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Read the book with me, pick it up here: https://amzn.to/2OLDCIH Lesson 5: The Rich Invent Money There is a serious problem with our lack of financial literacy, that problem is it holds us back from having the confidence to make moves. This fear and self doubt can be crippling and lock you into an unsatisfying career. You really do need courage, technical, and financial knowledge to go out on your own and start businesses. Prior to our modern age, people who owned land controlled the wealth. The next era were the industrialists and manufacturing. Now, it is the holders of information and data. It is interesting how these waves come and go, it is so important to learn how to identify an opportunity and not let it slip. The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth. This quote is a recurring theme in financial independence books. Basically, you cannot move mountains, but you can take your mind with you. Even if an opportunity fails, and you have to relocate, you can always bring your mind. One example Robert uses to demonstrate this idea that the rich truly make money is how he started investing in real estate. Basically, he found a great opportunity, the numbers made sense and he knew he could turn a profit. He borrowed the down payment from an investor, purchased the property, the resold it immediately for a profit, paid the investor back, 1031’ed the profits to buy his next place, all within a short period of time. There are two very different types of investors:
If you want to be someone who builds these deals, you need 3 skills:
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Read the book with me, pick it up here: https://amzn.to/2OLDCIH Lesson 4: The History of Taxes and the Power of Corporations Here we start with a very interesting look into income taxes. Prior to 1913, taxes were optional and opt in to finance war efforts. Meaning, if you did not want to - you did not have to pay income taxes. However, in 1913 these became permanent due to the 16th amendment. These mandatory taxes started only with the top earners, however, due to increasing “need” they quickly ended up in the middle class. However, unlike the middle class, the rich did not try to change the government, they worked within the rules and started corporations to avoid and reduce their tax liabilities. These taxes fund the government and government projects, and these projects are completed by independent contracts, which are owned by the rich. Basically, these income taxes are going from the middle class to the rich, whereas income tax was initially invented to tax the rich. Interesting eh? One example of a loophole rich people exploit is code 1031, which allows deferment of gains in real estate sales to buy more expensive real estate. So if you own a lot of property and “trade it up” every few years, you will only pay taxes when you sell and do not buy bigger. Financial IQ The rich leverage these fundamentals to gain more and more wealth and stay rich.
Conclusion This book is great, we are hitting yet another eye opening chapter. I cannot recommend this book enough - it has provoked some great conversations. Read the book with me, pick it up here: https://amzn.to/2OLDCIH Lesson 3: Mind Your Own Business This is a bit of a call back to chapter one, but the author summarizes it well: The rich focus on their asset column while everyone else focuses on their income statement. We open with an interview with Ray Croc, he is known for a little company called McDonald's. He asks a group of MBA students, “What business am I in” and after the obvious guesses (burgers, food, etc.) he corrects them, “My business is real estate”. He explains, the problem with the way our schools are designed is they train you to be one thing and single focused. This style of thinking is not a good way to become rich, but it is a great way to be a good employee. If someone asks what you do, you may reply to any number of things (banker, grocer, chef) but rarely do you own the business (bank, grocery store, restaurant). Also, people may discuss net worth, but net worth is not a great indicator of wealth. A lot of these “assets” cannot be resold for full value, but normally a fraction of their value. Especially with limited time to sell them. The best way to build wealth is to keep expenses as low as you can, reduce liabilities and build assets that generate wealth. What are Assets? There are any number of assets, but some examples are:
Rob uses an example that you can take profits and funnel it into real estate, once your dollar is in an asset leave it there. It is a worker that is there to make you more money. Poor people buy luxuries first, but rich people buy them last. Conclusion This chapter is interesting, but you can tell it was a bit of an information dump. Still required to understand the next chapter, stay tuned. Real estate is an interesting stream of “Passive Income”. I say passive with a word of caution, this truly is not passive in the sense that it is hands-off, but, it is a potentially low time investment with a potentially high return. It really does depend on where you buy, and how lucky you get. Let’s consider the a sample set of numbers: Home: Property Cost: $250,000 Taxes: $4,000 / year Insurance: $1,200 / year Down Payment: 25% (62,500) Total Mortgaged: $187,500 Total Mortgage with Insurance and Taxes: ~$1,450 / month Now, if this property has 2 units, and each pays $1,000 a month in rent, that is a net gain of $550, just for having people live in your property. Not a bad amount of cash for holding this property. That said, this number is a lie. While you are profiting $550 per month, there are other considerations. Water, sewer, and fire taxes, improvements, and replacements for appliances, landscaping fees, and the list goes on. However, if you had 3 units in the same building, that profit goes up to $1550 per month (!) for the same cost. That is about 7% a year in profit on the mortgaged value. Also, something to consider, assuming the house does not increase in value over the years (which it should and potentially at a considerable amount) the mortgage payments are bringing down the principal amount owed as well. When you sell this property, you get to reclaim that principle, it is like making money twice. Also, if you have a few properties and no longer want