The story of bow the quest for a Financial Dream turns into a financial nightmare. The moving-picture show of hard-working people has a set pattern. Recently married, the happy, highly educated young couple move in together, in one of their cramped rented apartments. Immediately, they realize that they are saving money because two can live as cheaply as
The problem is, the apartment is cramped. They decide to save money to buy their dream home so they can have kids. They now have two incomes, and they begin to focus on their careers.
Their incomes begin to increase.
As their incomes go up……their expenses go up as well.
The No. 1 expense for most people is taxes. Many people think it's income tax, but for most Americans their highest tax is Social Security. As an employee, it appears as if the Social Security tax combined with the Medicare tax rate is roughly 7.5 percent, but it's really 15 percent since the employer must match the Social Security amount. In essence, it is money the employer cannot pay you. On top of that, you still have to pay income tax on the amount deducted from your wages for Social Security tax, income you never receive because it went directly to Social Security through withholding. Then, their liabilities go up.
This is best demonstrated by going back to the young couple. As a result of their incomes going up, they decide to go out and buy the house of their dreams. Once in their house, they have a new tax, called property tax. Then, they buy a new car, new furniture and new appliances to match [heir new house. Ail of a sudden, they wake up and their liabilities column is full of mortgage debt and credit-card debt.
They're now trapped in the rat race. A child comes along. They work harder. The process repeats itself. More money and higher taxes, also called bracket creep, A credit card comes in the mail. They use it. It maxes out. A loan company calls and says their greatest "asset," their home, has appreciated in value. The company offers a "bill consolidation" loan, because their credit is so good, and tells them the intelligent thing to do is clear off the high-interest consumer debt by paying off their credit card. And besides, interest on their home is a tax deduction. They go for it, and pay off those high-interest credit cards. They breathe a sigh of relief. Their credit cards are paid off. They've now folded their consumer debt into their home mortgage. Their payments go down because they extend their debt over 30 years. It is the smart thing to do.
Their neighbor calls to invite them to go shopping-the Memorial Day sale is on. A chance to save some money. They say to themselves, "I won't buy anything. I'll just go look." But just in case they find something, they tuck that clean credit card inside their wallet.
I run into this young couple all the time. Their names change, but their financial dilemma is the same. They come to one of my talks to hear what I have to say. They ask me, "Can you tell us how to make more money?" Their spending habits have caused them to seek more income.
They don't even know that the trouble is really how they choose to spend the money they do have, and that is the real cause of their financial struggle. It is caused by financial illiteracy and not understanding the difference between an asset and a liability.
More money seldom solves someone's money problems. Intelligence solves problems, There is a saying a friend of mine says over and over to people in debt.
"If you find you have dug yourself into a hole…… stop digging."
As a child, my dad often told us that the Japanese were aware of three powers; "The power of the sword, the jewel and the mirror."
The sword symbolizes the power of weapons. America has spent trillions of dollars on weapons and, because of this, is the supreme military presence in the world.
The jewel symbolizes the power of money. There is some degree of truth to the saying, "Remember the golden rule. He who has the gold makes the rules."
The mirror symbolizes the power of self-knowledge. This self-knowledge, according to Japanese legend, was the most treasured of the three.
The poor and middle class all loo often allow the power of money to control them. By simply getting up and working harder, failing to ask themselves if what they do makes sense, they shoot themselves in the foot as they leave for work every morning. By not fully understanding nioney, the vast majority of people allow the awesome power of money to control them. The power of money is used against them.
If they used the power of the mirror, they would have asked themselves, "Does this make sense?" All too often, instead of trusting their inner wisdom, that genius inside of them, most people go along with the crowd. They do things because everybody else does it. They conform rather than question. Often, they mindlessly repeat what they have been told. Ideas such as "diversify" or "your home is an asset." "Your home is your biggest investment." "You get a tax break for going into greater debt." "Get a safe job." "Don't make mistakes." "Don't take risks."
It is said that the fear of public speaking is a fear greater than death for most people. According to psychiatrists, the fear of public speaking is caused by the fear of ostracism, the fear of standing out, the fear of criticism, the fear of ridicule, the fear of being an outcast. The fear of being different prevents most people from seeking new ways to solve their problems.
That is why my educated dad said the Japanese valued the power of the mirror the most, for it is only when we as humans look into the mirror do we find truth. And the main reason that most people say "Play it safe1' is out of fear. That goes for anything, be it sports, relationships, career, money.
