A New Approach To Money.
Everyone can get rich. That’s according to Robert T. Kiyosaki, who spent the last two and a half decades spreading this message through his “Rich Dad” character. But why, then, are so many people still struggling financially?
Rich Dad’s answer? They’re trapped in thinking patterns that prevent them from making money. Where entrepreneurs see rewards, they see risk; where the wealthy see tools, they see hurdles. Success, in other words, is all about your mindset.
This post reveals some of the ideas that made Kiyosaki rich. You’ll discover how applying them may help you meet your financial goals!
Leverage is power.
How do you transform small amounts of money into large amounts? This statement puzzled Robert Kiyosaki in the mid-1970s. Twenty years later, he was a millionaire looking forward to early retirement. He had found the solution. So, how did he do it?
In a word, leverage – or doing more with less. This concept refers to a lever – a tool that uses a beam and pivot to harness the laws of physics, moving heavy objects with minimal force. Leverage isn’t just about heavy lifting, though; it’s one of the principles governing the world.
Let’s take a look at the animal kingdom, for example. Humans aren’t nearly as fast as cheetahs or as strong as bears. Unlike birds and fish, we can’t fly or survive underwater. And yet we dominate the Earth. That’s leverage.
Cheetahs, bears, birds, and fish use the advantages nature has given them, but they don’t multiply them like humans do. On the other hand, we leverage our greatest gift – the mind – to do things our bodies can’t. We’ve built tools, like levers to move boulders or vehicles to move quickly on dry land, in the sky, and even underwater.
The history of innovation is a series of technological leaps that have given our species greater leverage over the natural world. And this leverage has shaped human society.
Around 5,000 years ago, sea merchants realized that attaching large sheets of woven flax to a pole and crossbeam allowed them to harness the wind. The wind’s force propelled their boats. Suddenly, they could do more with less. Sailing was easier and more efficient than relying on a crew of oarsmen. It was also more powerful. Vessels were now able to carry more cargo further than ever before. The merchants and statesmen who embraced this new technology prospered and built powerful empires.
More recent breakthroughs follow the same pattern. Today, entire fleets of container ships can be dispatched to any port in the world at the click of a button. Entrepreneurs who recognized how to harness the internet early on to make this possible are among the richest people to have ever lived.
This post isn’t about technology, though. They’re about the ideas and strategies that will give you financial leverage to do more with your money.
The risk-reward ratio helps you put risk into perspective.
How you see the world shapes how you act in the world. In other words, reality is partly constructed within your own mind, arming you with a unique perspective.
Think of a concept like risk. The perceived risk of a certain behavior often determines whether you engage in that behavior or not. Investing, for example, is often seen as risky – so some people don’t invest. After all, the best way to avoid getting burned is to avoid playing with fire, right?
What about crossing the road? That can be risky too. But how often are you affected by that perceived risk? Fixating on the risk would probably paralyze you with fear, and walking around a city’s streets would become impossible. Fixating on risk alone, then, is counterproductive. That’s why Rich Dad finds the risk-reward ratio much more productive.
Nine out of ten businesses fail – and yet people continue to open new businesses. That’s not just down to hubris. Each entrepreneur simply has a different perspective and appetite for risk. And relying on the risk-reward ratio helps them understand what risk they’re willing to take.
We all know that failure is possible in any endeavor we undertake. But it’s also important to look at the overall balance of failures against successes. Put simply, if every new business fails nine out of ten times but the reward of a successful tenth attempt is great enough, we can afford to fail on the previous nine attempts.
Take it from one of Kiyosaki’s best friends, a New York-based day trader on the stock market. His strategy is built around this ratio. He’ll never spend more than a tenth of his assets to play the market. So if he has $200,000, he’ll put $20,000 aside. This is a loss he can live with should everything go disastrously wrong. But here’s where things get interesting.
When day-trading, Kiyosaki’s friend can expect to make money on one out of every twenty trades. Because of these odds, he only risks one twentieth of his trading fund for each transaction, which amounts to $1,000 per trade. Even if he loses 19 times, which rarely happens, he can still expect to make his money back on the final trade. Since each market move usually makes double or more on his original $20,000 investment, the reward of this behavior easily outweighs the risk.
Your debt and wealth ratios can help you track your financial health over time.
It’s the poor worker who blames her tools, but a person who uses poor tools also achieves poor results. Kiyosaki discovered this Rich Dad wisdom when he was a young man. It has stayed with him ever since.