to manage them yourself, you can hand them off to a property management company. They take a percentage of the collected rent (between 5 and 10%) but handle it all for you. You just collect the excess. This makes it much more passive, but potentially less profitable. The biggest problem with real estate is you really need to save your profits. When things happen - they can happen big. For example, if someone stops paying rent, it can take MONTHS to have them properly evicted, which depending on your current holdings may flip your property to a monthly loss. Also, things like hot water heaters, roofs, pipe bursts and similar can cost huge dollars to fix. If you are not in a highly trafficked area, you may not be able to fill rentals in a timely manner. You need to be sure you are saving for these inevitable issues. Disclosure: I own a few properties they treat me pretty well, however, I do not use a management company, so my time investment is considerably higher than someone who does. Wrap Up: Time investment: 1-8/10 Potential income: 5-10/10 Difficulty: 1-8/10 Read the book with me, pick it up here: https://amzn.to/2OLDCIH Lesson 2: Why Teach Financial Literacy Financial Literacy is so important, and it is very interesting that we do not have requirements for these courses in school. Most kids can ask where the library is in French or Spanish but cannot tell you how compound interest works. Rule #1: Know the Difference Between an Asset and a Liability Due to this lack of literacy, people who get a windfall (lottery, professional athletes, rich uncle, etc.) tend to lose it all. They do not understand even the basics. Also, we are apt to miscategorize assets and liabilities. Basically, rich people will take their money and buy things that make them money, a.k.a assets (dividend stocks, rental properties, etc.). Poor people, on the other hand, think their personal house is an asset when in reality, it is a cost center and as such a liability. They also spend far too much on cars, which is the worst investment you can make. How the Quest for a Financial Dream Turns into a Financial Nightmare Poor people with limited financial literacy do not understand the fundamental basics of cash flow and because of this, an increase in the amount of money does not lead to more wealth. Their pattern of spending does not change, they just spend more on liabilities. One very interesting point made here - the number one expense for most people (not houses, not cars, not food) is income tax! This blew my mind, it is so true because the government gets about 40% of my income. This awakening in the kids had started to cause problems in school when they were 16. They spent so much time with Rich dad, listening in on phone calls and learning how to deal with vendors and partners. It was interesting that a man who dropped out of high school (Rich dad) was now working with and directing very well educated people. He was truly in charge. Why the Rich Get Richer As we discussed before, the rich get richer because they tend to spend cash on assets that build wealth. Their assets make more income than they spend. Why the Middle-Class Struggle Expenses increase as income increases, they tend to have balanced income and expenses with no real savings. Conclusion Still an excellent book. I will see you for lesson 3. When thinking about passive income generation, it is important to look at skills you already have, these may go a long way to providing you a vehicle for generating passive income. I have a full time job, and a part time job. I do not do the part time job for the money, I love mentoring and teaching, so I am an adjunct at a local college. That said, one method of generating passive income is to develop a course on something you know well, or would be considered an expert in. For example, if you are a lawyer and recently passed the bar, you could come up with course content relating to passing the bar, if you are a chef, perhaps a basic knife skills course, a day trader - a course on reading candlestick patterns, the list really does go on and on. Of course there is an initial investment of time, but once the course is available, this could be something that you dedicate almost no time to that has a return. There are popular sites that you can host your content on (udemy, teachable, skillshare - being a few examples) and get paid when people buy your course. It may be worth researching google trends and similar to see how in demand this topic is before investing the time, but this one can have a huge return on investment. Even if there is a limited audience, you may be able to make some good side cash. The time investment varies greatly, if you have never done any video production work (made youtube videos for example) it could be difficult to adjust to video editing, lighting, sound production and similar. That said, once this is done, it should be fairly straight forward. You by no means need to be great at this, a simple video will do in most cases, no rigorous editing or cuts would be required. Time investment: 7/10 Potential income: 8/10 Difficulty: 4/10 Read the book with me, pick it up here: https://amzn.to/2OLDCIH Lesson One: The Rich Don’t Work For Money Welcome to part one of my “Rich Dad Poor Dad” series. This is my continuing efforts to read the most popular books on financial independence, and summarize what I have read here. This book is divided into “lessons” which are the most logical way for me to break up these readings. We start off with some background on the author, he grew up in a well educated household on the poor side of the tracks, however, due to zoning he ended up in the rich school, with the rich students. He and his best friend went to school together, but did not have many friends. They wanted to make money, and collected various things in the neighborhood to melt and turn into money (yes, counterfeiting - it was hilarious) but were told this was illegal. The Lesson Begins The Robert (author) and Mike (his friend) wanted to learn how to make money, and they knew that Mike’s dad owned a few business and setup a meeting. It is important to remember, they are about 9 years old. At that meeting, Mike’s dad offered them a trade, you work for me and I will teach you how to get rich. 30 Cents Later Mike’s dad offered the boys a job working at the grocery store for .10 an hour, making .30 a