It is that same fear, the fear of ostracism that causes people to conform and not question commonly accepted opinions or popular trends. "Your home is an asset." "Get a bill consolidation loan and get out of debt." "Work harder." "It's a promotion." "Someday I'll be a vice president." "Save money." "When ! get a raise, I'll buy us a bigger house." "Mutual funds are safe." "Tickle Me Elmo dolls are out of stock, but I just happen to have one in back that another customer has not come by for yet."
Many great financial problems are caused by going along with the crowd and trying to keep up with the Joneses. Occasionally, we all need to look in the mirror and be true to our inner wisdom rather than our fears.
By the time Mike and I were 16 years old, we began to have problems in school. We were not bad kids. We just began to separate from the crowd. We worked for Mike's dad after school and on the weekends. Mike and I often spent hours after work just sitting at a table with his dad while he held meetings with his bankers, attorneys, accountants, brokers, investors, managers and employees. Here was a man who had left school at the age of 13, now directing, instructing, ordering and asking questions of educated people. They came at his beck and call, and cringed when he did not approve of them.
Here was a man who had not gone along with the crowd. He was a man who did his own thinking and detested the words, "We have to do it this way because that's the way everyone else does it." He also hated the word "can't." If you wanted him to do something, just say, "I don't think
you can do it."
Mike and I learned more sitting at his meetings than we did in all our years of school, college included. Mike's dad was not school educated, but he was financially educated and successful as a result. He use to tell us over and over again. "An intelligent person hires people who are more intelligent than they are." So Mike and I had the benefit of spending hours listening to and, in the process, learning From
But because of this, both Mike and I just could not go along with the standard dogma that our teachers preached, And that caused the problems. Whenever the teacher said, "If you don't get good grades, you won't do well in the real world," Mike and I just raised our eyebrows. When we were told to follow set procedures and not deviate from the rules, we could see how this schooling process actually discouraged creativity. We started to understand why our rich dad told us that schools were designed to produce good employees instead of employers.
Occasionally Mike or I would ask our teachers how what we studied was applicable, or we asked why we never studied money and how it worked. To the later question, we often got the answer that money was not important, that if we excelled in our education, the money would follow.
The more we knew about the power of money, the more distant we grew from the teachers and our classmates.
My highly educated dad never pressured me about my grades. I often wondered why. But we did begin to argue about money. By the time I was 16, I probably had a far better foundation with money than both my mom and dad. I could keep books, I listened to tax accountants, corporate attorneys, bankers, real estate brokers, investors and so forth. My dad talked to teachers.
One day, my dad was telling me why our home was his greatest investment. A not-too-pleasant argument took place when I showed him why I thought a house was not a good investment.
The following diagram illustrates the difference in perception between my rich dad and my poor dad when it came to their homes. One dad thought his house was an asset, and the other dad thought it was a liability.
I remember when I drew a diagram for my dad showing him the direction of cash flow. I also showed him the ancillary expenses that went along with owning the home. A bigger home meant bigger expenses, and the cash flow kept going out through the expense column.
Today, I am still challenged on the idea of a house not being an asset. And 1 know that for many people, it is their dream as well as their largest investment. And owning your own home is better than nothing. I simply offer an alternate way of looking at this popular dogma. If my wife and I were to buy a bigger, more flashy house we realize it would not be an asset, it would be a liability, since it would take money out of
So here is the argument I put forth. I really do not expect most people to agree with it because a nice home is an emotional thing. And when it comes to money, high emotions tend to lower financial intelligence. 1 know from personal experience that money has a way of making every decision emotional.
1. When it comes to houses, I point out that most people work all their lives paying for a home they never own. In other words, most people buy a new house every so many years, each time incurring a new 30-year loan to pay off the previous one.
2. Even though people receive a tax deduction for interest on mortgage payments, they pay for all their other expenses with after-tax dollars. Even after they pay off their mortgage.
3. Property taxes. My wife's parents were shocked when the property taxes on their home went to $1,000 a month. This was after they had retired, so the increase put a strain on their retirement budget, and they felt forced to move.
4 Houses do not always go up in value. In 1997, I still have friends who owe a million dollars for a home that will today sell for only $700,000.
5. The greatest losses of all are those from missed opportunities. If all your money is tied up in your house, you may be forced to work harder because your money continues blowing out of the expense column, instead of adding to the asset column, the classic middle class cash flow pattern. If a young couple would put more money into their asset column early on, their later years would get easier, especially as they prepared to send their children to college. Their assets would have grown and would be available to help cover expenses. All too often, a house only serves as a vehicle for incurring a home-equity loan to pay for mounting expenses. In summary, the end result in making a decision to own a house that is too expensive in lieu of starting an investment portfolio early on impacts an individual in at least the following three ways:
1. Loss of time, during which other assets could have grown in value.
2. Loss of additional capital, which could have been invested instead of paying for high-maintenance expenses related directly to the home.
