4 Foundations of Financial Literacy

Dear Reader,

Many people have opinions on how to fix the problem of poor financial literacy. Unfortunately, much of what is labeled out there as financial education leaves a lot to be desired. From my experience, it centers on concepts like saving, investing in a 401(k), getting a college degree, paying down debt, and homeownership. In short, it centers on old ideas about money.

I’ve said it before when you follow the old rules of money, you’re screwed financially.

Rich dad was adamant that in order to see money, you had to have financial intelligence. His definition of financial intelligence was as follows: It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.

For rich dad, financial intelligence started with simple financial education and grew from there. He felt that education was important because you needed to train your brain to see money; it doesn’t come naturally.

The key to training your brain to see money is financial literacy, the ability to understand the words and number systems of capitalism. If you don’t understand the words or numbers, you might as well be speaking a foreign language.

The beginning of financial literacy is knowing words and numbers. 

I disagree with those who say, “It takes money to make money.” In my opinion, the ability to make money with money begins with understanding the language of money. As rich dad always said, “If money is not first in your head, it won’t stick to your hands.”

These four foundations are the baseline for a truly comprehensive financial education.

Foundation of Financial Literacy #1: The Difference Between An Asset And A Liability

Many people think they know what an asset is. For instance, you probably think your house is an asset—but it’s not. The truth is that just as there are two definitions of an asset.

Accountants use one definition that requires lots of financial calisthenics to make people and companies feel richer than they really are. This keeps them employed and their clients blissfully ignorant.

The rich use another definition grounded in simplicity and reality. An asset is anything that puts money in your pocket and a liability is anything that takes money out of your pocket.

Your house is not an asset because it takes money out of your pocket each month. Even if you own your house outright, you still have to pay for the taxes, maintenance, and more out of your own pocket.

But if you own a rental property, that can be an asset—if it puts money in your pocket each month in the form of cash flow. When your tenant pays rent, they cover your mortgage, maintenance, taxes, and more.

Foundation of Financial Literacy #2: Cash Flow Versus Capital Gains

Most people invest for capital gains. The rich invest for cash flow.

Simply put, investing for capital gains is like gambling. You invest your money and hope the price goes up. For instance, many people buy a house hoping they’ll be able to sell it for more money later. In the meantime, they have to pay their mortgage and home expenses. Money goes out of their pockets. It becomes a liability.

The problem is that when you invest for capital gains you have no control over whether the price goes up or down, and the bigger issue is, if you do make a profit, you pay the highest rate in taxes.

Conversely, the rich invest for cash flow. So, for instance, they buy investment real estate with other people’s money, find tenants to pay the expenses, and collect rent each month. It becomes an asset. And if there are capital gains, that’s a bonus.

By investing for cash flow instead of capital gains, the rich have control over their income and pay the lowest rate in taxes-and sometimes nothing in taxes. But investing for cash flow, while a simple concept, requires a strong financial education in order to make your own financial decisions.

Foundation of Financial Literacy #3: Using Debt And Taxes To Get Richer

Your financial adviser will tell you that debt is bad and taxes are inevitable. But the rich understand that both debt and taxes can be used to create immense wealth. When it comes to debt, there are two kinds-bad and good. When your financial adviser tells you to stay out of debt, she means stay out of bad debt.

Bad debt comes in the form of borrowing money for liabilities such as using credit cards to buy TVs and take vacations, borrowing a line of credit on your personal home, and more.

Staying out of bad debt is good advice, but the problem is that your financial adviser won’t tell you about good debt.

Good debt is debt used to purchase assets like a rental property.

When you use the bank’s money to purchase cash-flowing real estate, you use less of your own money to secure an asset by paying only a down payment instead of full price, and your tenant’s rent pays off your debt while you own the asset and pocket the profit.

When it comes to taxes, the rich understand that governments write tax codes to encourage specific types of behavior. If governments want you to build affordable housing, they give you a tax cut. If they want to encourage oil exploration, they give you a tax cut. If they want to see higher employment, they give you a tax cut.

The secret is that most tax benefits are made to help entrepreneurs and investors. With the right financial education, you too can utilize the tax code to not only get richer but also pay nothing in taxes.

Utilizing good debt and getting richer through taxes takes a high level of financial intelligence. But everyone can learn and put these principles into practice.

Foundation of Financial Literacy #4: Making Your Own Financial Decisions

When you’re not confident about your knowledge of money, you let others make your financial decisions for you. You let your broker decide how your money should be invested. 

You let your bank tell you what interest rate is worthy of your money. 

You follow whatever investing trend is popular in the news.

The rich don’t follow the crowds. They set the trends and are gone by the time the trends become mainstream. What’s their secret? They think for themselves about money and make their own financial decisions because they have high financial intelligence.

 

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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Robert Kiyosaki

Robert Kiyosaki, author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company.

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