shift. Even by that standard then, this was a pitance. Rob spoke with his dad (Poor Dad) and he was outraged, he told him to go demand more money or leave. Waiting in Line on Saturday Here we have the two boys waiting in line to demand their just due from Rich dad on a Saturday. Here is one of the first fantastic points he makes. Basically, Rich dad explains that this is exactly how poor people think, not just the kids. They blame Rich dad for their lack of income but never themselves for not looking elsewhere and creating their own wealth. There are 2 excellent quotes here: Life teaches by pushing, you can either let it or pushback. If you think I am the problem, you have to change me. If you realize you are the problem then you can change yourself. Basically, once you realize this - it is very enlightening. This was to teach the boys that people do what they do because of fear, fear controls their decision making. His next lesson is to make the boys work without pay. Avoiding One of Life’s Biggest Traps People’s lives are forever controlled by 2 emotions: fear and greed Here the lesson is the cycle that causes people to be workers instead of entrepreneurs. The way our school system is designed breeds loyal and well educated employees. It does not teach the skills needed to be financial independent and due to this money ends up being the reason we have this fear and greed. It can really control us. The boys are brought back into a meeting, a few weeks later. Rich dad offers the boys a raise (minor at first, but growing each time - keep in mind they are making nothing at this point) and they both decline, though the temptation is strong. After a while, Rich dad explains he is proud, they were able to separate emotion and money. That is a huge step towards becoming rich. Sensing What Others Miss Now that they are essentially told to make money, they would need to find their own way, they look for opportunities. They take comics that are being thrown away (under a promise not to resell) where they work for free and open a comic book library. They quickly start turning a profit and for the first time they are able to exercise the following: Sooner you forget about needing a paycheck the easier life is. Conclusion I am going to keep this short, this book so far is incredible. Very interesting, easy to read and really opens your eyes to the obvious truths. I love the personal conflict he has between the 2 dads. Most people only earn money doing their 9-5 Monday to Friday jobs. This approach works, it pays the bills, it puts food in your mouth, however, it will not make you rich or wealthy. In life there is only one thing that money doesn't buy you, and that is time. When you are trading time for money, you can only make so much of it. As an example, let's take a barista at Starbucks, who makes $12 per hour and works 40 hours a week. Employer: Starbucks Hourly Rate: $12 Hours Per Week: 40 Pretax income: $480 Taxes paid (30%): $144 Take home: $336 Actual hourly rate: $8.40 This employee is essentially selling one hour of their lives for $8.40, and while that may be necessary to pay the bills, let's look at another option. This person has an etsy shop, they sell art prints. On average, they sell 10 a month at $40 a piece, this is all art they created for fun any number of months ago. Employer: Self Employed Cost of print: $40 Sales per month: 10 Total Sales: $400 Taxes (30%): $120 Take Home: $280 Hours spent on creation: 2 Actual Hourly rate: $140 In this example does the person selling art online make enough to pay the bills? Probably not, however, this is essentially passive income generated from something they do for fun, and can continue to make money each month even if no time is spent to develop new content. Not bad for doing something you enjoy. Over the next few posts, I will be taking a look at some popular side streams of income. Do you have any that you love that generates income while you sleep that we can look at? If you got to this point, congrats! You are doing a great job moving along on your goal to building wealth, you have your budget, you are leveraging your tax advantaged accounts and are overall reducing your taxable income. What’s next? Now we can consider liquid savings. Reason to Keep it Liquid With the exception of your emergency fund there are not many good reasons to hang on to a lot of cash (with interest rates ranging from .01 to 1%) however, if you know you are going to have to purchase a new or used vehicle, a home, investment property, or anything else you may need to have a large amount of cash on hand. Let’s Talk Saving - Purchasing a Car In this example, let's assume you buy a used car for $15,000 at a 6% annual percentage yield, on a 5 year loan. By the time you pay this loan back, you will have paid $17,339 ($2,339 in interest)! Now let’s look at the same rate and payback period but on a much newer vehicle valued at $45,000 (more than I have ever spent on a vehicle, but there are people who like cars far more than I do). At the end of the loan you will have paid $52,198 ($7,198 in interest, that is the majority of the cost of a used car)! Consider This If you are going to purchase a 2-4 unit home for investment purposes, you need to have a 25% down payment. Depending on the financials of the home, you can make some amount of money each month on the property. I will dig much deeper into this concept in my side gig discussions but let’s use the following: Expenses: Home Value: $250,000 Down Payment: $62,500 Loan Amount: $188,000 Total Mortgage Payment (with interest and taxes): $1285 Income: Units: 3 Rent: $1000 each Total: $3,000 You could leverage this down payment (which is not much more than the new car purchase) to potentially MAKE a 41% return year over year on that down payment. Now of course, these are just simple figures, but it shows the power of investing that capital, and you cannot do it easily with the initial down payment. Resources: https://www.bankrate.com/calculators/managing-debt/annual-percentage-rate-calculator.aspx Just a quick summary of my read through of The Millionaire Next Door. For more details, see my full review playlist.
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SeanI am just a regular guy who does far to much research on financial independence and early retirement (FI/RE). I look forward to sharing my journey with you all. |