3. Loss of education. Too often, people count their house, savings and retirement plan as all they have in their asset column. Because they have no money to invest, they simply do not invest. This costs them investment experience. Most never become what the investment world calls a "sophisticated investor." And the best investments are usually first sold to "sophisticated investors," who then turn around and sell them to the people playing it safe. I am not saying don't buy a house. I am saying, understand the difference between an asset and a liability. When I want a bigger house, I first buy assets that will generate the cash flow to pay for the house.
My educated dad's personal financial statement best demonstrates the life of someone in the rat race. His expenses seem to always keep up with his income, never allowing him to invest in assets. As a result, his liabilities, such as his mortgage and credit card debts are larger than his assets. The following picture is worth a thousand words:
Educated Dad's Financial Statement
Asset < Liability
My rich dad's personal financial statement, on the other hand, reflects the results of a life dedicated to investing and minimizing liabilities:
Rich Dad's Financial Statement
Income > Expense
Asset > Liability
A review of my rich dad's financial statement is why the rich get richer. The asset column generates more than enough income to cover expenses, with the balance reinvested into the asset column. The asset column continues to grow and, therefore, the income it produces grows with it.
The result being: The rich get richer!
Why the Rich Get Richer
Income -> Assets -> More Income
Expenses are low, Liabilities are low
The middle class finds itself in a constant state of financial struggle. Their primary- income is through wages, and as their wages increase, so do their taxes. Their expenses tend to increase in equal increments as their wages increase; hence the phrase "the rat race." They treat their home as their primary asset, instead on investing in income-producing assets.
Why the Middle Class Struggle
Income goes up, Expenses go up
Assets do not increase, Liabilities do increase
This pattern of treating your home as an investment and the philosophy that a pay raise means you can buy a larger home or spend more is the foundation of today's debt-ridden society. This process of increased spending throws families into greater debt and into more financial uncertainty, even though they may be advancing in their jobs and receiving pay raises on a regular basis. This is high risk living caused by weak financial education.
The massive loss of jobs in the 1990s-the downsizing of businesses-has brought to light how shaky the middle class really is financially. Suddenly, company pension plans are being replaced by 401k plans. Social Security is obviously in trouble and cannot be looked at as a source for retirement. Panic has sei in for the middle class. The good thing today is that many of these people have recognized these issues and have begun buying mutual funds. This increase in investing is largely responsible for the huge rally we have seen in the stock market. Today, there are more and more mutual funds being created to answer the demand by the middle class.
Mutual funds are popular because they represent safety. Average mutual fund buyers are too busy working to pay taxes and mortgages, save for their children's college and pay off credit cards. They do not have time to study to learn how to invest, so they rely on the expertise of the manager of a mutual fund. Also, because the mutual fund includes many different types of investments, they feel their money is safer because ii is "diversified."
This group of educated middle class subscribes to the "diversify" dogma put out by mutual fund brokers and financial planners. Play it safe. Avoid risk.
The real tragedy is that the lack of early financial education is what creates the risk faced by average middle class people. The reason they have to play it safe is because their financial positions are tenuous at best. Their balance sheets are not balanced. They are loaded with liabilities, with no real assets that generate income. Typically, their only source of income is their paycheck. Their livelihood becomes entirely dependent on their employer.
So when genuine "deals of a lifetime" come along, those same people cannot take advantage of the opportunity. They must play it safe, simply because they are working so hard, are taxed to the max, and are loaded with debt.
As I said at the start of this section, the most important rule is to know the difference between an asset and a liability. Once you understand the difference, concentrate your efforts on only buying income-generating assets. That's the best way to get started on a path to becoming rich. Keep doing that, and your asset column will grow. Focus on keeping liabilities and expenses down. This will make more money available to continue pouring into the asset column. Soon, the asset base will be so deep that you can afford to look at more speculative investments. Investments that may have returns of 100 percent to infinity. Investments that for $5,000 are soon turned into $1 million or more. Investments that the middle class calls "too risky." The investment is not risky. It's the lack of simple financial intelligence, beginning with financial literacy, that causes the individual to be "too risky,"
If you do what the masses do, you get the following picture.
Income = Work for Owner
Expense = Work for Government
Asset = (none)
Liability = Work for Bank
As an employee who is also a homeowner, your working efforts are generally as follows:
1. You work for someone else. Most people, working for a paycheck, are making the owner, or the shareholders richer. Your efforts and success will help provide for the owner's success and retirement.
