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A Different Financial Education (in 17 Definitive Lessons)

THIS is how Rich Dad Poor Dad would teach financial education

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What is financial education? That’s a good question, and one that has many different answers depending on who you talk to.

For some, financial education means teaching kids how to save money, balance a checkbook, and use a credit card responsibly.

For others, it means teaching how to invest in the stock market and manage a 401(k).

Whatever your definition of financial education, it’s clear that there’s one thing we can all agree on—financial education is nearly non-existent in our schools.

According to GOBankingRates.com, over 50% of Americans feel they need more education about investing. Additionally, over 40% of Americans avoid investing altogether, because they feel uncomfortable with their level of knowledge.

This begs the question, what would it look like to teach financial education in our schools?

A successful financial literacy program would include the following 17 financial lessons. Even if you’re not in school anymore, these are valuable lessons to study and learn on your own as part of your financial education.

Lesson 1: 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 no longer tangible and intuitive. It's important to study money to grow rich. Below are 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 passed the Employee Retirement Income Security Act

If you want to learn more about how the history of money is impacting your life, check out this >post about fake money.

Lesson 2: Understanding your personal financial statement

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."

One of the foundational elements of financial literacy is understanding how to read and understand a personal financial statement.

Click here to learn more about the personal financial statement and how to begin using one today.

One major takeaway: It’s not about what you make (income), it’s about how much you keep (expenses).

Lesson 3: Know 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 really, it's a liability. A simple distinction of these two, is that an asset is anything that puts money in your pocket, whereas a liability is anything that takes money out of your pocket.

All your life, you’ve probably thought that wealth was achieved by focusing on your income. You’ll come to find that focusing on assets is the key to financial freedom.

Discover how to transform your liabilities into assets.

Lesson 4: First seek cash flow, then capital gains

Many people invest for capital gains, meaning they're betting on the price of something to go up. Unfortunately, this is a gamble that doesn’t always win. 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 main difference? Let’s use real estate as an example. Investing for cash flow is when you buy a property, and rent it out so that it generates monthly cash flow- this makes it an asset. Investing for capital gains is when you buy a property with the hopes to sell once the price has gone up; this sometimes works, but this property is a liability, not an asset, because it isn’t generating any cash while it waits to be sold. Instead, it’s costing you money.

Get a deeper understanding of the differences between cash flow and capital gains here.

Lesson 5: Three types of income

Not everyone earns money through a paycheck. In fact, rich dad taught that there are three types of income: earned, portfolio, and passive.

If you have a job and receive a paycheck, you make money through earned income. If you make money through the sale of capital gains, you make money through portfolio income. The third type of income, passive, is when you make money regardless of whether you work or not.

Making money with passive income is the true definition of being rich.

Gain a deeper understanding of the different types of income here.

Lesson 6: The CASHFLOW Quadrant

According to rich dad, there are two types of people, and they view the world through the two different sides of Rich Dad's CASHFLOW Quadrant.

To summarize, on the left side of the quadrant are Employees and Self-employed. They pay the most in taxes and trade their time for money. And each has a different mindset.

On the right side, however, are the Business owners and Investors. They pay far less in taxes but create (or invest in) assets that make money for them even when they're sleeping.

Dig deeper into the CASHFLOW Quadrant here.

Lesson 7: Savers are losers

In 1971, President Nixon changed the rules of money. That year, he closed the gold window, instantly turning our dollar (which was backed by gold) into a currency. This was one of the most important monetary shifts to happen in modern history, yet few people understand why.

The reason savers are losers is because of this change. The value of the dollar continues to lose its value because of inflation. Basically, what your money can buy in the future is less than what it can purchase now.

Therefore, remember this: money is like a current. If it doesn’t move, it dies. Thus, savers are losers.

Check here if you want to better understand why saving is for losers.

Lesson 8: Your wealth number

True wealth isn't determined by your net worth or how big your bank account reads. True wealth is determined by your wealth number.

In short, if you are making money through passive income and it's more than you spend every month, you have an infinite wealth number.

To discover your Wealth Number, there are two important parts to the question, “If you (or you and your partner/spouse) stopped working today, how long could you survive financially?”

  1. If you stopped working today…
    That means there are no more paychecks coming your way. For whatever reason, you can no longer work for a business or job, so no income is coming in from those sources.

  2. How long could you survive financially?

Figure out your wealth number here.

Lesson 9: 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.

Learn the differences between fundamental and technical investing here.

Lesson 10: Know how to measure an asset’s strength

There are five asset classes: Business, real estate, paper assets, commodities, and cryptocurrency. To grow rich, you must study these classes, choose what is best for you, and work towards becoming an expert.

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 asset's full properties: Team, leadership, mission, cash flow, communication, systems, legal, and product.

Lesson 11: Know how to choose good people

Partners are crucial to business success. Rich dad used to say, "The best way to know a good partner is to have had a bad partner." Agreat deal can blow up if you have a bad partner. So choosing partners and team members well is crucial.

You need to learn from every interaction. That’s how you become a successful leader on your path to financial freedom.

Lesson 12: Know when to focus and when to diversify

Ideally, you'll want to be diversified in all five 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.

Lesson 13: Minimize your investment risk

With investing and business, there is always an element of risk. A smart investor knows how to minimize risk by hedging, and 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.

There are three reasons why investing can be risky:

  1. Lack of training

  2. Lack of control

  3. Lack of knowledge

Here are some tips to minimize the risks associated with investing and business.

Lesson 14: Make more money with taxes

Like we mentioned above, "It's not about how much you make, it's about how much you keep." Taxes are your biggest expense. That's why it's important to your financial education to understand how you can best limit that expense.

A financially intelligent person understands how to use the tax code to his or her advantage. Go here to learn more about how you can save on taxes.

Lesson 15: The good, the bad, and the truth about debt

As many of you know, there is good debt and there is bad debt. Without a solid plan to pay back debt, you'll soon have no credibility.

The key to using debt is knowing how to borrow wisely and how to pay back the money. The rich use good debt to grow their worth, and they invest in cash flowing assets using Other People’s Money (OPM)—both the bank’s and investors’.

A solid financial education will include understanding these different types of debt and how to pay that debt back.

Lesson 16: 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.

Here’s how to prevent these thieves from stealing your money.

Lesson 17: 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, and not let them take you out of the game. Look at failure as a learning opportunity.

It doesn't matter what road you take. What's important is that you start.

Getting started

We covered many of the truths that we hold dear at Rich Dad and in them are many different avenues to increase your financial education.

Here are a few free options to choose from:

Original publish date: September 20, 2011

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