Rich Dad, Poor Dad Part 10

If you're tired of what you're doing, or you're not making enough, it's simply a case of changing the formula via which you make money.

Years ago, when I was 26,1 took a weekend cla.s.s called "How to Buy Real Estate Foreclosures." I learned a formula. The next trick was to have the discipline to actually put into action what I had learned. That is where most people stop. For three years, while working for Xerox, I spent my spare time learning to master the art of buying foreclosures. I've made several million dollars using that formula, but today, it's too slow and too many other people are doing it.

So after I mastered that formula, I went in search of other formulas. For many of the cla.s.ses, I did not use the information I learned directly, 'i but I always learned something new.

I have attended cla.s.ses designed for only derivative traders, also a cla.s.s for commodity option traders and a cla.s.s for Chaologists. I was way out of my league, being in a room full of people with doctorates in nuclear physics and s.p.a.ce science. Yet, I learned a lot that made my stock and real estate investing more meaningful and lucrative. Most junior colleges and community colleges have cla.s.ses on financial planning and buying of traditional investments. They are great places to start.

So I always search for a faster formula. That is why, on a fairly regular basis, I make more in a day than many people will make in their lifetime.

Another side note. In today's fast-changing world, it's not so much what you know anymore that counts, because often what you know is old. It is how fast you learn. That skill is priceless. It's priceless in finding faster formulas-recipes, if you will, for making dough. Working hard for money is an old formula born in the day of cave men.

5. PAY YOURSELF FIRST: The power of self-discipline. If you cannot get control of yourself, do not try to get rich. You might first want to join the Marine Corps or some religious order so you can get control of yourself. It makes no sense to invest, make money and blow it. It is the lack of self-discipline that causes most lottery winners to go broke soon after winning millions. It is the lack of self-discipline that causes people who get a raise to immediately go out and buy a new car or take a cruise.

It is difficult to say which of the ten steps is the most important. But of all the steps, this step is probably the most difficult to master if it is not already a part of your makeup. I would venture to say that it is the lack of personal self-discipline that is the No. 1 delineating factor between the rich, the poor and the middle cla.s.s.

Simply put, people who have low self-esteem and low tolerance for financial pressure can never, and I mean never, be rich. As I have said, a lesson learned from my rich dad was that "the world will push you around." The world pushes people around not because other people are bullies, but because the individual lacks internal control and discipline. People who lack internal fort.i.tude often become victims of those who have self-discipline.

In the entrepreneur cla.s.ses I teach, I constantly remind people to not focus on their product, service or widget, but to focus on developing management skills. The three most important management skills necessary to start your own business are: 1. Management of cash flow.

2. Management of people.

3. Management of personal time.

I would say, the skills to manage these three apply to anything, not just entrepreneurs. The three matter in the way you live your life as an individual, or as part of a family, a business, a charitable organization, a city or a nation.

Each of these skills is enhanced by the mastery of self discipline. I do not take the saying "pay yourself first" lightly.

The Richest Man in Babylon, by George Cla.s.sen, is where the statement "pay yourself first" comes from. Millions of copies have been sold. But while millions of people freely repeat that powerful statement, few follow the advice. As I said, financial literacy allows one to read numbers, and numbers tell the story. By looking at a person's income statement and balance sheet, I can readily see if people who spout the words "pay yourself first" actually practice what they preach.

A picture is worth a thousand words. So let's again compare the financial statements of people who pay themselves first against someone who doesn't.

People who pay themselves first +------------------------+.

Job---------------> Income ---- ^ ------------------------- .

Expense +------------------------+ .

a.s.sets Liabilities .

_________ ____________ .

Someone who pays everyone else first- Often there is nothing left +------------------------+.

Job---------------> Income -------------------------.

Expense ----> Nothing left!

a.s.sets Liabilities .

_________ ____________ .

Study the diagrams and notice if you can pick up some distinctions. Again, it has to do with understanding cash flow, which tells the story. Most people look at the numbers and miss the story. If you can truly begin to understand the power of cash flow, you will soon realize what is wrong with the picture on the next page, or why 90 percent of most people work hard all their lives and need government support like Social Security when they are no longer able to work.

Do you see it? The diagram above reflects the actions of an individual who chooses to pay himself first. Each month, they allocate money to their a.s.set column before they pay their monthly expenses. Although millions of people have read Cla.s.sen's book and understand the words "pay yourself first," in reality they pay themselves last.