2. You work for the government. The government takes its share from your paycheck before you even see it. By working harder, you simply increase the amount of taxes taken by the government - most people work from January to May just for the government.
3. You work for the bank. After taxes, your next largest expense is usually your mortgage and credit card debt.
The problem with simply working harder is that each of these three levels takes a greater share of your increased efforts. You need to learn how to have your increased efforts benefit you and your family directly.
Once you have decided to concentrate on minding your own business, how do you set your goals? For most people, they must keep their profession and rely on their wages to fund their acquisition of assets.
As their assets grow, how do they measure the extent of their success? When does someone realize that they are rich, that they have wealth? As well as having my own definitions for assets and liabilities, I also have my own definition for wealth. Actually I borrowed it from a man named Buckminster Fuller. Some call him a quack, and others call him a living genius. Years ago he got all the architects buzzing because he applied for a patent in 1961 for something called a geodesic dome. But in the application, Fuller also said something about wealth. It was pretty confusing at first, but after reading it for awhile, it began to make some sense: Wealth is a person's ability to survive so many number of days forward…… or if I stopped working today, how long could I survive?
Unlike net worth-the difference between your assets and liabilities, which is often filled with a person's expensive junk and opinions of what things are worth-this definition creates the possibility for developing a truly accurate measurement. I could now measure and really know where I was in terms of my goal to become financially independent.
Although net worth often includes these non-cash-producing assets, like stuff you bought that now sits in your garage, wealth measures how much money your money is making and, therefore, your financial survivability.
Wealth is the measure of the cash flow from the asset column compared with the expense column.
Let's use an example. Let's say I have cash flow from my asset column of S"J,000 a month. And I have monthly expenses of 52,000. What is my wealth?
Let's go back to Buckminster Fuller's definition. Using his definition, how many days forward can I survive? And let's assume a 30-day month. By that definition, I have enough cash flow for half a month.
When I have achieved $2,000 a month cash flow from my assets, then I will be wealthy.
So I am not yet rich, but I am wealthy. I now have income generated from assets each month that fully cover my monthly expenses. If I want to increase my expenses, I first must increase my cash flow from assets to maintain this level of wealth. Take notice that it is at this point that I no longer am dependent on my wages. I have focused on and been successful in building an asset column that has made me financially independent. If I quit my job today, I would be able to cover my monthly expenses with the cash flow from my assets.
My next goal would be to have the excess cash flow from my assets reinvested into the asset column. The more money that goes into my asset column, the more my asset column grows. The more my assets grow, the more my cash flow grows. And as long as I keep my expenses less than the cash flow from these assets, I will grow richer, with more and more income from sources other than my physical labor.
As this reinvestment process continues, I am well on my way to being rich. The actual definition of rich is in the eye of the beholder. You can never be too rich.
Just remember this simple observation: The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets. So how do I start minding my own business? What is the answer? Listen to the founder of McDonald's.
Lesson Three: Mind Your Own Business
In 1974, Ray Kroc, the founder of McDonald's, was asked to speak to the MBA class at the University of Texas at Austin. A dear friend of mine, Keith Cunningham, was a student in that MBA class. After a powerful and inspiring talk, the class adjourned and the students asked Ray if he would join them at their favorite hangout to have a few beers. Ray graciously accepted.
"What business am I in?" Ray asked, once the group had all their beers in hand.
"Everyone laughed," said Keith. "Most of the MBA students thought Ray was just fooling around."
No one answered, so Ray asked the question again. "What business do you think I'm in?"
The students laughed again, and finally one brave soul yelled out, "Ray, who in the world does not know that you're in the hamburger business."
Ray chuckled. "That is what I thought you would say." He paused and then quickly said, 'ladies and gentlemen, I'm not in the hamburger business. My business is real estate."
Keith said that Ray spent a good amount of time explaining his viewpoint. In their business plan, Ray knew that the primary business focus was to sell hamburger franchises, but what he never lost sight of was the location of each franchise. He knew that the real estate and its location was the most significant factor in the success of each franchise. Basically, the person that bought the franchise was also paying for, buying, the land under the franchise for Ray Kroc's organization.
McDonald's today is the largest single owner of real estate in the world, owning even more than the Catholic Church. Today, McDonald's owns some of the most valuable intersections and street corners in America, as well as in other parts of the world.
Keith said it was one of the most important lessons in his life. Today, Keith owns car washes, but his business is the real estate under those car washes.
The previous chapter ended with the diagrams illustrating that most people work for everyone else but themselves. They work first for the owners of the company, then for the government through taxes,