Rich dad’s lesson – What to do? Action plan

• Assess your present situation: If you keep on doing what you are doing since quite some time, you will get the same results what you are getting. To get new

results, do something different.

• Try to find some new idea – how will you create and income generating asset? • Take action, after finding new some new idea. Practical tip: Find Mentor. Try to find some person who has achieved what you want to achieve. Ask tips from him / her. • Try to invest in real estate when market is down. Make offers. Don’t sit and wait

for opportunity to come. • Learn from lessons of successful people.

ACT, MANAGE RISK, THINK BIG, THINK BUSINESS, DON’T BE AFRAID TO TRY and FAIL

3. CHAPTER THREE

Lesson Two: Why Teach Financial Literacy?

In 1990, my best friend, Mike, took over his father's empire and is, in fact, doing a better job than his dad did. We see each other once or twice a year on the golf course. He and his wife are wealthier than you could imagine. Rich dad's empire is in great hands, and Mike is now grooming his son to take his place, as his dad had groomed us.

In 1994, I retired at the age of 47, and my wife, Kim, was 37. Retirement does not mean not working. To my wife and me, it means that barring unforeseen cataclysmic changes, we can work or not work, and our wealth grows automatically, staying way ahead of inflation. I guess it means freedom. The assets are large enough to grow by themselves. It's like planting a tree. You water it for years and then one day it doesn't need you anymore. It's roots have gone down deep enough. Then, the tree provides shade for your enjoyment. Mike chose to run the empire and I chose to retire.

Whenever I speak to groups of people, they often ask what I would recommend or what could they do? "How do they get started?" "Is there a good book I would recommend?" "What should they do to prepare their children?" "What is the secret to success?" "How do I make millions?" I am always reminded of this article I was once given. It goes as follows.

The richest businessmen

In1923 a group of our greatest leaders and richest businessmen held a meeting at the Edgewater Beach hotel in Chicago. Among them were Charles Schwab, head of the largest independent steel company; Samuel Instill, president of the world's largest utility; Howard Hopson, head of the largest gas company; Ivar Kreuger president of the International Match Co., one of the world's largest companies at that time; Leon Frazier, president of the Bank of International Settlements; Richard Whitney, president of the New York Stock Exchange; Arthur Cotton and Jesse Livermore, two of the biggest stock speculators; and Albert Fall, a member of President Harding's cabinet. Twenty five years later nine of them (those listed above) ended as follows. Schwab died penniless after living for five years on borrowed money. Instill died broke living in a foreign land. Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall were just released from prison. Fraser and Livermore committed suicide.

I doubt if anyone can say what really happened to these men. If you look at the date, 1923, it was just before the 1929 market crash and the Great Depression, which I suspect had a great impact on these men and their lives. The point is this: Today we live in times of greater and faster change than these men did. I suspect there will be many booms and busts in the next 25 years that will parallel the ups and downs these men faced. I am concerned that too many people are focused too much on money and not their greatest wealth, which is their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve problems, I am afraid those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.

Most people fail to realize that in life, it's not how much money you make, it's how much money you keep. We have all heard stories of lottery winners who are poor, then suddenly rich, then poor again. They win millions and are soon back to where they started. Or stories of professional athletes, who, at the age of 24, are earning millions of dollars a year, and are sleeping under a bridge by age 34. In the paper this morning, as I write this, there is a story of a young basketball player who a year ago had millions. Today, he claims his friends, attorney and accountant took his money, and now he works at a car wash for minimum wage. He is only 29. He was fired from the car wash because he refused to take off his championship ring as he was wiping off the cars, so his story made the newspaper. He is appealing his termination, claiming hardship and discrimination and that the ring is all he has left. He claims that if you take that away, he'll crumble.

In 1997, I know so many people who are becoming instant millionaires. It's the Roaring '20s one more time. And while I am glad people have been getting richer and richer, I only caution that in the long run, it's not how much you make, it's how much you keep, and how many generations you keep it.

So when people ask, "Where do I get started?" or "Tell me how to get rich quick," they often are greatly disappointed with my answer. I simply say to them what my rich dad said back to me when I was a little kid. "If you want to be rich, you need to be financially literate."

That idea was drummed into my head every time we were together. As I said,

my educated dad stressed the importance of reading books, while my rich dad

stressed the need to master financial literacy.

If you are going to build the Empire State Building, the first thing you need to do is dig a deep hole and pour a strong foundation. If you are going to build a home in the suburbs, all you need to do is pour a 6-inch slab of concrete. Most people, in their drive to get rich, are trying to build an Empire State Building on a 6-inch slab.

Our school system, having been created in the Agrarian Age, still believes

in homes with no foundation. Dirt floors are still the rage. So kids graduate

from school with virtually no financial foundation. One day, sleepless and deep

in debt in suburbia, living the American Dream, they decide that the answer to

their financial problems is to find a way to get rich quick.

As for Mike and me in our adult years, both of our choices were possible

because we were taught to pour a strong financial foundation when we were just

kids. Now, accounting is possibly the most boring subject in the world. It also

could be the most confusing. But if you want to be rich, long term, it could be

the most important subject. The question is, how do you take a boring and

confusing subject and teach it to kids? The answer is, make it simple. Teach it

first in pictures.