Now I can hear the howls from those of you who sincerely believe in paying your bills first. And I can hear all the "responsible" people who pay their bills on time. I am not saying be irresponsible and not pay your bills. All I am saying is do what the book says, which is "pay yourself first." And the diagram above is the correct accounting picture of that action. Not the one that follows.

My wife and I have had many bookkeepers and accountants and bankers who have had a major problem with this way of looking at "pay yourself first." The reason is that these financial professionals actually do what the ma.s.ses do, which is pay themselves last. They pay everyone else first.

There have been months in my life, when for whatever reason, cash flow was far less than my bills. I still paid myself first. My accountant and bookkeeper screamed in panic. "They're going to come after you. The IRS is going to put you in jail." "You're going to ruin your credit rating." "They'll cut off the electricity." I still paid myself first.

"Why?" you ask. Because that's what the story The Richest Man In Babylon was all about. The power of self-discipline and the power of internal fort.i.tude. "Guts," in less elegant terms. As my rich dad taught me the first month I worked for him, most people allow the world to push them around. A bill collector calls and you "pay or else." So you pay and not pay yourself. A sales clerk says, "Oh, just put it on your charge card." Your real estate agent tells you to "go ahead-the government allows you a tax deduction on your home." That is what the book is really about. Having the guts to go against the tide and get rich. You may not be weak, but when it comes to money, many people get wimpy.

I am not saying be irresponsible. The reason I don't have high credit card debt, and doodad debt, is because I want to pay myself first. The reason I minimize my income is because I don't want to pay it to the government. That is why, for those of you who have watched the video The Secrets of the Rich, my income comes from my a.s.set column, through a Nevada corporation. If I work for money, the government takes it.

Although I pay my bills last, I am financially astute enough to not get into a tough financial situation. I don't like consumer debt. I actually have liabilities that are higher than 99 percent of the population, but I don't pay for them; other people pay for my liabilities. They're called tenants. So rule No. 1 in paying yourself first is don't get into debt in the first place. Although I pay my bills last, I set it up to have only small unimportant bills, that I will have to pay.

Secondly, when I occasionally come up short, I still pay myself first. I let the creditors and even the government scream. I like it when they get tough. Why? Because those guys do me a favor. They inspire me to i go out and create more money. So I pay myself first, invest the money, and let the creditors yell. I generally pay them right away anyway. My wife and I have excellent credit. We just don't cave into the pressure and spend our savings or liquidate stocks to pay for consumer debt. That is not too financially intelligent.

So the answer is: 1. Don't get into large debt positions that you have to pay for. Keep your expenses low. Build up a.s.sets first. Then, buy the big house or nice car. Being stuck in the rat race is not intelligent.

2. When you come up short, let the pressure build and don't dip into your savings or investments. Use the pressure to inspire your financial genius to come up with new ways of making more money and then pay your bills. You will have increased your ability to make more money as well as your financial intelligence. ; : So many times I have gotten into financial hot water, and used my brain to create more income, while staunchly defending the a.s.sets in my a.s.set column. My bookkeeper has screamed and dived for cover, but I was like a good trooper defending the fort, Fort a.s.sets.

Poor people have poor habits. A common bad habit is innocently called "Dipping into savings." The rich know that savings are only used to create more money, not to pay bills.

I know that sounds tough, but as I said, if you're not tough inside, the world will always push you around anyway.

If you do not like financial pressure, then find a formula that works for you. A good one is to cut expenses, put your money in the bank, pay more than your fair share of income tax, buy safe mutual funds and take the vow of the average. But this violates the "pay yourself first" rule.

The rule does not encourage self-sacrifice or financial abstinence. It doesn't mean pay yourself first and starve. Life was meant to be enjoyed. If you call on your financial genius, you can have all the goodies of life, get rich and pay bills, without sacrificing the good life. And that is financial intelligence.

6. PAY YOUR BROKERS WELL: The power of good advice. I often see people posting a sign in front of their house that says, "For Sale by Owner." Or I see on TV today many people claiming to be "Discount Brokers."

My rich dad taught me to take the opposite tack. He believed in paying professionals well, and I have adopted that policy also. Today, I have expensive attorneys, accountants, real estate brokers and stockbrokers. Why? Because if, and I do mean if, the people are professionals, their services should make you money. And the more money they make, the more money I make.

We live in the Information Age. Information is priceless. A good broker should provide you with information as well as take the time to educate you. I have several brokers who are willing to do that for me. Some taught me when I had little or no money, and I am still with them today.

