REVEALED: Rich Dad’s Power Plan for Investing
When I was a young boy, my rich dad told me about the difference between being rich and being wealthy.
“Many people think that being rich and being wealthy are the same thing,” said rich dad. “But there is a difference between the two: The rich have lots of money but the wealthy don’t worry about money.”
What my rich dad meant was that while being rich might mean you have lots of money, you also might have lots of expenses that keep you up at night.
These could be expenses like your mortgage, your car payment, credit cards, private school tuition, and more. In short, if you’re rich, you’re often trying to keep up with the Rat Race.
Most people do not understand what it means to be truly wealthy. Most people confuse being wealthy with being rich—that is, with having lots of money to spend but no real financial independence.
Being wealthy means you don’t have these worries.
The Definition of Wealth
I’ve come across many definitions of the word wealthy in my three decades of teaching financial education.
The best way to define wealthy is through an equation.
I first heard about the equation for wealth while studying under one of the true American geniuses, R. Buckminster Fuller. He defined wealthy as: “A person’s ability to survive X number of days forward without working.”
Financially speaking, that equation translates to: How many days could you survive if you stopped working today? How long could you survive on the amount of money you have?
It’s that simple.
For example, if your monthly expenses are $5,000 and you have $20,000 in savings, your wealth is approximately four months or 120 days.
But if your expenses are $5,000 and you have investments that provide $5,000 a month, you are infinitely wealthy. This is because your recurring cash flow covers your recurring expenses. You do not have to work to maintain your lifestyle. Your investments are doing the work for you.
Wealth is measured in time, not dollars.
Thinking Like the Rich
In a world with less and less job security, the cash flow pattern of the rich makes more and more sense. And to achieve this pattern, you need to see the world from the perspective of a business owner and investor, not an employee (trading your time for money) or self-employed person (only eating what you kill).
One of the most important things my rich dad taught me to do was to control my cash flow and monitor the world’s cash flow. He taught me to monitor global cash flow by observing three things:
- Jobs: For years, jobs have flowed overseas from the US. Many jobs that used to pay a lot, no longer exist in America.
- People: The flow of jobs out of the US has led many to find new careers. This often means moving to a new city or even a country where certain industries are thriving. I like to invest in markets where people are moving to, not from.
- Cash: During the great recession, we saw cash flow out of the stock market and into savings, mattresses, bonds, and gold—in other words, safe-havens. Today, money is flowing back into the stock market, but for how long? To be rich, you must be on top of where the cash is flowing and move accordingly before others get there.
This is why it’s also important to realize the power of good debt.
Learning how to use debt is one of the most important skills a person can learn. And an important lesson is that debt is only as good as your cash flow.
Debt that causes cash to flow into your bank account is good. Debt that takes money out is bad.
My partners and I create cash flow for ourselves by watching the global movement of cash.
For instance, we invest using debt to purchase apartment buildings in areas where there are good jobs, areas where people are flowing and money is moving to. In simple terms, real estate is not worth much if there are no jobs. Jobs attract people. And where people are moving, cash is flowing.
It’s simple, but most people are not trained to look for these things. As a result, their cash flow suffers.
Creating Passive Income From Different Asset Classes
All of the qualities necessary for getting rich, start with financial education—a type of education that you can’t get in a traditional school. My financial education started with my rich dad and continues today through books, seminars, learned lessons, and mentors. From all these sources, I learned about cash flow, debt, business and investing, taxes, and more—and how to use each to make myself rich.
In my quest to retire young and retire rich, I had to know which type of money to work hard for. Kim and I were able to retire early because our plan had us working hard for passive income and not for ordinary income, which is what most people do. Another difference is that we planned on retiring with more passive income and not portfolio income, which is what most people plan to retire on. While most people do retire on portfolio income, it is not always the best income because it is the second-highest taxed of the three incomes, and taxes are your largest single lifetime expense.
As investors, our goal is to generate a passive income stream that is greater than our expenses and to grow our cash flow. When your passive income surpasses your expenses, you’re out of the Rat Race.
Power Plan For Investing
The way I learned about rich dad’s power-investing plan was by understanding the concept and then going out and putting it into practice. At the age of 25, I committed to learning how to build a business, invest in real estate, and identify investments in paper assets. In other words, I wanted to have control of my assets rather than just turn my career and my money over to strangers.
Rich dad’s power-investing plan requires the ownership of a profitable business, investing in real estate that produces positive cash flow, and then investing in paper assets that produce higher returns than savings accounts with the same liquidity.
Rich dad’s power investing plan is the basic plan that the richest investors in the world follow.
- Start a business.
- Invest the cash flow from the business into real estate.
- Invest your excess cash flow into paper assets.
Asset #1: Business
A business is by far your best asset because, if successful, you can generate the most income with less work and with the least taxes. One of the reasons Warren Buffett turned Berkshire Hathaway into an insurance company rather than a garment manufacturing company was because the tax advantages of an insurance company are greater.
Asset #2: Real Estate
Let’s say I buy a $100,000 property by using the following:
$10,000 of my own money
$90,000 of my bank’s money
The banker allows me as the investor to take the phantom cash flow as well as capital gains from their side of the investment. In other words, even if the bank technically owns 90 percent of the investment, the investor also gets the banker’s share of the phantom cash flow as well as the banker’s share of the capital gains.
Think about that one. How many business partners will give you their share of the profits? In this case, your banker does. The banker has 90 percent of the risk, but you receive their share of the profits. They get nothing but the interest, which is paid by your tenant.
Asset #3: Paper Assets
After my money passes through the leverage of real estate, it often goes into the stock market. Investing in stock options allows me to leverage my investments in paper assets. Instead of buying the stock, I can still control it through the purchase of options for a fraction of the cost. Options give me the right to buy or sell a fixed amount of stock at a fixed price, called the strike price, over a specific period of time. A contract allowing me to “buy” stock at the fixed strike price is called a call option, which allows me to purchase, say, 100 shares of the underlying stock. People buy calls because they hope the stock price will go up and they will make a profit. They can make a profit either by selling the calls at a higher price or by exercising their option, which means buying the shares at the strike price when the market price is higher.
On the other hand, a contract that lets me “sell” stock at a fixed price is called a put option. People buy puts because they hope the stock price will go down and they will make a profit. They will make a profit either by selling the puts at a higher price or by exercising their option, which would force the seller of the put to buy the stock at the strike price when the market price was lower.
$105,000 Into $30 Billion
Warren Buffett was able to turn $105,000 into $30 billion using a similar method of investing, although he did not use real estate as much as I do.
The lesson to be learned is that power investing is based upon a synergy of investments.
This synergy between asset classes is what makes turning $10,000 into $10 million easy, once you learn how to do it and once your system is set up. It can be difficult at first, but once the system is working, the cash flows in, rather than out.
Editor, Rich Dad Poor Dad Daily