Start Where You Are
First of all, Happy Thanksgiving.
No matter where you are, or who you’re with, the Rich Dad team wishes you and your loved ones a safe and happy holiday.
I am often asked questions like, “I have $10,000 to invest. What do you recommend I invest in?”
And my standard reply is, “Do you have a plan?”
A long time ago, I was a guest on a radio station in San Francisco. The program was on investing and was hosted by a very popular local stockbroker.
A call came in from a listener wanting some investment advice. “I am 42 years old. I have a good job, but I have no money. My mother has a house with a lot of equity in it. Her home is worth about $800,000 and she owes only $100,000 on it. She said she would let me borrow some of the equity so I could begin investing. What do you think I should invest in? Should it be stocks or real estate?”
My reply was, “Do you have a plan?”
“I don’t need a plan,” was the reply. “I just want you to tell me what to invest in. I want to know if you think the real estate market is better or the stock market.”
“I know that is what you want to know—but do you have a plan?” I again asked as politely as possible.
“I told you I don’t need a plan,” said the caller. “I told you my mother will give me the money. So I have money. That’s why I don’t need a plan. I’m ready to invest. I just want to know which market you think is better, the stock market or the real estate market. I also want to know how much of my mom’s money I should spend on my own home. Prices are going up so fast here in the Bay Area that I don’t want to wait any longer.”
Deciding to use another approach, I asked…
“If you’re 42 years old and have a good job, why is that you have no money? And if you lose your mother’s equity money from her home, can she continue to afford the home with the added debt? And if you lose your job or the market crashes, can you continue to afford a new house if you can’t sell it for what you paid for it?”
To an estimated 400,000 listeners came his answer. “That is none of your business. I thought you were an investor. You don’t need to dig into my private life to give me tips on investing. And leave my mother out of this. All I want is investment advice, not personal advice.”
Invest In Your Future
In order to prosper financially, it is imperative that you learn how to invest.
Unfortunately, like the caller on the radio station, many don’t even know where to begin. The good news is, it’s not that hard.
The following are three simple steps to creating a winning investment plan that can change your financial future.
Find out which asset class excites you most, and then drill down on the type of investments in that class that you want to learn the most about and put your time, money, and energy into.
For me, it was real estate.
I started with single-family housing and then expanded into apartment buildings. I could have done commercial real estate, like office buildings or mini-storage, but I really fell in love with focusing on residential real estate.
The best part is by drilling down on it, I became an expert in it.
#1 Determine How Much You Can Invest
A lot of people make the excuse that they don’t have any money to start investing.
For most people, this is simply not true. Rather, they spend their money on any number of things that they don’t really need and then have no money left over. The problem isn’t that they don’t have enough money, the problem is how they budget the money they do have.
When Kim and I were younger, we treated our investing as an expense in our budget. We determined how much we wanted to spend each month in investments, and we made sure that we paid that “expense” each and every month.
This, of course, meant we had to take a look at other expenses in our budget and cut some of them in order to pay the “expense” of investing.
Do the same.
How much do you want to invest each month? What can you cut back on in order to make investing a priority? Make it a priority today, and it will become a habit tomorrow.
The other important thing to consider here is that you don’t always have to use your money to invest.
#2 Find Out What You Want To Invest In
Another reason many people are intimidated by investing is that they don’t understand the variety of things available to invest in.
For most people, investing means a 401(k) or the stock market. But the reality is there are so many other areas where you can invest your hard-earned money—you just have to find the winning investment plan that works for you.
For starters, take a look at the four main asset classes:
Paper assets include stocks, bonds, mutual funds, and retirement accounts where you can invest in stock options, stock futures, and foreign exchange. Paper assets also include real estate investment trusts, or REITs, and exchange-traded funds (ETFs).
- Real estate
Real estate investments either provide cash-flow from rental properties (the overage you make each month from rent once all your costs are paid) or capital gains (a one-time profit from buying and selling a property).
Commodities include metals (gold, silver, copper, etc.), food (grains, corn, coffee, and sugar), and raw materials (oil, gas, cotton, etc.). Commodities are generally a capital gains (or loss) investment, and you can buy futures contracts of any commodity through future exchanges.
This is an asset that people have become more aware of thanks to television shows like “The Apprentice” and “Shark Tank.” Within this class, there are two routes to take: 1) invest in your own business or 2) invest in someone else’s private business or company. The whole point is to generate a return back to you, the business and your investors and/or lender.
#3 Make Long-Term Goals
Once you know how much you can invest and where you want to invest, establish your long-term goals. Write them down and revisit them often.
For instance, if you invest in residential real estate as I did, maybe you make a goal of buying one rental house in your first year. Then maybe you make a goal of buying two in the second year. Then you could have a goal to purchase a small apartment building by year five.
Whatever it is you choose to invest in, have a plan to go big in the long-term, and stick to it.
Make A Plan And Follow It
A number of years ago, there was a study done of rich and poor all around the world to find out how people born into poverty eventually become wealthy.
The study found that these people, regardless of where they live, possess three qualities:
- They maintain a long-term vision and plan
- They believe in delayed gratification
- They use the power of compounding in their favor
The study found that these people thought and planned for the long term and knew that they would ultimately achieve financial success by holding onto a dream or a vision. They were willing to make short-term sacrifices to gain long-term success, which is the basis of delayed gratification.
Albert Einstein was amazed at how money could multiply just by the power of compounding. He considered the compounding of money to be one of the most amazing inventions.
Today I meet people who get frustrated with me because they want me to tell them how they can make more money immediately.
They don’t like the idea of thinking long-term. Many are desperately seeking short-term answers because they have money problems today caused by consumer debt and lack of investments due to their uncontrolled desire for immediate gratification. They have the idea of, “Eat, drink, and be merry.” This abuses the power of compounding and leads to long-term debt instead of long-term wealth.
The key to making any investment is setting a big goal and approaching it systematically, taking baby steps first, and then gradually increasing the size of your investments as your learning and experience increase.
You will want to push yourself beyond your comfort zone—but gradually. That is how Kim and I did it. There is nothing wrong with having smaller goals that lead up to the ultimate goal of financial freedom.
Editor, Rich Dad Poor Dad Daily