What I pay a broker is tiny in comparison with what kind of money I can make because of the information they provide. I love it when my real estate broker or stockbroker makes a lot of money. Because it usually means I made a lot of money.

A good broker saves me time in addition to making me money-as when I bought the piece of vacant land for $9,000 and sold it immediately for over $25,000, so I could buy my Porsche quicker.

A broker is your eyes and ears to the market. They're there every day so I do not have to be. I'd rather play golf.

Also, people who sell their house on their own must not value their time much. Why would I want to save a few bucks when I could use that time to make more money or spend it with those I love? What I find funny is that so many poor and middle cla.s.s people insist on tipping restaurant help 15 to 20 percent even for bad service and complain about paying a broker 3 to 7 percent. They enjoy tipping people in the expense column and stiffing people in the a.s.set column. That is not financially intelligent.

All brokers are not created equal. Unfortunately, most brokers are only salespeople. I would say the real estate salespeople are the worst.

They sell, but they themselves own little or no real estate. There is a tremendous difference between a broker who sells houses and a broker who sells investments. And that is true for stock, bond, mutual fund and insurance brokers who call themselves financial planners. As in the fairy tale, you kiss a lot of frogs to find one prince. Just remember the old saying, "Never ask an encyclopedia salesperson if you need an encyclopedia."

When I interview any paid professional, I first find out how much property or stocks they personally own and what percentage they pay in taxes. And that applies to my tax attorney as well as my accountant. I have an accountant who minds her own business. Her profession is accounting, but her business is real estate. I used to have an accountant that was a small business accountant, but he had no real estate. I switched because we did not love the same business.

Find a broker who has your best interests at heart. Many brokers will .'; spend the time educating you, and they could be the best a.s.set you find. Just be fair, and most of them will be fair to you. If all you can think about is cutting their commissions, then why should they want to be around you? It's just simple logic.

As I said earlier, one of the management skills is the management of people. Many people only manage people they feel smarter than and they have power over, such as subordinates in a work situation. Many middle managers remain middle managers, failing to get promoted because they know how to work with people below them, but not with people above them. The real skill is to manage and pay well the people who are smarter than you in some technical area. That is why companies have a board of directors. You should have one, too. And that is financial intelligence.

7. BE AN "INDIAN GIVER": This is the power of getting something for nothing. When the first white settlers came to America, they were taken aback by a cultural practice some American Indians had. For example, if a settler was cold, the Indian would give the person a blanket. Mistaking it for a gift, the settler was often offended when the Indian asked for it back.

The Indians also got upset when they realized the settlers did not want to give it back. That is where the term "Indian giver" came from. A simple cultural misunderstanding.

In the world of the "a.s.set column," being an Indian giver is vital to wealth. The sophisticated investor's first question is, "How fast do I get my money back?" They also want to know what they get for free, also called a piece of the action. That is why the ROI, or return of and on investment, is so important.

For example, I found a small condominium, a few blocks from where I live, that was in foreclosure. The bank wanted $60,000, and I submitted a bid for $50,000, which they took, simply because, along with my bid, was a cas.h.i.+er's check for $50,000. They realized I was serious. Most investors would say, aren't you tying up a lot of cash? Would it not be better to get a loan on it? The answer is, not in this case. My investment company uses this as a vacation rental in the winter months, when the "s...o...b..rds" come to Arizona, and rent it for $2,500 a month for four months out of the year. For rental during the off-season, it rents for only $1,000 a month. I had my money back in about three years. Now I own this a.s.set, which pumps money out for me, month in and month out.

The same is done with stocks. Frequently, my broker will call me and recommend I move a sizable amount of money into the stock of a company that he feels is just about to make a move that will add value to the stock, like announcing a new product. I will move my money in for a week to a month while the stock moves up. Then, I pull my initial dollar amount out, and stop worrying about the fluctuations of the market, because my initial money is back and ready to work on another a.s.set. So my money goes in, and then it comes out, and I own an a.s.set that was technically free.

True, I have lost money on many occasions. But I only play with money I can afford to lose. I would say, on an average ten investments, I hit home runs on two or three, while five or six do nothing, and I lose on two or three. But I limit my losses to only the money I have in at that time.

For people who hate risk, they put their money in the bank. And in the long run, savings are better than no savings. But it takes a long time to get your money back and, in most instances, you don't get anything for free with it. They used to hand out toasters, but they rarely do that these days.

