Live By This Golden Lesson
Having money does not make you rich, because you can always lose money. Owning real estate does not make you truly rich, because (as we have seen dramatically in the 2008 crisis) real estate can always lose value.
So what makes you rich? Knowledge.
As a young adult, even before I began investing in real estate, my very first investment was in gold.
“Gold is the only true money,” I reasoned.
“How could I go wrong?”
I began buying gold coins in 1972 when gold was approximately $85 an ounce. I was 25 years old. By the time I was 32, gold was approaching $800 an ounce, and my money had multiplied nearly tenfold. Hot dog!
The frenzy was on, and greed overtook caution. Rumors were that gold was going to hit $2,500 an ounce. Greedy investors began piling on, even those who had never bought gold before. I could have sold my gold coins for a significant profit, but I hung on, hoping for gold to go higher. About a year later, with gold sagging back below $500 an ounce, I finally sold my last coin. I watched gold drift lower and lower until 1996 when it finally bottomed at $275 in 1996.
I didn’t make much money with it, but gold taught me a priceless lesson about money. Once I saw that I could actually lose money investing in “real money,” I realized that it was not the tangible asset that was valuable. It was information relative to the asset that ultimately made a person rich or poor.
It is not real estate, gold, stocks, hard work, or money that makes you rich; it is what you know about real estate, gold, stocks, hard work, and money that makes you rich. Ultimately, it is your financial intelligence that makes you rich.
Financial intelligence has little or nothing to do with academic intelligence. You can be a genius when it comes to academic intelligence, but a moron when it comes to financial intelligence.
1) Knowing How to Make More Money
The more money you make, the higher your financial intelligence. Someone who earns a $1 million a year has a higher financial IQ than one who earns $30,000 a year.
2) Knowing How to Protect Your Money
The world is out to take your money, and it’s not just Bernie Madoffs. One of the biggest financial predators is your government, who takes your money legally.
Take two people who both make $1 million a year. If one pays 20 percent in taxes while the other pays 35 percent, the first person has a higher financial IQ.
3) Knowing How to Budget Your Money
Many people fail to keep much money out of what they earn, simply because they budget like a poor person rather than like a rich person. Budgeting your money also takes financial intelligence.
Take two people: Person A earns $120,000 a year, and Person B earns only $60,000 a year. Who has more financial intelligence, Person A? Not so fast. Let’s say Person A also spends $120,000 every year, putting him at Square 1 at year’s end. But Person B, who earns only $60,000, budgets carefully and is able to live well on just $50,000, and invests the remaining $10,000. Who ends up with more?
If you have poor money-management skills, then all the money in the world cannot save you. If you budget your money wisely and learn about the B and I quadrants, then you are on the path to great personal fortune and, most importantly, freedom.
Being able to live well and still invest no matter how much or how little you make requires a high level of financial intelligence. Having a surplus is something you have to actively budget for.
4) Knowing How to Leverage Your Money
After you budget a surplus, the next financial challenge is to leverage that surplus. Return on investment is yet one more measurement of financial intelligence.
The person who earns 50 percent on his money has a higher financial IQ than one who earns 5 percent. And the one who earns 50 percent tax-free on his money has a much higher financial IQ than the one who earns just 5 percent and then pays 35 percent in taxes on that 5 percent return!
Most people save their financial surplus, if they have any, by sticking it in a bank or putting it into a mutual fund portfolio, hoping this will leverage their money. But there are much better ways to leverage your money than savings and mutual funds. Those don’t require much financial intelligence: You can train a monkey to save money and invest in mutual funds—which is exactly why the returns on those investment vehicles are historically pretty pitiful.
A Magnificent Life
From my observations of people in many different situations, I would say there are three ways to live. These three ways are driven by three different emotions, and also correspond closely to three different financial and emotional states:
Living in fear
I know what it’s like to be broke. I’ve described how, in 1985, in many ways the worst year of my life, Kim and I were in such dire straits financially that we were literally homeless and living in our old broken-down Toyota. The feeling of fear during those days was paralyzing, so intense that it numbed our entire bodies.
I knew this feeling: It was the same sense I had as a young child, growing up in a family that was broke most of the time. That dark cloud of “not enough money” hung over our family for most of my childhood. Not having enough money to live on is a horrible experience, and it hurts in many more ways than financial. It can undermine your self-confidence and sense of self-worth, and sabotage every aspect of your life.
Living in anger and frustration
The second way of living is living with the emotion of anger or frustration from having to get up and go to work, especially when you would rather be doing something else. A person who lives with this feeling might be someone who has a good job and high pay but cannot afford to stop working. That is where the frustration comes from. They know if they stop, the world they live in would come crashing down.
People like this may say, “I cannot afford to quit. If I quit, the banks would come and take everything away.” These people often say, “I can’t wait until my next vacation,” or “Only ten more years to retirement.”
Living in joy, peace, and contentment
The third way of living is to live with the peace of mind of knowing that, regardless of whether you work or not, there is plenty of money coming in. This is the feeling Kim and I have lived with ever since 1994 when we sold our business and retired. Kim was then 37 and I was 47. Today, many years later, we still work; in fact, we work hard. Why? Because we love what we do.
The feeling of not having to work, knowing that no matter what we do we’ll have more than enough money coming in for as long as we live, is an amazingly freeing, exhilarating feeling, allowing us to do what we genuinely love.
We spend our time together, and whether we’re playing golf, traveling around the world, or putting in long hours in our boardroom, to us, it’s all play and it’s all the stuff of dreams. It’s our life, exactly as we’ve always wanted it to be, and we treasure every single moment of it.
Editor, Rich Dad Poor Dad Daily