Make Money Without Working?
The bigger tragedy than the current financial crisis, or even the degradation of a capitalist system that has brought such prosperity to the American people, is that so few truly understand what happened, and even more so, why it happened.
Most people don’t even understand what they should do to protect themselves, much less the economy. And because many people don’t understand these things, many of the opportunities available today will not be taken advantage of, and many of the challenges we face will continue for a long time.
The ability of many people to realize the American Dream. Abraham Lincoln said that every American should have the opportunity to “improve his lot in life” but this severely inhibited by our country’s severe lack of ﬁnancial education. As the prophet, Hosea put it so eloquently, “My people perish for lack of knowledge.”
One of the greatest failures of the educational system is the failure to provide ﬁnancial education to students. Educators seem to think that money has some sort of quasi-religious or cult-like taint to it, believing that the love of money is the root of all evil. But we are experiencing one of the worst ﬁnancial crises in our country’s history—a crisis that has the potential to last for generations.
It is education alone that provides the knowledge necessary to remove barriers to opportunity.
Three Basic Types Of Eduction
Academic education is our ability to read, write, do mathematics, and compute data. This is a very important education. We use this education to solve problems like knowing where and when a hurricane might strike and what kind of damage might be expected.
This is the education we use to acquire a skill and earn money. For example, a medical doctor will spend years developing this very important education. A doctor’s skill will earn them a substantial income and solve many people’s problems.
In simple terms, professional education is the education we use to solve people’s problems, and people are willing to pay money for those solutions. If my car is broken, I am very happy to pay money to the auto mechanic who ﬁxes my car. I am also very happy to pay my housekeeper money. She solves a very big problem for my wife and me. She is important in our life.
In my businesses, I have diﬀerent people who manage diﬀerent aspects of my business. These individuals tend to have great people skills, as well as great technical skills. These people, and their varied education, are essential to my businesses. An important lesson from rich dad was that diﬀerent businesses require diﬀerent technical education. For example, in The Rich Dad Company, I need people with excellent business and people skills. In my real estate businesses, I need people with technical skills, such as licensed plumbing and electrical professionals.
Most of us have enough ﬁnancial education to make money. We all know that a person may have done well academically and be a genius in the classroom but be unable to make much money in the real world. I would say, my poor dad, a great teacher, and a hardworking man had a high academic IQ but a low ﬁnancial IQ. He did very well in the world of academia but did poorly in the world of business.
My point is we need diﬀerent types of education to do well in this brave new world we live in. While I do not think ﬁnancial education is the most important education, it does aﬀect everything that is important.
The beauty of the world today, if you understand this, you can make money without working.
Understanding Your Financial Statement
I am not an accountant, but I have attended several classes on accounting. In most of those classes, what struck me was how the instructors focused on either one of the documents, but not the relationship between the income statement and the balance sheet. In other words, the instructors never explained why one document was important to the other or how one affected the other.
Rich dad thought the relationship between the income statement and the balance sheet was everything. He would say, “How can you understand one without the other? How can you tell what an asset or liability really is without the income column or the expense column?”
He would go on and say, “Just because something is listed under the asset column does not make it an asset.” I think that statement was the single most important point he made. He would say, “The reason most people suffer financially is that they purchase liabilities and list them under the asset column. That is why so many people call their home an asset when it is really a liability.”
After Rich Dad Poor Dad was published, many people asked, “Is he saying that a person should not buy a house?” The answer to that question is, “No, he was not saying not to buy a house.” Rich dad was only emphasizing the importance of being financially literate. He was saying, “Don’t call a liability an asset, even though it is your house.” The next most asked question was, “If I pay off the mortgage on my house, will that make it an asset?” Again, the answer in most cases is, “No, just because you have no debt on your home, that does not necessarily make it an asset.”
Once you understand the difference between income and expenses, and assets and liabilities, the next lesson to understand is the two most important words in investing: cash flow.
To rich dad, the most important words in business and investing were cash flow. He would say, “Just as a fisherman must watch the ebb and flow of the tides, an investor and businessperson must be keenly aware of the subtle shifts in cash flow. People and businesses struggle financially because they have poor control of their cash flow.”
Four Assets That Make People Rich Through Cash Flow
There are four basic asset classes in any financial statement.
- Real Estate
My first choice has always been commodities. I love gold and silver. I began collecting silver coins when I was nine years old.
My second choice is real estate. I love real estate because it is easy to use debt to acquire properties. It’s a bonus that the tax laws are favorable for real estate investing.
My third choice related to asset classes was to be an entrepreneur, someone who started businesses. I have started many businesses, but most of them never survived those first critical years. The ones that did survive were my nylon and Velcro surfer wallet business, my rock-and-roll business, my education company, a gold mine, a silver mine, an oil company, and today, The Rich Dad Company.
Of all the asset classes, business is the toughest. That may be why the richest people in the world are entrepreneurs. It can be a long road—and a tough one—but when they win, they often win big.
My fourth choice is paper assets. I have attended many classes on stocks and options. I am not good at it. I don’t love reading annual reports or watching stock prices going up and down.
As an entrepreneur, I have formed three companies and taken them public, via an IPO, an Initial Public Offering, just for the experience. I wanted to look behind the curtains at how companies are created and then sold to the public. It is a dirty game and I did not enjoy it but you might.
I encourage you to take the time to look at all four asset classes and to drill down a little and study as cash-flowing assets are your ticket to making money without working.
Editor, Rich Dad Poor Dad Daily