On every one of my investments, there must be an upside, something for free. A condominium, a mini-storage, a piece of free land, a house, stock shares, office building. And there must be limited risk, or a low-risk idea. There are books devoted entirely to this subject that I will not get into here. Ray Kroc, of McDonald's fame, sold hamburger franchises, not because he loved hamburgers, but because he wanted the real estate ; under the franchise for free.

So wise investors must look at more than ROI; it's the a.s.sets you get for free once you get your money back. That is financial intelligence. : 8. a.s.sETS BUY LUXURIES: The power of focus. A friend's child has been developing a nasty habit of burning a hole in his pocket. Just 16, he naturally wanted his own car. The excuse, "All his friends' parents gave their kids cars." The child wanted to go into his savings and use it for a down payment. That was when his father called me. "Do you think I should let him do it, or should I just do as other parents do and just buy him a car?"

To which I answered. "It might relieve the pressure in the short term, but what have you taught him in the long term? Can you use this desire to own a car and inspire your son to learn something?" Suddenly the lights went on, and he hurried home.

Two months later I ran into my friend again. "Does your son have his new car?" I asked.

"No, he doesn't. But I went and handed him $3,000 for the car. I told him to use my money instead of his college money." "Well, that's generous of you," I said.

"Not really. The money came with a hitch. I took your advice of using his strong desire to buy a car and use that energy so he could learn something."

"So what was the hitch?" I asked.

"Well, first we broke out your game again, CASHFLOW. We played it and had a long discussion about the wise use of money. I then gave him a subscription to the Wall Street Journal, and a few books on the stock market."

"Then what?" I asked. "What was the catch?"

"I told him the $3,000 was his, but he could not directly buy a car with it. He could use it to buy and sell stocks, find his own stockbroker, and once he had made $6,000 with the $3,000, the money would be his for the car, and the $3,000 would go into his college fund."

"And what are the results?" I asked.

"Well, he got lucky early in his trading, but lost all he gained a few days later. Then, he really got interested. Today, I would say he is down $2,000, but his interest is up. He has read all the books I bought him and he's gone to the library to get more. He reads the Wall Street Journal voraciously, watching for indicators, and he watches CNBC instead of MTV. He's got only $1,000 left, but his interest and learning are sky high. He knows that if he loses that money, he walks for two more years. But he does not seem to care. He even seems uninterested in getting a car because he's found a game that is more fun."

"What happens if he loses all the money?" I asked.

"We'll cross that bridge when we get to it. I'd rather have him lose everything now rather than wait till he's our age to risk losing everything. And besides, that is the best $3,000 I've ever spent on his education. What he is learning will serve him for life, and he seems to have gained a new respect for the power of money. I think he's stopped the burning of holes in his pockets."

As I said in the section "Pay Yourself First," if a person cannot master the power of self-discipline, it is best not to try to get rich. For while the process of developing cash flow from an a.s.set column in theory is easy, it is the mental fort.i.tude of directing money that is hard. Due to external temptations, it is much easier in today's consumer world to simply blow it out the expense column. Because of weak mental fort.i.tude, that money flows into the paths of least resistance. That is the cause of poverty and financial struggle.

I gave this numerical example of financial intelligence, in this case the ability to direct money to make more money.

If we gave 100 people $10,000 at the start of the year, I gave my opinion that at the end of the year: 80 would have nothing left. In fact, many would have created I greater debt by making a down payment on a new car, refrigerator, TV, VCR or a holiday. 16 would have increased that $10,000 by 5 percent to 10 percent. 4 would have increased it to $20,000 or into the millions.

We go to school to learn a profession so we can work for money. It is my opinion that it is also important to learn how to have money work for you.

I love my luxuries as much as anyone else. The difference is, some people buy their luxuries on credit. It's the keep-up-with-the-Joneses trap. When I wanted to buy a Porsche, the easy road would have been to call my banker and get a loan. Instead of choosing to focus in the liability column, I chose to focus in the a.s.set column.

As a habit, I used my desire to consume to inspire and motivate my financial genius to invest.

Too often today, we focus to borrowing money to get the things we want instead of focusing on creating money. One is easier in the short term, but harder in the long term. It's a bad habit that we as individuals and as a nation have gotten into. Remember, the easy road often becomes hard, and the hard road often becomes easy.

