WHY TEACH FINANCIAL LITERACY?

Why the Rich Get Richer

A review of my rich dad’s financial statement shows why the rich

get richer. The asset column generates more than enough income to

cover expenses, with the balance reinvested into the asset column. The

asset column continues to grow and, therefore, the income it produces

grows with it. The result is that the rich get richer!

Why the Middle Class Struggle

The middle class finds itself in a constant state of financial struggle.

Their primary income is through their salary. As their wages increase,

so do their taxes. Their expenses tend to increase in proportion to their

salary increase: hence, the phrase “the Rat Race.” They treat their home

as their primary asset, instead of investing in income-producing assets.

This pattern of treating your home as an investment, and the

philosophy that a pay raise means you can buy a larger home or spend

more, is the foundation of today’s debt-ridden society. Increased

spending throws families into greater debt and into more financial

uncertainty, even though they may be advancing in their jobs and

receiving raises on a regular basis. This is high-risk living caused by

weak financial education.

The massive loss of jobs in recent times proves how shaky the

middle class really is financially. Company pension plans are being

replaced by 401(k) plans. Social Security is obviously in trouble and

can’t be relied upon as a source for retirement. Panic has set in for

the middle class.

Today, mutual funds are popular because they supposedly

represent safety. Average mutual-fund buyers are too busy working to

pay taxes and mortgages, save for their children’s college, and pay off

credit cards. They do not have time to study investing, so they rely

on the expertise of the manager of a mutual fund. Also, because the

mutual fund includes many different types of investments, they feel

their money is safer because it is “diversified.” This educated middle

class subscribes to the dogma put out by mutual-fund brokers and

financial planners: “Play it safe. Avoid risk.”

The real tragedy is that the lack of early financial education is what

creates the risk faced by average middle-class people. The reason they have

to play it safe is because their financial positions are tenuous at best. Their

balance sheets are not balanced. Instead, they are loaded with liabilities

and have no real assets that generate income. Typically, their only source

of income is their paycheck. Their livelihood becomes entirely dependent

on their employer. So when genuine “deals of a lifetime” come along,

these people can’t take advantage of them because they are working so

hard, are taxed to the max, and are loaded with debt.

As I said at the start of this section, the most important rule

is to know the difference between an asset and a liability. Once

you understand the difference, concentrate your efforts on buying

income-generating assets. That’s the best way to get started on a patho becoming rich. Keep doing that, and your asset column will grow.

Keep liabilities and expenses down so more money is available to

continue pouring into the asset column. Soon the asset base will be

so deep that you can afford to look at more speculative investments:

investments that may have returns of 100 percent to infinity;

$5,000 investments that are soon turned into $1 million or more;

investments that the middle class calls “too risky.” The investment is

not risky for the financially literate.

As an employee who is also a homeowner, your working efforts

are generally as follows:

1. You work for the company.

Employees make their business owner or the shareholders

rich, not themselves. Your efforts and success will help

provide for the owner’s success and retirement.

2. You work for the government.

The government takes its share from your paycheck before

you even see it. By working harder, you simply increase the

amount of taxes taken by the government. Most people

work from January to May just for the government.

3. You work for the bank.

After taxes, your next largest expense is usually your

mortgage and credit-card debt.

The problem with simply working harder is that each of these

three levels takes a greater share of your increased efforts. You need to

learn how to have your increased efforts benefit you and your family

directly.

Once you have decided to concentrate on minding your own

business—focusing your efforts on acquiring assets instead of a bigger

paycheck—how do you set your goals? Most people must keep their

job and rely on their wages to fund their acquisition of assets.

As their assets grow, how do they measure the extent of their

success? When does someone know that they are rich, that they

have wealth?

As well as having my own definitions for assets and liabilities,

I also have my own definition for wealth. Actually, I borrowed it from

a man named R. Buckminster Fuller. Some call him a quack, and

others call him a genius. Years ago he got architects buzzing because

he applied for a patent for something called a geodesic dome. But in

the application, Fuller also said something about wealth.

It was pretty confusing at first, but after reading it, it began to make

some sense:

Wealth is a person’s ability to survive so many number of days

forward—or, if I stopped working today, how long could I survive?

Unlike net worth—the difference between your assets and liabilities,

which is often filled with a person’s expensive junk and opinions of what

things are worth—this definition creates the possibility for developing

a truly accurate measurement. I could now measure and know where I

was in terms of my goal to become financially independent.

Although net worth often includes non-cash-producing assets, like

stuff you bought that now sits in your garage, wealth measures how

much money your money is making and, therefore, your financial

survivability.

Wealth is the measure of the cash flow from the asset column

compared with the expense column.

Let’s use an example. Let’s say I have cash flow from my asset

column of $1,000 a month. And I have monthly expenses of $2,000.

What is my wealth?

Let’s go back to Buckminster Fuller’s definition. Using his

definition, how many days forward can I survive? Assuming a 30-day

month, I have enough cash flow for half a month.

When I achieve $2,000 a month cash flow from my assets, then

I will be wealthy.

So while I’m not yet rich, I am wealthy. I now have income

generated from assets each month that fully cover my monthly

expenses. If I want to increase my expenses, I first must increase my

cash flow to maintain this level of wealth. Also note that it is at this

point that I’m no longer dependent on my wages. I have focused on,

and been successful in, building an asset column that has made me

financially independent. If I quit my job today, I would be able to

cover my monthly expenses with the cash flow from my assets.

My next goal would be to have the excess cash flow from my

assets reinvested into the asset column. The more money that goes

into my asset column, the more my asset column grows. The more

my assets grow, the more my cash flow grows. And as long as I keep my

expenses less than the cash flow from these assets, I grow richer with

more and more income from sources other than my physical labor.

As this reinvestment process continues, I am well on my way to

becoming rich. Just remember this simple observation:

• The rich buy assets.

• The poor only have expenses.

• The middle class buy liabilities they think are assets.

So how do I start minding my own business? What is the answer?

Listen to the founder of McDonald’s in the next chapter.