Before I get into this week's post, I want to thank everyone for taking the time to comment on the topics they'd like to see covered. There was lots of great input that will make for some interesting and hopefully useful posts down the road.
If you've been around Rich Dad for any amount of time, you've heard the term financial education batted around pretty regularly. But what do we mean when we say financial education?
In my book, Conspiracy of the Rich: The 8 New Rules of Money, I wrote a whole chapter on what financial education would look like if I ran the school system. This post is adapted from that chapter. If you want to dig deeper, I encourage you to pick up a copy of the book.
If I ran the school system, I'd create a financial education program that included the fifteen following lessons. Even if you're not in school anymore, these would be valuable things for you to study and learn on your own as part of your journey towards financial literacy.
The history of money
It's important to understand how money works, and part of doing that is by studying how it's worked in the past. Money has progressed over the centuries from something pretty simple like bartering to something pretty complicated like derivatives. It's gone from being an object to an idea, so it's not tangible and intuitive. It's important to study money to grow rich. Some dates that are important:
- 1903 - Rockefeller's General Education Board takes over the U.S. education system
- 1913 - The Federal Reserve is formed
- 1929 - The Great Depression
- 1944 - The Bretton Woods agreement
- 1971 - Nixon takes the dollar off the gold standard
- 1974 - Congress passes the Employee Retirement Income Security Act
Understanding your financial statement
My rich dad often said, "Your banker never asks to see your report card. A banker wants to see your financial statement—your report card when you leave school."
To grow rich, you must know how to read and understand the three parts of your financial statement: Profit and loss statement, balance sheet, cash flow statement.
The difference between an asset and a liability
One reason many people are in financial trouble is because they confuse liabilities with assets. For instance, many people think their house is an asset when it's really a liability. A simple definition of an asset is anything that puts money in your pocket. A simple definition of a liability is anything that takes money out of your pocket.
The difference between capital gains and cash flow
Many people invest for capital gains, meaning they're betting on the price of something to go up. Unfortunately, today, many people are taking it in the shorts. Investing for capital gains is akin to gambling, only not as much fun. Instead of investing for capital gains, the wealthy invest for cash flow and capital gains are icing on the cake, if they do happen.
The difference between fundamental and technical investing
Fundamental investing is the process of analyzing a company's financial performance, and that begins with understanding a financial statement. Technical investing is measuring the emotions or moods of the markets by using technical indicators. You can invest successfully doing both types of investing, but both take commitment and continued financial education.
Measuring an asset's strength
There is no shortage of opportunities in the world of investing. The question then becomes, which investments are worth pursuing? A key component of a full financial education is understanding how to measure whether an asset is strong or not. One of the best ways to do this is to refer to the B-I Triangle which looks at an assets full properties: Team, leadership, mission, cash flow, communication, systems, legal, and product.
Know how to choose good people
Partners are crucial to business success. My rich dad used to say, "The best way to know a good partner is to have had a bad partner." You need to learn from every interaction. A good deal can blow up if you have a bad partner. So choosing partners and team members well is crucial.
Know what asset is best for you
There are four asset classes: Business, real estate, paper assets, and commodities. To grow rich, you must study these classes, choose what is best for you, and work towards becoming an expert.
Know when to focus and when to diversify
Ideally, you'll want to be diversified in all four asset classes, but you'll want to focus on becoming an expert in one at a time. An old adage is that if you try to please everyone, you'll please no one. The same could be said for investing.
In investing and business, there is always an element of risk. A smart investor knows how to minimize risk by hedging. There are a number ways you can do that within each asset class. Study up on ways to minimize risk in your chosen asset class.
Know how to minimize taxes
It's not about how much you make, it's about how much you keep. Taxes make an unintelligent person poor. A financially intelligent person understands how to use the tax code to his or her advantage.
The difference between debt and credibility
As many of you know, there is good debt and there is bad debt. The key to using debt is knowing how to borrow wisely and how to pay back the money. Without a solid plan to pay back debt, you'll soon have no credibility. A solid financial education will include understanding debt and how to pay that debt back.
Know how to use derivatives
Derivatives are things derived out of another object. For instance, orange juice is a derivative of an orange. My business is a derivative of my mind. Tax-free money from a refinance is a derivative of another asset, my investment property. There are many ways to use derivatives to create wealth.
Know how your wealth is stolen
There are four things that steal your wealth: Taxes, debt, inflation, and retirement. A proper financial education will stress understanding how to use these wealth-stealing forces to make money rather than lose money.
Know how to make mistakes
It's impossible to learn without making mistakes along the way. The key is to learn the lessons of those mistakes, not to let them take you out of the game. Look at failure as a learning opportunity.