Derek Thompson with The Atlantic wrote on July 26th 2017 “the college premium—the extra income one should expect from getting a bachelor’s degree—is higher than it was in the 1990s, but it’s stopped growing this century for young workers.” Amidst his other points he presses that the college debt bubble is not going to “pop” but slowly “hiss” itself out. Enrollment is down, tuition prices are slowing, and it’s the for-profit college’s that Derek says are on the chopping block. Though college can be a great experience and help secure a solid job, with no promise of actually attaining anything but massive debt, the narrative is changing.
You may have heard this throughout your life no matter if you are a baby boomer or a millenial, but the principals of “go to school” or “get a good job” are actually causing you to go broke! The only way to break away from these outdated “tips” and mindsets are to grow your financial IQ. A great resource I use it Rich Dad Education by the author and educator Robert Kiyosaki. He calls these ideas “sacred cows”.
Myth #1. Go to School
I’m definitely not saying drop out of school and give up learning, but you’ll have to agree that schools don’t teach much on financial education. After college, many of us walked out with a diploma, student loan debt, and credit card debt saying, “What now?” And on to a JOB we go. So in all reality, schools are designed to spit out employees who work to make other people rich. Ironically, there are many famous and successful entrepreneurs who didn’t finish school like Steve Jobs or Richard Branson or Mark Zuckerberg or Tyra Banks but we all know their names and use their products and services. So the education we are receiving isn’t quite teaching us how to succeed. After school, your report card is your financial statement – how’s that looking at the moment? To truly be educated, you need to add FINANCIAL education to your academic and professional educations. Financial education has its own languages and context but “when you learn the language of money, you can talk to the whole world” – Robert Kiyosaki.
As we’ve all heard, “get a good job” follows the school part of the industrial age advice that is ruining our finances. As we enter into the “employment” status we notice our checks have this major deduction called TAXES. Oddly enough, many employees end up paying more taxes than their employers! Many people get sick of the JOB and switch to self-employed jobs so they can be their own boss. Then they end up paying even more in taxes. If you pay in the 35% tax bracket, you literally work till April to pay the government, then you finally get to pay yourself. Tax laws are in favor of entrepreneurs who create jobs. That’s why the Trump’s of the world can pay less than 10% in taxes. Besides, when you have a JOB, many of us find ourselves “just over broke” as Robert Kiyosaki likes to point out, plus we are at the highest risk of any income position. We have one income coming in so we are dependent on that one company to not fire us or go under themselves. Many people want ‘safe’ and ‘secure’ jobs but FINANCIAL SECURITY is more important than job security.
Go to school, get a good job, and then “work hard!” Typical advice we hear all the time. It’s even a compliment, “Oh that so and so, they are such a hard worker!” That is great especially if they are repairing your roof but the problem employees and self-employed professionals have is the harder we work, the more we pay in taxes. As our income goes up, so does our tax bracket and the longer into the year we pay Uncle Sam before we get a paycheck. This is where a major mindset change is required. Employees and self-employed individuals work hard for money. The rich – big business owner or investors – make money work hard for them. It seems that the status quo of people my age was get a good job, then buy a new car or pickup, buy a house, and buy expensive toys that get used less than ten times a year but require payments twelve times a year. As their payments went up, they worked harder and put in more hours. As we are trained through our traditional education, we focus on our income and increasing that number as much as we can. We’re proud of it. The problem is, one injury, transfer, shut down, you name it and it all comes tumbling down. The rich mindset is to focus on assets. This is a key term to remember. An asset is: anything you buy that provides monthly cash flow. This isn’t everyone’s definition, but it is mine and Robert Kiyosaki’s. If you work hard to buy assets, then those assets naturally produce the income to buy the liabilities or “toys” of life. Plus, you have a life raft should your job end suddenly. The real kicker is you even get tax breaks for some assets as well. Lastly, though the talking heads say incomes are on the rise, in reality incomes have been going down the last 10 years. As the Federal Reserve Bank has been printing money, those dollar bills now buy less and less. Even the dollar menu at McDonald’s is all but gone. So as your income goes up, it takes more and more money to maintain your lifestyle.
This one always makes me think of my grandparents. They went through the Great Depression and Dust Bowl and were extremely frugal with their money. Whenever I would get paid for working on the farm it would be “don’t spend all that hard earned money,” “you should put some in your savings so you don’t spend it,” “use coupons when you buy…” Which is all good advice but focuses on limiting your means. As a young kid it was always a let down to want a name brand toy and getting the generic-Happy-Meal-looking copycat. As a responsible person – it still sucks, except the toys are cars and houses and boats and dream vacations. Robert Kiyosaki says there are four expenses that keep poor people poor: taxes, debt, inflation, and retirement. So to live below your means requires paying those four things every month from your solo source of income, then cutting items out of your budget to “get ahead.” Why not raise your means? Why not buy assets that buy your liabilities? Instead of cutting back who you are, become more than you are. Budgets are restricting and look back, whereas strategies look to the future of WHAT CAN I DO? A lot of professional advisers will ask you, “what will you need to retire?” How about “What do you WANT to retire?” Or “put your money in the bank” or “put it into a mutual fund”…where you can get taxed again and the value is deflating. I’ve read many articles about how important self-talk is for changing a mindset or outcome. If you have to say,”I can’t afford that” or “that’s not in the budget” you probably feel a little held back. The mindset change is “how can I afford that?” For example, if you want a free cell phone payment, buy something that pays you that much a month rather than go to the smallest plan each month and count your data.
