[REVELED] Top Investments That Pay For Today and Tomorrow
In Rich Dad Poor Dad, the two most important words the book focused on were assets and liabilities. I will say, later I learned that the two most important terms for investing are: cash flow and capital gains.
When a person says, “I bought this stock (or property) because I believe the price will go up,” this person is most likely investing for capital gains. Rich dad used to say, “Capital gains is the dream of gamblers. A true investor first invests for cash flow, not capital gains.”
A good question is: Why do so many people invest for capital gains rather than cash flow? The answer is again found in the perils of allowing yourself to say, “I can’t afford it,” or “You can’t do that,” or “It’s too risky.” You become vulnerable to financial predators.
One of the tools of deception that financial predators use is the promise of a better future. They may say, “In three years the price of this property will double,” or, “The stock market goes up 6 percent on average every year.”
Rich dad used to say, “People who cannot find an investment today gamble on the promise of tomorrow.
They count on hope rather than intelligence. They have dreams, so they buy lies.”
Grow Your Financial Intelligence
My highly educated, but poor dad thought that a job with a high salary was important and that buying your dream home was important. He also believed in paying bills first and living below your means.
My rich dad taught me to focus on passive income and spend my time acquiring assets that provide passive or long-term residual income. He did not believe in living below your means. To his son and me, he often said, “Instead of living below your means, focus on expanding your means.”
To do that, he recommended that we focus on building the asset column and increasing our passive income from capital gains, dividends, residual income from businesses, rental income from real estate, and royalties.
Financial intelligence begins with knowing what you are investing for. As I stated earlier, in the world of money, there are two things investors invest for: capital gains and cash ﬂow.
- Capital gains. Another reason so many people think investing is risky is that they invest for capital gains. In most cases, investing for capital gains is gambling or speculation. When a person says, “I’m buying this stock, mutual fund, or piece of real estate,” he or she is investing for capital gains, an increase in the price of the asset. For example, if I had purchased the $17 million apartment house hoping I could sell it for $25 million, then I would be investing for capital gains. As many of you know, investing for capital gains means a tax increase in some countries.
- Cash ﬂow. Investing for cash ﬂow is a lot less risky. Investing for cash ﬂow is investing for income. If I put savings in the bank and receive 5 percent in interest, I am investing for cash ﬂow. While interest is low-risk, the problem with savings is the return is low, taxes can be high, and the dollar keeps losing value. When I purchased the 300-unit apartment house, I was investing for cash ﬂow. The difference is I was investing for cash ﬂow using my banker’s money for a higher return on investment and paying less in taxes. That is a better use of leverage.
The average investor does not know the difference between investing for cash flow and investing for capital gains. Most investors invest for capital gains, hoping and praying the price of their stock or home goes up. As long as you have more cash flowing in than flowing out, your investment is a good investment.
One of the reasons I was able to retire at age 47, and my wife, Kim, at 37, was simply because we had enough cash flow coming in (primarily from our real estate investments). It wasn’t much, about $10,000 a month, but we only had about $3,000 in monthly expenses. That left us with $7,000 a month to do with as we pleased.
On the other hand, capital gains are when you buy a stock for a dollar, and it goes up to $10 so you make $9 a share. Or, you buy a house for $100,000, and it appreciates to $150,000. You sell it and make $50,000.
There are people who do not become financially free because most of them are focusing on capital gains rather than cash flow. Chasing capital gains alone is gambling not investing. Want proof? You don’t have to go back very far to find it: Between 2000 and 2003, millions of investors lost trillions of dollars in the stock market.
Most retirement plans are based on hope and promise stretched over many years. That makes very little sense to me, yet it seems to make a lot of sense to the millions of investors who are hoping the money they expect will be there at age 65.
Avoid Losing Money
How can millions of people be deluded into the idea that losing money every month, for years on end, without a money-back guarantee or insurance against catastrophic loss can be considered smart investing?
It has to be one of the biggest mass sales jobs in the history of the world, a sales job that could only occur with a financially naive population. In fact, this is more than a sales job.
The stock-market industry is hard at work in our education system teaching youngsters to be future clients, teaching them to be gamblers betting on capital gains, rather than teaching them to be astute investors investing for cash flow.
In my opinion, one of the primary reasons people invest for tomorrow, rather than for today, is because, in their minds, they cannot find or afford an investment that pays them today. When a person cannot find an investment that pays them today, they often become believers in tomorrow, which makes them gamblers betting on capital gains. That is why so many people lose money. They are willing to lose money, even if it is only a little every month, in the hope and promise that tomorrow their ship will come in. These people, who do not know the difference between cash-flow investing and capital-gains investing, are the people who fall prey to financial predators.
Editor, Rich Dad Poor Dad Daily