You see, concepts are the tools of the brain. When you use them correctly, they can help you see things your eyes can’t. Previously, we assessed the risk-reward ratio. Here, we’ll discover the concepts that can help you track your wealth, which is the key to your financial leverage.
Understanding how you’re using positive debt, available assets, and income to support your goal to become rich is the first step toward a successful retirement.
To keep track of the positive debt versus available assets being used as currency, we look to the debt-to-equity ratio. Here’s how it works. Say you have $100,000 in positive debts and $20,000 in equities, like shares. Divide the former number by the latter – so, in this case, 100,000 divided by 20,000 – and you get a debt-to-equity ratio of five.
That figure doesn’t tell you much right away, but it’s a handy yardstick to measure your financial health over time. If your ratio goes up to ten, for example, you’ll know there’s a problem. Your debt might have doubled while your equity remained constant. Or perhaps your debt remained the same while your equity was halved. In either case, this jump is an alarm bell telling you to reassess your finances and steer them back on track. A movement in the other direction, by contrast, is an indicator of progress.
Then there’s the wealth ratio, which helps you measure your passive and portfolio income against your expenses. Here, divide your indirect income by your total expenses. Say you receive $800 from stocks, shares, or rental income each month, and your monthly expenses add up to $4,000. This gives you a wealth ratio of 0.2, meaning your income from sources other than your job cover 20 percent of your expenses.
This indicator tells you how close you are to being able to make bold financial moves like retiring early or taking on a more rewarding job that pays less. When your ratio gets to one, that means you’ll break even. Any number over one means you’ll be making money – even after covering all expenses.
Simple, good habits go a long way.
Dozens of books about how to get rich are published every year. But it’s often hard to say which authors get it right and which don’t. A lot of times, readers are told to take steps that are difficult to put into practice, and so they never get around to testing these ideas.
Rich Dad has a more viable approach: rather than starting with complex models and strategies, concentrate on low-hanging fruit by adopting simple, good habits.
If some habits make you rich and others make you poor, it stands to reason that you should cultivate the former and avoid the latter. And the upside is, these habits are easy to start and will improve your financial position.
Let’s take a look at two of the habits Kiyosaki credits with transforming his fortunes. First up is learning, which is one of the most crucial habits you’ll ever pick up.
We live in a dynamic and fluid information age. This differs from the twentieth century, which was an industrial age. It used to be that most people learned a set number of skills and then spent their working lives applying this know-how. Today, by contrast, we need to keep learning. Change is constant and inevitable; what worked yesterday won’t necessarily work tomorrow. That makes our greatest asset the information in our heads.
Put differently, what really matters is staying one step ahead of the pack and seeing what others can’t. Whether you’re reading books, attending seminars, or just chatting with people in different industries, the key is to stay curious and make sure you’re learning something new every day.
Acquiring new knowledge, insights, and ideas is one way of investing in yourself. It also helps you spot opportunities before others do. With all of these opportunities on the horizon, you’ll probably need to borrow money, which leads us to the second habit: rely on a good bookkeeper.
Most people don’t qualify for loans because they have poor financial records. Ultimately, few people will trust you to manage their money if you can’t prove that you’re able to manage your own. A bookkeeper’s job is to create professional records showing that you’re keeping your income, expenses, assets, and liabilities in order. This helps increase your financial leverage, giving you access to new resources like positive debt.
Using debt to buy assets can give you an infinite return.
Wait a minute – debt is a form of leverage? This claim might sound counterintuitive. After all, most people spend a great deal of time and energy trying to get out of debt. But, used in the right way, debt is a useful tool that can make you richer. It all depends on whether you’re getting into good or bad debt. So, what’s the difference?
In a nutshell, good debt generates income, while bad debt eats away at existing income. In the first case, debt is working for you; in the second, you’re working for it.
Many people borrow money to acquire liabilities – things that cost them more money. They use credit cards to finance expensive holidays and take out loans to buy cars. Servicing this debt takes a hefty chunk out of their paychecks. But debt can also be used to buy assets – things that create an income.
One of the best assets to buy with debt is real estate. This could either be property you’re planning to resell, or a place you can rent out. Let’s look at the first real estate deal that Kiyosaki financed with debt to see how it works.
In 1974, Kiyosaki found a small beachfront condo in Hawaii, which was being sold for $18,000. Back then he was broke, so he borrowed the cash. His bank gave him a $16,000 loan, and he used a credit card to cover the $2,000 down payment.
After acquiring the property, he rented it out. The amount didn’t just cover Kiyosaki’s loan and credit card repayments, interest, and expenditures, though. It also generated a monthly income of $25 – the equivalent of $130 today.