My rich dad poured a strong financial foundation for Mike and me. Since we

were just kids, he created a simple way to teach us. For years he only drew

pictures and used words. Mike and I understood the simple drawings, the jargon,

the movement of money, and then in later years, rich dad began adding numbers.

Today, Mike has gone on to master much more complex and sophisticated accounting analysis because he has had to. He has a billion-dollar empire to run. I am not as sophisticated because my empire is smaller, yet we come from the same simple foundation. In the following pages, I offer to you the same simple line drawings Mike's dad created for us. Though simple, those drawings helped guide two little boys in building great sums of wealth on a solid and deep foundation.

Rule One. You must know the difference between an asset and a liability,

and buy assets. If you want to be rich, this is all you need to know. It is Rule

No. 1. It is the only rule. This may sound absurdly simple, but most people have

no idea how profound this rule is. Most people struggle financially because they

do not know the difference between an asset and a liability.

"Rich people acquire assets. The poor and middle class acquire liabilities,

but they think they are assets"

When rich dad explained this to Mike and me, we thought he was kidding.

Here we were, nearly teenagers and waiting for the secret to getting rich, and

this was his answer. It was so simple that we had to stop for a long time to

think about it.

"What is an asset?" asked Mike.

"Don't worry right now," said rich dad. "Just let the idea sink in. If you

can comprehend the simplicity, your life will have a plan and be financially

easy. It is simple; that is why the idea is missed."

"You mean all we need to know is what an asset is, acquire them and we'll

be rich?" I asked.

Rich dad nodded his head. "It's that simple."

"If it's that simple, how come everyone is not rich?" I asked.

Rich dad smiled. "Because people do not know the difference

between an asset and a liability."

I remember asking, "How could adults be so silly. If it is that simple, if

it is that important, why would everyone not want to find out?"

It took our rich dad only a few minutes to explain what assets and

liabilities were.

As an adult, I have difficulty explaining it to other adults. Why? Because

adults are smarter. In most cases, the simplicity of the idea escapes most

adults because they have been educated differently. They have been educated by

other educated professionals, such as bankers, accountants, real estate agents,

financial planners, and so forth. The difficulty comes in asking adults to

unlearn, or become children again. An intelligent adult often feels it is

demeaning to pay attention to simplistic definitions.

Rich dad believed in the KISS principle-"Keep It Simple Stupid"-so he kept

it simple for two young boys, and that made the financial foundation strong.

So what causes the confusion? Or how could something so simple be so

screwed up? Why would someone buy an asset that was really a liability. The

answer is found in basic education.

We focus on the word "literacy" and not "financial literacy." What defines

something to be an asset, or something to be a liability are not words. In fact,

if you really want to be confused, look up the words "asset" and "liability" in

the dictionary. I know the definition may sound good to a trained accountant,

but for the average person it makes no sense. But we adults are often too proud

to admit that something does not make sense.

As young boys, rich dad said, "What defines an asset is not words but

numbers. And if you cannot read the numbers, you cannot tell an asset from a

hole in the ground."

"In accounting," rich dad would say, "it's not the numbers, but what the

numbers are telling you. It's just like words. It's not the words, but the story

the words are telling you.

"If you want to be rich, you've got to read and understand numbers." If I

heard that once, I heard it a thousand times from my rich dad. And I also heard,

"The rich acquire assets and the poor and middle class acquire liabilities."

An asset is something that puts money in my pocket.

A liability is something that takes money out of my pocket.

This is really all you need to know. If you want to be rich, simply spend

your life buying assets. If you want to be poor or middle class, spend your life

buying liabilities. It's not knowing the difference that causes most of the

financial struggle in the real world.

Illiteracy, both in words and numbers, is the foundation of financial

struggle. If people are having difficulties financially, there is something that

they cannot read, either in numbers or words. Something is misunderstood. The

rich are rich because they are more literate in different areas than people who

struggle financially. So if you want to be rich and maintain your wealth, it's

important to be financially literate, in words as well as numbers.

Numbers alone really mean little. Just as words alone mean little. It's the

story that counts. In financial reporting, reading numbers is looking for the

plot, the story. The story of where the cash is flowing. In 80 percent of most

families, the financial story is a story of working hard in an effort to get

ahead. Not because they don't make money. But because they spend their lives

buying liabilities instead of assets.

For instance, this is the cash flow pattern of a poor person, or a young

person still at home:

Job (provides income)-> Expenses(Taxes Food Rent Clothes Fun Transportation)

Asset (none)

Liability (none)

This is the cash flow pattern of a person in the middle class:

Job (provides income)-> Expenses(Taxes Food Mortgage Clothes Fun

Transportation)

Asset (none)

Liability (Mortgage Consumer loans Credit Cards)

This is the cash flow pattern of a wealthy person:

Assets(stocks bonds notes real estate intellectual property)->income

(dividends interest rental income royalties)

Liabilities (none)

All of these diagrams were obviously oversimplified. Everyone has living

expenses, the need for food, shelter and clothing.

The diagrams show the flow of cash through a poor, middle class or wealthy

person's life. It is the cash flow that tells the story. It is the story of how

a person handles their money, what they do after they get the money in their

hand.

The reason I started with the story of the richest men in America is to