So you went to school, got the good job, you’re working hard, living below your means because you should be saving money. I will just quote Robert Kiyosaki here, “Savers are losers.” This phrase is in most of his books, including his most famous “Rich Dad, Poor Dad.” With interest rates at almost zero (and negative in some countries) at banks, why stick money in them? What Robert is saying here is not a reflection of savers’ social stigma but that if we are putting money into bank accounts, we are literally losing money. After 1971 when the US dollar went off the gold standard, the dollar want from money to a currency. Currencies fail. Got any old pesos or Deutche Marks you’re still using? Doubtful. Now what the dollar represents is in essence debt. If you chart the value of a dollar since 1971 till now, you’ll see it has lost about 95% of its value. So are prices really going up or is our dollar just not worth what is was? Same coin, different sides. I do believe you should always have cash at hand and a nest egg when times are tough but the point is saving money in a bank account is risky.
Of any of these myths, Robert Kiyosaki has gotten the most flack from this idea. In 1997’s “Rich Dad Poor Dad” he wrote this concept but it didn’t make itself obvious until 2008.Many financial advisers recommend buying a house because it will appreciate meaning you will make money and you can write off the interest. So you’re telling me to pay a dollar to at best get back 40 cents. That’s still losing 60% of what I paid. How is that good advice? Buying more houses for more deductions is just bad planning. When it comes to your house, after paying the mortgage, taxes, insurance, upkeep, utilities, repairs, updates, etc. do you make money each month? Remember that an asset is anything that pays you monthly cash flow that you don’t have to work for so if you pay monthly for your house – it’s a liability. Who’s asset is it then? The banks. The bank gets a nice payment every month and they don’t have to spend any money or time to get it. The other big thing is know the difference between capital gains and cash flow. Capital gains is when something you own goes up in value. Cash flow is the money left over when you deduct all the expenses from all the income for an asset. So, if your house goes from $100,000 to $120,000, you’ve had a capital gains of $20,000. If you rent a house out for $1000 dollars a month and all your expenses are $850, your cash flow is $150 dollars. The problem with capital gains (other than taxes) is real estate goes in cycles. So in 2008 when property values dropped, many people lost their homes or owed more on their homes then they were worth. That same $100,000 house that went up to $120,000 in five years then dropped to $60,000. And the worst part is your banker told you to pull out a home equity line of credit or refinance your house so you borrowed $96,000 against your house to buy a boat or new car!! OUCH!! With a capital P for punch me in the wallet. Now you owe more than your house is worth. Now that same cash flowing house, 2008 happens – the house is in a 30 year mortgage so your expenses stay the same and rent moves slower than housing prices so unlike house number one that is now $36,000 upside down, this rental is still producing $150 a month cash flow. Notice the difference? So, please do buy a house if you want, home ownership is not a bad thing. Just keep in mind your house is not an asset.