The earlier you can train yourself and those you love to be masters of money, the better. Money is a powerful force. Unfortunately, people use the power of money against them. If your financial intelligence is low, money will run all over you. It will be smarter than you. If money is smarter than you, you will work for it all your life.

To be the master of money, you need to be smarter than it. Then money will do as it is told. It will obey you. Instead of being a slave to it, you will be the master of it. That is financial intelligence.

9. THE NEED FOR HEROES: The power of myth. When I was a kid, I greatly admired Willie Mays, Hank Aaron, Yogi Berra. They were my heroes. As a kid playing Little League, I wanted to be just like them. I treasured their baseball cards. I wanted to know everything about them. I knew the stats, the RBI, the ERAs, their batting averages, how much they got paid, and how they came up 1 from the minors. I wanted to know everything because I wanted to be just like them.

Every time, as a 9 or 10 year-old kid, when I stepped up to bat or played first base or catcher, I wasn't me. I was Yogi or Hank. It's one of the most powerful ways we learn that we often lose as adults. We lose our heroes. We lose our naivete.

Today, I watch young kids playing basketball near my home. On the court they're not little Johnny; they're Michael Jordan, Sir Charles or Clyde. Copying or emulating heroes is true power learning. And that is why when someone like O.J. Simpson falls from grace, there is such a huge outcry.

There is more than just a courtroom trial. It is the loss of a hero. Someone people grew up with, looked up to, and wanted to be like. Suddenly we need to rid ourselves of that person.

I have new heroes as I grow older. I have golf heroes such as Peter Jacobsen, Fred Couples and Tiger Woods. I copy their swings and do my best to read everything I can about them. I also have heroes such as Donald Trump, Warren Buffett, Peter Lynch, George Soros and Jim Rogers. In my older years, I know their stats just like I knew the ERAs and RBI of my baseball heroes. I follow what Warren Buffett invests in, and read anything I can about his point of view on the market. I read Peter Lynch's book to understand how he chooses stocks. And I read about Donald Trump, trying to find out how he negotiates and puts deals together.

Just as I was not me when I was up to bat, when I'm in the market or I'm negotiating a deal, I am subconsciously acting with the bravado of Trump. Or when a.n.a.lyzing a trend, I look at it as though Peter Lynch were doing it. By having heroes, we tap into a tremendous source of raw genius.

But heroes do more than simply inspire us. Heroes make things look easy. It's the making it look easy that convinces us to want to be just like them. "If they can do it, so can I."

When it comes to investing, too many people make it sound hard. Instead find heroes who make it look easy.

10. TEACH AND YOU SHALL RECEIVE: The power of giving. Both of my dads were teachers. My rich dad taught me a lesson I have carried all my life, and that was the necessity of being charitable or giving. My educated dad gave a lot by the way of time and knowledge, but almost never gave away money. As I said, he usually said that he would give when he had some extra money. Of course, there was rarely any extra.

My rich dad gave money as well as education. He believed firmly in t.i.thing. "If you want something, you first need to give," he would always say. When he was short of money, he simply gave money to his church or to his favorite charity.

If I could leave one single idea with you, it is that idea. Whenever you feel "short" or in "need" of something, give what you want first and it will come back in buckets. That is true for money, a smile, love, friends.h.i.+p. I know it is often the last thing a person may want to do, but; it has always worked for me. I just trust that the principle of reciprocity it is true, and I give what I want. I want money, so I give money, and it comes back in multiples. I want sales, so I help someone else sell something, and sales come to me. I want contacts and I help someone else get contacts, and like magic, contacts come to me. I heard a saying years ago that went, "G.o.d does not need to receive, but humans need to give."

My rich dad would often say, "Poor people are more greedy than rich people." He would explain that if a person was rich, that person was providing something that other people wanted. In my life, over all these ; years, whenever I have felt needy or short of money or short of help, I simply went out or found in my heart what I wanted, and decided to give it first. And when I gave, it always came back.

It reminds me of the story of the guy sitting with firewood in his arms on a cold freezing night, and he is yelling at the pot-bellied stove, "When you give me some heat, then I'll put some wood in." And when it comes to money, love, happiness, sales and contacts, all one needs to remember is first to give what you want and it will come back in droves. ? Often just the process of thinking of what I want, and how could I give what I want to someone else, breaks free a torrent of bounty. Whenever I feel that people aren't smiling at me, I simply begin smiling and saying h.e.l.lo, and like magic, there are suddenly more smiling people around me. It is true that your world is only a mirror of you.