Robert Kiyosaki showing some children how to play the CASHFLOW game on a tablet

The Four Foundations of Financial Literacy

Why millennial parents are teaching their kids to be poor…and how they can change their ways

When I was growing up, my poor dad, my natural father, never wanted to talk about money. As a result, he never taught me or my siblings about it. We were left to our own devices.

My poor dad was not unlike many people in his generation. For them, money was a dirty subject that was not appropriate to talk about, let alone with children. They could get away with this because, for them, things were relatively predictable.

For those of my parents’ generation, if you followed the old rules of money, you could be comfortable. This meant going to college, getting a good job, investing in stocks and saving in the bank, and buying a house.

My rich dad, my best friend’s dad, didn’t share my poor dad’s aversion to talking about money. He saw that the way money worked was changing and he made it his mission to prepare his son Mike to thrive financially in this changing world. Thankfully, he also included me in his lessons.

Because my rich dad chose to invest in Mike and me, we are financially successful today.

How young is too young?

My poor dad said, “You’re too young to learn about money.”

My rich dad said, “You’re never too young to learn about money.”

Thankfully, attitudes over time about teaching kids about money. As “USA Today” reports, only 2 out of 10 baby boomer parents talked to kids 12 and under about money. But 4 out of 10 millennial parents are teaching their kids about money.

My advice is to start teaching your kids about money as soon as they are able to talk and understand what money is. In my opinion, there is no such thing as too young. It’s only a matter of when they are ready.

Garbage in. Garbage out.

Unfortunately, what these millennial parents are teaching their kids is garbage when it comes to financial advice. Here’s “USA Today’s” breakdown of the topics covered by the parents surveyed.

When do parents start talking finances with their children?

As the old saying goes, “Garbage in; garbage out.” While it’s a good thing that millennial parents are teaching their kids about money at a younger age than previous generations, what they’re teaching will only set their kids up for financial failure later in life. Of course, this is because they can only teach what they have learned. If you aren’t convinced that these financial lessons are garbage, I’d suggest you read my post, “Why Savers Are Losers and the Millennial Generation May Be the Biggest Losers of All.”

The four foundations of financial literacy

If you’re reading this as a parent and you’re thinking, oh boy that describes me to a T, fear not. I’m going to share with you here the four foundations of financial literacy. These will set both you and your kids up for financial success if you internalize them and spend your life learning more and more about them.

Foundation of Financial Literacy #1: The difference between an asset and a liability

Many people think they know what an asset is. For instance, you probably think your house is an asset-but it’s not. The truth is that just as there are two definitions of an asset.

Accountants use one definition that requires lots of financial calisthenics to make people and companies feel richer than they really are. This keeps them employed and their clients blissfully ignorant.

The rich use another definition grounded in simplicity and reality. An asset is anything that puts money in your pocket and a liability is anything that takes money out of your pocket.

Your house is not an asset because it takes money out of your pocket each month. Even if you own your house outright, you still have to pay for the taxes, maintenance, and more out of your own pocket.

But if you own a rental property, that can be an asset-if it puts money in your pocket each month in the form of cash flow. When your tenant pays rent, they cover your mortgage, maintenance, taxes, and more.

A true financial education would teach students how to tell the simple difference between an asset and a liability, and why it’s so important to have as many assets as possible under your ownership.

Foundation of Financial Literacy #2: Cash flow versus capital gains

Most people invest for capital gains. The rich invest for cash flow.

Simply put, investing for capital gains is like gambling. You invest your money and hope the price goes up. For instance, many people buy a house hoping they’ll be able to sell it for more money later. In the meantime, they have to pay their mortgage and home expenses. Money goes out of their pocket. It becomes a liability.

The problem is that when you invest for capital gains you have no control over whether the price goes up or down, and the bigger issue is, if you do make a profit, you pay the highest rate in taxes.

Conversely, the rich invest for cash flow. So, for instance, they buy investment real estate with other people’s money, find tenants to pay the expenses, and collect rent each month. It becomes an asset. And if there’s capital gains, that’s a bonus.

By investing for cash flow instead of capital gains, the rich have control over their income and pay the lowest rate in taxes-and sometimes nothing in taxes.

But investing for cash flow, while a simple concept, requires a strong financial education in order to make your own financial decisions.

A true financial education would teach kids how to make passive income rather than to be passive about their investments.

Foundation of Financial Literacy #3: Using debt and taxes to get richer

Your financial adviser will tell you that debt is bad and taxes are inevitable. But the rich understand that both debt and taxes can be used to create immense wealth.

When it comes to debt, there are two kinds-bad and good. When your financial adviser tells you to stay out of debt, she means stay out of bad debt.

Bad debt comes in the form of borrowing money for liabilities such as using credit cards to buy TVs and take vacations, borrowing a line of credit on your personal home, and more.

Staying out of bad debt is good advice, but the problem is that your financial adviser won’t tell you about good debt.

Good debt is debt used to purchase assets like rental property.

When you use the bank’s money to purchase cash-flowing real estate, you use less of your own money to secure an asset by paying only a down payment instead of full price, and your tenant’s rent pays off your debt while you own the asset and pocket the profit.

When it comes to taxes, the rich understand that governments write tax codes to encourage specific types of behavior. If governments want you to build affordable housing, they give you a tax cut. If they want to encourage oil exploration, they give you a tax cut. If they want to see higher employment, they give you a tax cut.

The secret is that most tax benefits are made to help entrepreneurs and investors. With the right financial education, you too can utilize the tax code to not only get richer, but also pay nothing in taxes.

Utilizing good debt and getting richer through taxes takes a high level of financial intelligence. But everyone can learn and put these principles into practices.

A true financial education would teach students the many ways both debt and taxes can be used to get rich.

Foundation of Financial Literacy #4: Making your own financial decisions

When you’re not confident about your knowledge of money, you let others make your financial decisions for you.

You let your broker decide how your money should be invested. You let your bank tell you what interest rate is worthy of your money. You follow whatever investing trend is popular in the news.

The rich don’t follow the crowds. They set the trends and are gone by the time the trends become mainstream. What’s their secret? They think for themselves about money and make their own financial decisions because they have a high financial intelligence.

The key to building great wealth is having great knowledge to act on and great wisdom to know which course of action is the best.

This kind of knowledge and wisdom only comes through a high financial intelligence gained from applying yourself to financial education.

A true financial education would teach young people how to think critically and for themselves about money and investing.

Original publish date: July 31, 2018