Now you’ve done everything that you thought should, school – check, safe and secure job – check, house – check, saving – sorta check, retirement plan – check; then the next thing you hear is “you should get out of debt!” Well those credit cards are pretty maxed out, and it sure would be nice to not have to worry about that… so you focus on paying off all you debts. Recommendations come from everywhere and now you’re focusing on paying off your house early and being debt free. Which, if we forget about myth 4, 5, and 6, sounds great! Many people have credit card debt but credit cards aren’t actually bad. Being financially ignorant is.There is good debt and bad debt. Bad debt takes money out of your pocket. Good debt puts money in your pocket. Paying off credit cards would mean eliminating bad debt if you bought things that don’t make you money. Paying off your house early is eliminating debt as well but, depending on your situation, could be good or bad debt. Here’s why. That extra money you are using to pay down your house loan lets say $500 a month is $6000 a year. What is the interest rate on your home? 3.25% 4% What is the average stock market growth…roughly 7% so if you put money into an asset that paid you 7% instead, you’d be making about 3% more annually with that same $6000. The second problem with equity is its liquidity aka how fast you can convert it to cash. Lets say you have payed the house off and want to buy another vacation home. It’s a steal of a deal but you don’t have the cash to cover that house. Option #1: You wait another 5 years to save up for that place which has now gone up about 15% while the value of your dollar has gone down. Option #2: you utilize the equity in your home by going to a bank and refinancing your home and pay cash for that smaller vacation home. Now you’re right back where you started except you have 2 insurance payments, 2 tax payments, 2 utility payments, etc.. Plus it took about a month for the appraisal of your house (more cash gone) and the appraisal and closing of house two (imagine barrel of cash on fire). Now you got the deal but you have to focus on paying down that loan again. You may have gotten a good deal but you have two liabilities now. Lets say you truly have saved or use the extra money you’ve been paying on your mortgage for a down payment on rental property that cash flows $50 a month. You did have to take out a loan but your $6000 down bought you a $30,000 house. Because it is cash flowing, you aren’t paying for that debt, your renter is. On top of that you are making $600 cash a year or 10% cash on cash which is triple what you were saving by paying off debt. Here is some of the best truths about real estate. If you have $1,000,000 to invest in mutual funds, you buy $1,000,000 in mutual funds. If you have $1,000,000 to invest in real estate, you get a $5,000,000 property. On top of that, the depreciation and tax benefits are based on the $5,000,000 not your down payment. If you think this is ridiculous, go to your bank and try to take out a loan to go buy mutual funds and make sure you tell them. You aren’t getting that loan. Another beauty in real estate is you can borrow against rental #2 and not get taxed because loans aren’t taxed, and now you have your down payment back. Are the wheels turning? So paying off debt may sound great but your paid of house, myth #6, could drop by half in value and you are out of all that equity whereas if that equity was put into other assets that are still performing, you didn’t lose all that equity.
Diversify” “Diversify” “Invest for the long term” “In the long run you win if you hold” Said most every stock and investment broker ever. But, if keeping your money invested made me more money, I’d probably have the same advice. That is till I started growing my financial IQ and realized what is actually occurring. Many long term investing is tied up in 401k’s and IRA’s but some people do manage their own portfolio as well. One of the main vehicles used to invest the money from these accounts is mutual funds. Tony Robbins has a lot to say about this in “Unshakeable” and “Money, Mastering the Game” and Robert Kiyosaki hits them multiple times in his videos, books, and live lectures. Mutual funds are assets for the brokerage more than anyone else. We the investors put up 100% of the money (no leverage here), we take 100% of the risk, and we usually only get back 20% (Robert Kiyosaki) to 33% (Tony Robbins: “Money”) of the gains whereas the brokerage keeps 67-80% in fees and commissions. I did the math on my own account and of my 5.7% return over the course of 2 crashes, my actual return was close to 2%. Where did all that other money go? The second problem is what if you want your mutual fund to purchase a company you think is really hot? Can you get them to buy that company into the fund? No. When you invest in any paper asset you lose control of your money (Think Enron share holders). Control over your money should be important to you and it definitely is to the rich. So, in order to prevent you from flushing all your money and risk on one company’s stock, they say “diversify” and invest the fund money in to many varied companies’ stocks. As Warren Buffet, one of the greatest investors of our time, would say, diversification is to protect you from ignorance. In Robert Kiyosaki’s “Cashflow Quadrants” he writes that Buffet himself promotes a concentrated investment strategy with lots of research and know-how. So this diversification actually holds back the earnings available because you never win big but sure can lose a lot. Ironically, 401k’s and mutual funds don’t typically have insurance but my rental properties do… Truly, what diversification means is diversify into the four main assets! Not diversify within stock which is only a type of asset. The four types of assets are: businesses, real estate, paper assets like stock, and commodities like gold and silver. So instead of worrying about the crash that will happen to everyone more than once, diversify outside of stock or just real estate or just gold. That is protecting your assets.
So now what?
After debunking those Industrial Age mentalities that won’t cut it in the Information Age, where do we go now? As Robert Kiyosaki says, “Money starts in your head.” In the Industrial Age it was the other way around, “Money starts with your hands.” With that in mind, we need to focus on our minds and learn what our Industrial Age school system was equipped to do – grow our financial intelligence. Robert speaks of 5 elements of financial intelligence. 1. History – what has happened to money and how that affects us today. 2. Taxes – learn them and how to best position yourself as to not pay more than you should. 3. Financial Vocabulary – It is a whole new vocabulary but the whole world speaks it, get familiar with terms. 4. Wealth Protection – In the end it’s not how much you make but how much you keep and for how long! 5. There are 2 sides to every coin – learn to see both sides so you can prosper and understand.
If you are interested in learning more about investing and how to grow your financial intelligence, please check out my website with its recommended reading list, investor book club library, and Cashflow meetup. If you aren’t near me, check out meetup.com for local Cashflow meetups or free resources like www.BiggerPockets.com or Rich Dad Radio podcasts. “Education is a process” as Robert Kiyosaki reminds us, so grow, read, listen, and invest!