Now, that isn’t exactly a king’s ransom, but the principle is important. Remember, Kiyosaki hadn’t spent a dime of his own money, yet he was still generating an income after covering all his expenses, including the loan. In finance, this is called an infinite return. We might as well just call it free money!
The lesson here is simple. If you borrow in the right way, you can use other people’s money to make yourself richer. In practice, that usually means investing in income-generating real estate, which is the topic we’ll look at next.
If you want to find the right property, you have to look at a lot of duds.
How do you find a great deal for a real estate investment? It’s simple: train yourself to spot what others miss! Don’t worry, that’s not as daunting a task as it might sound.
Although it has its quirks and unique bureaucratic hurdles, real estate isn’t all that different from other things you buy. Just like finding the best possible deal on a holiday, an appliance, or a pair of sneakers, you have to look around and compare offers before taking the plunge.
So, if you want to understand the real estate market, you have to view a lot of properties. Rich Dad recommends the 100:10:3:1 method to assess any potential investments. That means looking at one hundred properties, making an offer on ten of them, having three sellers agree to your offer, and – finally – buying one of them.
The 100:10:3:1 method doesn’t just teach you about how the market works. It’s also a fail-safe way to steer clear of making painful mistakes.
Take it from one of Kiyosaki’s friends, a lawyer who decided to invest in real estate without using the method. She bought a beachfront condo near San Diego after looking at only two units, both of which were in the same complex.
Two years later, she was losing over $450 a month – the homeowner’s association had raised its maintenance fees, and it turned out she couldn’t charge as much rent as she had originally hoped. Even worse, selling wasn’t an option since she bought the condo for $25,000 more than anyone was willing to offer. She would’ve been able to avoid all of this if she had simply taken the time to research the local market.
The moral of this story according to Rich Dad: you have to kiss a lot of frogs before you find a handsome prince. A lot of folks don’t spend enough time comparing potential investments. Instead, they act on impulse, hot tips, or hearsay. But as we’ve seen in the case of Kiyosaki’s friend, people who don’t like kissing frogs often end up settling in an unhappy marriage with the first amphibian they encounter!
Problems can be opportunities.
Every fisherman has a story about the “one that got away.” Real estate investors, on the other hand, have a story about nabbing the perfect property that everyone else overlooked. Robert Kiyosaki and his wife, Kim, are no different. For them, it was a small mountain cabin they found while on vacation in Pennsylvania.
The Kiyosakis are no strangers to putting the 100:10:3:1 method into action while on holiday. You never know where opportunity will hit, and why not see what’s up for sale in other towns?
This property they found didn’t just end up being a cash cow. It also taught them an invaluable lesson about investing in real estate: just because a property has problems doesn’t mean you can’t turn those problems into money.
When they were on a hiking trip in Pennsylvania in the late ’90s, the Kiyosakis visited a local realtor’s office to see what homes were for sale. Only one property caught their attention – a run-down cabin with 15 acres of land, listed for the unusually low asking price of $43,000.
Why was the cabin so cheap? The property’s well didn’t produce enough water to sustain full-time occupants. Undeterred, the Kiyosakis took a look for themselves. After poking around, they consulted a well expert. It turned out that the well did provide enough water. The actual issue was that the amount of water it produced depended on the time of year; some months got a lot less than others.
There was an easy fix for that – installing 3,000-gallon holding tanks to store surplus water for leaner months. Keeping this knowledge to themselves, the couple offered $24,000. The owner, who had been trying to sell the cabin for years, accepted. After closing the deal, Kiyosaki returned to the property with the well expert. The two holding tanks ended up costing him a mere $5,000.
A month after the installation, the Kiyosakis put the cabin, which now came with enough water to meet an entire family’s annual needs, up for sale. It was snapped up within weeks by a young couple who were delighted to find their dream home in the mountains. Final price? $66,000 – that’s a $37,000 profit.
It’s a lesson the Kiyosakis have never forgotten. With a little patience and creative thinking, “problem” properties can reward investors with huge returns.
Leverage makes the world go round, so it’s not surprising that it also helps explain how successful entrepreneurs make their money. Some entrepreneurs leverage ideas, like the risk-reward ratio – a cognitive tool that illuminates the true risk of an investment. Others leverage credit. Despite its bad rap, debt can actually help you make money if you spend it on the right things. Take it from Robert Kiyosaki, who made his fortune by using other people’s cash to buy income-generating assets like real estate.
