🔑 7 Steps Toward Financial Freedom
Today, 42 million Americans owe approximately $1.3 trillion in student loan debt. According to the U.S. Government Accounting Office (GAO) interest on student loan debt is one of the federal government’s largest assets. Student loan debt makes the Department of Education one of the biggest banks in America.
The truth is, the price of a good education is too high and the ROI is too low. Today, millions of people, young and old, are leaving school deeply in debt and unable to find that mythical high-paying job for life.
Like it or not, life costs money. Yet we teach students little to nothing about money. Even when students graduate from school, many with advanced degrees, most leave school, financially illiterate.
Below are seven things they don’t teach in school but are necessary if financial freedom is your goal:
#1 How to Read a Financial Statement
My rich dad said, “My banker has never asked me for my report card. My banker does not care if I was a good student or what school I went to.”
Curious, we asked rich dad, “What does your banker want to see?” “My ﬁnancial statement,” rich dad said, reaching into a ﬁle drawer of his desk. Showing us his ﬁnancial statement, rich dad said, “Your ﬁnancial statement is your report card when you leave school. The problem is, most kids leave school and never know what a ﬁnancial statement is.”
One of the most important things you need to know in order to be financially successful is to know how to read an income statement and balance sheet. But even more important is understanding the relationship between them.
Many people who take accounting classes learn how to read an income statement and balance sheet separately. I’ve always found it fascinating, however, that these classes don’t teach why one document is important to the other or how one affects the other.
My rich dad felt that the relationship between the two was everything. “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 asked.
For rich dad, understanding the relationship between the two allowed you to easily see the direction of your cash flow to easily determine if something was making you money or not.
#2 Three Types of Income
If you have a job and receive a paycheck, you make your money through earned income.
To reference the CASHFLOW® Quadrant, Es and Ss, those on the left side of the quadrant, make money through earned income.
When you earn money through a paycheck, you are exchanging time for money. For example, when you work as an employee as a web designer, a grocery store cashier, or a police officer, you are getting paid a predetermined amount of money (X) to do that job for a certain amount of time (Y). Here in the United States, the amount of money is negotiated between the employee and employer and the amount of time required for a full-time employee is forty hours per week.
For many people who make their money through earned income, it’s often just enough money to cover basic monthly expenses, leaving little to no money left to invest.
Where earned income is acquired by exchanging time for money, portfolio income is made through capital gains.
As an example, when someone buys stock in a corporation at a given price, they plan on selling that same stock at a higher price in the future. So, if they buy a stock at $10 today, and the price goes up to $40 when they sell that stock, they make $30 in capital gains. That capital gain is their profit.
This is how stock traders traditionally make their money. They invest money in stocks they feel are undervalued now with the expectation that when the prices rise they can sell those same stocks for a capital gain.
As I’ve mentioned before, my rich dad used the formula of “four green houses, one red hotel,” in the game of Monopoly® to describe how you can make passive income, the third and final type of income.
Again referencing the CASHFLOW Quadrant, those on the right-side, Bs and Is, make money by acquiring assets.
#3 Why You Should Work for Assets
If not for my rich dad’s teaching, I might have followed in my poor dad’s footsteps—earning an MBA, and climbing the corporate ladder.
Rather than working to acquire property and production, assets as my rich dad called them, I might still be working for a paycheck, paying higher and higher taxes, and praying that I wouldn’t outlive the money in my retirement account.
The rich work hard to acquire assets that put more money in their pockets and allow them to keep more of what they earn.
The gap between capitalists and everyone else begins when a parent says to their child, “Go to school to get a job,” rather than, “Go to school and learn to acquire assets.”
#4 Why Savers are Losers
When I say savers are losers, I’m talking about those who think savings will be enough to help them have a secure financial future. This is an old way of thinking that doesn’t take into account how money has changed, that it is a currency that loses value if it just sits and isn’t invested.
Because we live in an inflationary economy, cash loses values over time. Why would you save money when the Fed prints trillions of dollars making it worth less and less?
On the other hand, assets rise and fall in value relative to inflation. If you want to thrive financially, you have to learn how to identify the right investments for your money to flow into and how to find assets that create cash flow. This is what we call investing.
#5 Don’t Be Afraid to Make Mistakes
Rich dad said, “Most people think, but never do. If you do something, you make mistakes, and it’s from our mistakes that we learn the most. Remember that anything important can’t really be learned in the classroom. It must be learned by taking action, making mistakes, and then correcting them. That’s when wisdom sets in.”
In school, we are taught that making mistakes is bad. Whether it’s from the teacher, adults, or other kids who laugh when another makes a mistake, many kids grow up to believe this is a bad thing and tend not to learn from them.
Having the awareness to learn from our mistakes is one of the biggest keys to succeeding. I make mistakes all the time, but I know that I can learn a lot not only to improve my business but also my health, wealth, and happiness.
#6 Taxes Make You Richer
They say there are only two sure things in life: death and taxes. And nobody likes either of them.
My rich dad said to me, “When it comes to taxes, the rich make the rules.”
He also said, “If you want to be rich, you need to play by the rules of the rich.”
One of the reasons the rich get richer is because they earn a lot of money without paying much, if anything, in taxes. They know how to use banks’ tax-free money to become richer.
Anyone can do the same. For instance, instead of paying capital gains tax on the sale of our condo units, real estate laws allowed us to defer paying these taxes and invest them into another property instead. The cash that does come from this property goes into our pockets at a lower tax rate because there’s no Social Security or self-employment tax to pay, and the tax rate is further reduced by the depreciation of the property.
Doesn’t it make more sense to play by the rules of the rich, and earn more while paying less in taxes?
#7 “What did school teach you about money?”
What did school teach you about money?
For most people, the answer is, “not much.” If they did learn anything, what they learned was “Go to school, get a job, save money, buy a house, get out of debt, and invest for the long term in the stock market.” That might have been great advice for the Industrial Age, but it’s obsolete advice in the Information Age.
Our schools, K-12, teach little to nothing about money. Most people still believe in saving money, not realizing that after 1971 debt is money. Without financial education, most people do not realize that the rules of money have changed.
If you want to grow richer, invest in your financial education before you practice using debt as money. Learning to use debt to make you rich gives you unbelievable power, a power very few will ever experience.
Editor, Rich Dad Poor Dad Daily