LESSON 2: WHY TEACH FINANCIAL LITERACY?

It’s not how much money you make.

It’s how much money you keep.

In 1990, 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. For us, it means that, barring

unforeseen cataclysmic changes, we can work or not work, and our

wealth grows automatically, staying ahead of inflation. Our 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. Its

roots are implanted 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 that they do. “How do I get started?” “Is there a book

you would recommend?” “What should I do to prepare my children?”

“What is your secret to success?” “How do I make millions?”

Whenever I hear one of these questions, I’m reminded of the

following story:

The Richest Businessmen

In 1923 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 Insull, president of the world’s largest utility;

Howard Hopson, head of the largest gas company; Ivar Kreuger,

president of 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 these

titans ended their lives as follows: Schwab died penniless after

living for five years on borrowed money. Insull died broke in a

foreign land, and Kreuger and Cotton also died broke. Hopson

went insane. Whitney and Albert Fall were released from prison,

and 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 coming years that will parallel the ups

and downs these men faced. I am concerned that too many people

are too focused on money and not on their greatest wealth, their

education. If people are prepared to be flexible, keep an open mind

and learn, they will grow richer and richer despite tough changes.

If they think money will solve problems, they 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’ve all heard stories

of lottery winners who are poor, then suddenly rich, and then poor

again. They win millions, yet are soon back where they started. Or

stories of professional athletes, who at the age of 24 are earning

millions, but are sleeping under a bridge 10 years later.

I remember a story of a young basketball player who a year ago

had millions. Today, at just 29, he claims his friends, attorney, and

accountant took his money, and he was forced to work at a car

wash for minimum wage. He was fired from the car wash because

he refused to take off his championship ring as he was wiping off

the cars. His story made national news and he is appealing his

termination, claiming hardship and discrimination. He claims that

the ring is all he has left and if it was stripped away, he’ll crumble.

I know so many people who became instant millionaires. And

while I am glad some people have become richer and richer, I caution

them that in the long run, it’s not how much money 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 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 six-inch slab of concrete. Most people, in their drive to get

rich, are trying to build an Empire State Building on a six-inch slab.

Our school system, 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.

Construction on the skyscraper begins. It goes up quickly, and soon,

instead of the Empire State Building, we have the Leaning Tower of

Suburbia. The sleepless nights return.

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.

Accounting is possibly the most confusing, boring subject in the

world, but if you want to be rich long-term, it could be the most

important subject. For rich dad, the question was how to take a boring

and confusing subject and teach it to kids. The answer he found was to

make it simple by teaching it 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 few 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 had to in order to run his empire. I am

not as sophisticated because my empire

is smaller, yet we come from the same

simple foundation. Over the following pages, I offer to you the same

simple line drawings Mike’s dad created for us. Though basic, those

drawings helped guide two little boys in building great sums of wealth

on a solid and deep foundation.

Rich people acquire

assets. The poor and

middle class acquire

liabilities that they

think are assets.