So I hope to lay out a ‘plan’ of action that I’ve somewhat intuitively begun to follow, but hope to step up into a more disciplined and intentional endeavor. But first, the background knowledge.
Most of this basic knowledge I picked up from the book Rich Dad, Poor Dad by Robert Kiyosaki. I HIGHLY recommend it for the content (but stylistically, Kiyosaki is not a very good writer). In short, he essentially had ‘two Dads’- one who was his real, biological father (the ‘Poor Dad’) and his best friend’s father (who became phenomenally wealthy). In having these two powerful influences he was able to clearly see differences in thoughts and actions that are the true distinctions between the rich and the poor (that ultimately lead to the obvious distinctions of net worth.)
The biggest misconception is that wealth is a product of one’s income- “If only I could get a higher paying job, I could be rich!” And while that couldn’t hurt, income is not really the issue. Consider the “richest” man in the world- currently tagged as Warren Buffett. His annual income, from his job, is only $100,000 a year. And yet his net worth is far in excess than execs who ‘earn’ 10 times that amount.
But notice I qualified his income as being ‘from his job’ (his job, by the way, is Chairman and CEO of Berkshire-Hathaway). I’m sure he has other income- but it is income that comes from holding certain assets like stocks and such (although, even with that, his largest holding is in Berkshire-Hathaway stock, which he probably doesn’t actually receive money from as Berkshire doesn’t pay out dividends). You see, the secret to wealth is not in the income, but in the assets that one owns.
Rich people, essentially, operate like businesses. When you evaluate businesses you look at their financial statements which include an income statement (which includes expenses they pay) and a balance sheet that lists the company’s assets and liabilities.
Robert Kiyosaki breaks it down like this:
The Poor and Middle Class primarily have financial statements that look like this:
Money comes in as income from their job(s) and then gets filtered through a lengthy list of liabilities (auto loans, mortgages, school loans, credit card debt, etc.) and so gets sent out of their possessions through all the expenses that these liabilities generate.
Rich people, however, have financial statements that go more like this:
As much as their income as possible goes into purchasing assets- in particular for our case, earning assets. And this is an important distinction. Some things are considered assets because they are ‘worth’ a certain amount. That’s why many people include their cars and boats and homes in their asset column. However, to utilize those assets in a financial sense you would have to sell them, which then means you no longer have that asset. Plus, you can rarely sell them for the amount that you can list them in your ‘Asset’ column. Another, very unfortunate plus, is that the ownership of these ‘assets’ often comes with a substantial addition to the liabilities side: car payments and mortgages. Which is why middle-class folks have most of their money filtering through the liabilities side and out through the monthly expenses even though they may be ‘wealthy’ enough to own the big screen TV’s, Bimmers, Hummers, and large homes in the ‘right’ neighborhood.
True wealth (and healthy businesses) results from assets that earn income- adding to what the ‘job’ brings in rather than siphoning it all out.
Some debt may be unavoidable, and may even be advantageous- IF you receive more than you pay out. For example the return you get on a rental property- in terms of actual profit above the monthly debt payments, may make a mortgage more justifiable. As the income stream widens, the debt becomes less and less significant.
That’s the secret to wealth in a nutshell. But always the generalist- I like principles that have more than one application- and life isn’t all about money...
...to be continued.
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