I grew up in Hilo on the Big Island in Hawaii. Hilo is a sugar town, or at least it was, and there was a divide among the rich plantation owners and the plantation workers. The divide was more than just income. Even the schools were divided. The poor kids of the plantation workers went to Hilo Union Elementary School and the rich kids of the plantation owners went to Riverside School—these schools were literally across the road from each other.
When I was nine years old, we moved across the street into a small rambler by Riverside School. My dad was the Head of Education for the State of Hawaii, and when we moved, I was able to attend Riverside School instead of Hilo Union Elementary School. For the first time in my life, I felt poor.
Though my dad was highly educated and was a great government employee, he had a low financial intelligence and wasn’t very good with money. As a result, we were always struggling. As a kid at Hilo Union Elementary School, I didn’t know the difference—everyone was poor. But once I started going to Riverside School, it quickly became apparent that my family was poor and that the kids I went to school with were rich.
At a young age, I knew I wanted to be rich. I saw my parents struggle and the stress it brought, and I knew that wasn’t for me. I wanted to buy nice things, be generous, and enjoy life worry free.
When I told my rich dad, my best friend’s dad who was a successful businessman, that I wanted to be rich, he asked, “How do you think you become rich?”
“You make a lot of money,” I said confidently.
“That’s partially correct,” my rich dad said. “But you can make a lot of money and still not be rich.” He went on to explain how some employees and self-employed people made a lot of money but weren’t rich because they had low financial intelligence. They lost most of their wealth to high taxes and by purchasing liabilities.
That was too much for my young brain to comprehend. I just knew I wanted to make a lot of money. But now that I’m older and hopefully wiser, I understand what my rich dad meant. Money doesn’t make you rich. Your financial intelligence does.
That’s why our mantra at Rich Dad is Knowledge is the New Money.
A recent article I read in Fortune Magazine entitled “Why the ‘rich’ aren’t feeling so rich”, highlights further what I mean by this. The article’s author, Shawn Tully, invented a term that is catching on—HENRY. It’s an acronym for “High Earners, Not Rich Yet”. What Tully is getting at is that those we’d consider rich because they make a lot of money, such as doctors and lawyers making $250,000 to $500,000, aren’t really rich at all.
Because they lose so much money to taxes, their income is based on the services they provide rather than passive income from investments, and they spend their money on liabilities like homes instead of on assets that produce cash flow.
As Tully writes, “When my story appeared, just before the presidential election, Barack Obama was targeting the HENRYs for big tax increases, declaring that families making over $250,000 a year were ‘the rich’ and needed to ‘pay their fair share.’ Even then, I argued, the HENRYs were so squeezed between their big expenses for the things they considered staples -- private schools and day care for the kids, for example -- and an immense tax burden that typically took $100,000 from a $350,000 income, that they not only weren't rich, but stood little chance of ever saving the big nest egg to qualify as truly wealthy.”
This is something I talk about in my book Conspiracy of the Rich: The 8 New Rules of Money. There are four things that steal your wealth: Taxes, Debt, Inflation, and Retirement. People who make a lot of money aren’t necessarily rich because they lose so much of it to those four forces.
Here’s an example. Let’s say we have two people who both earn $100,000. One pays 20 percent in taxes, has a crippling mortgage, and saves money in a 401(k) that barely keeps up with inflation. The other pays nothing in taxes, owns rental properties that provide passive income that adjusts with inflation, and has a plan to use that passive income to purchase more passive income investments. Who’s richer? It’s possible to make a lot of money and use the forces of taxes, debt, inflation, and retirement for your benefit—but it takes high financial intelligence.
Here’s the fundamental problem for ‘the rich’, high-income employees: They have the highest tax burden, the lowest control over their retirement, and can sell only their time.
My CASHFLOW Quadrant explains this simply. There are four types of people: Employees (E’s), Self-Employed (S’s), Big Business Owners (B’s), and Investors (I’s). The E’s and S’s are on the left side of the CASHFLOW Quadrant and the B’s and I’s are on the right side of the quadrant. Those on the left side pay the most in taxes, have the least control, and will never be truly rich. These are people like blue-collar employees but also people like doctors and lawyers who are self-employed but really don’t own a company—they own a job. They are victims to the four wealth-stealing forces.
Those on the right side, however, have all the tax advantages; have control over their money, business, and investments; and have the possibility of infinite returns because they know how to create money out of thin air through passive income. And they know how to use Taxes, Debt, Inflation, and Retirement to make them even richer—not poorer. If you want to learn more about the CASHFLOW Quadrant, I encourage you to read my book CASHFLOW Quadrant: Rich Dad’s Guide to Financial Freedom.
To be on the right side of the CASHFLOW Quadrant, you need a high financial intelligence. That means you need to continually increase your financial education. Read books, attend seminars, network with like-minded individuals, and change your mindset.
You can be truly rich, not just part of the HENRYs. Don’t settle for making a lot of money. Increase your financial IQ and become truly rich.