Robert Kiyosaki has a clear message. The United States needs financial education. Right now our education system is broken and nothing is being taught that prepares people for financial freedom. All of Robert’s books are good and teach the basics of financial education and the need for continuous learning. Rich Dad / Poor Dad is another famous book by this author. We will profile that book in a separate table of contents
The cash flow dial is a very important concept that people need to cement in their memory if they are to gain control over financial freedom. The dial is made up of:
1.) E – Stands for employee
2.) S – Stands for small business or self-employed
3.) B – Stands for large enterprise (500 employees or more)
4.) I – Stands for investor
Traditional education prepares us for quadrant E and S. The mantra has been going to school and then college to hopefully find a good job and save into a 401K for retirement. As many of you know, this is not a good model nowadays. On a side note, I was very lucky to grow up with an excellent finance teacher. My father taught the principles that Mr. Kiyosaki teaches in his books Rich Dad / Poor Dad, The Cashflow Quadrant and this book Unfair Advantage. I can also tell you that most people are not financially educated. Authors like Mr. Kiyosaki and Dave Ramsey are sorely needed and let’s do what should be taught in our school system nationwide.
Why is it important to me?
This can be answered by asking a few more questions. Do you know the difference between good debt and bad debt? Can you define an asset and a liability in simple terms?
Did you know that there are three types of income taxes?
If you are unclear on any of these then you need to read this book. In short, I will answer all these questions. Good debt is anything that unleashes positive cash flow and increases in value. So, if you have debt on a rental home that produces positive monthly cash flow, then it’s good debt. If you have credit card debt that you don’t pay off every month, then that is bad debt. Simply put, good debt makes you money and bad debt costs you money.
Activities and liabilities! Anything that generates positive cash flow is an asset while anything that costs you money is a liability. Example: A business that generates monthly profits is an asset. Your home is a liability. I know many of you will disagree with this, but your home is costing you money every month. This is not a bad thing but because you need a place to live but it is a liability.
The three types of income include: Ordinary, Portfolio and Passive. We’ll go into more detail about how these play a role in your financial freedom later in this roundup. This book is important for you if you want to be financially free and escape the rat race of running out of money before the end of each month.
There are several examples and details outlined in Unfair Advantage, but due to time constraints we will cover each of them in a nutshell.
1. Knowledge – Knowledge put into practice equals power. There are several ways to make money in a business, be it real estate, the stock market, content creation, licensing deals, internet marketing, or many other endeavors. The point here is that nothing happens without educating yourself. Warren Buffet, the second richest man in the world, is known for his constant reading and learning skills. The premise of Unfair Advantage is that with a very high financial education, money goes in rather than out. You can pay zero taxes and make millions with very little risk using other people’s money in good or bad economies. This creates an extreme unfair advantage.
2. Taxes – Taxes are government incentives to get people to do what they want them to do. Therefore, as businesses create jobs and wealth, they have tax strategies as incentives to keep the economy going. There’s a huge premise that people need to understand. I will explain the difference. When you’re an employee, you work, pay your taxes, and then get the money to pay your expenses. When you’re a business, you work, pay all your expenses, and then pay taxes on what’s left over. This is totally legal and can legally increase rates of return. Remember one thing: tax avoidance is prudent while tax evasion means jail time.
3.Debt – Good debt creates real wealth by allowing you to use OPM (Other People’s Money). This is very powerful and requires discipline. This is area I
I wish this book told in more detail. Please note that debt used wisely can create leverage and unlimited wealth. Too much misused debt can create financial ruin. Also, know that over 85% of the US population has too much BAD debt. That’s not what we’re talking about. This too must be taken care of to truly achieve financial freedom. Using debt is an advanced strategy and must be used wisely which requires financial education.
4. Risk – The greatest risk in investing comes from the fact that financially uneducated people give their money to financial planners and hope things work out. This has by far caused great losses to people. Inflation is running rampant right now even though the government says it’s not. This is a greater risk for savers than taxes. Saving money as an investment is a bad idea because over time the value is consumed by inflation. 401Ks and mutual funds along with diversification are all presented as NOT risky. This is the furthest from the truth. 1. Mutual funds are subject to double taxes and fees that eat into your returns. Also, you have no control over your money. Note: This does not mean that ALL funds are bad. This is where financial education comes into play. Different financial planners will tell their clients to diversify. According to Warren Buffet – “Diversification is a protection against ignorance.”
5. Compensation – Rich people don’t work for money. Think about hard work for a moment. If you work overtime, you trade hours for dollars. The problem becomes that your marginal tax rate increases as you earn more ordinary income. Your overtime is taxed higher as you work more. I’m not against hard work. Just make sure you pair it with SMART and RIGHT WORK as well. The wealthy work to buy goods that create cash flows. Your goal should be to make your money work harder than you do and make you more money as soon as possible.
What asset will pay for your liability? This concept was first covered in Rich Dad/Poor Dad. This simple question changes the whole mood and if people followed it, they would be in much better financial shape. This means if you want a new boat, what resource will pay for the boat? Once you grasp this simple idea, your world will change.
I hope you found this short video summary useful. The key to any new idea is to build it into your daily routine until it becomes a habit. Habits are formed in as little as 21 days. I highly recommend ingraining knowledge of the compound in your head. Answer the following correctly and you will understand the power of composition. Would you rather have $1,000,000 in cash today or double a cent every day for 31 days? You can email me at firstname.lastname@example.org with your response.