Blog | Personal development, Personal Finance

How to Manage Your Money (Vs. Gambling it Away)

The answer to risk management lies in your financial education

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  • There are strategic ways to manage your money - why rely on lady luck?

  • Even the safest investments involve risk

  • Having financial education allows you to invest your money with control

Do you like playing the lottery? Perhaps a weekly poker game? How about putting some money down on your favorite horse? Or maybe you like to spend weekends playing slots at your local riverboat casino or vacations hitting the craps tables in Las Vegas?

What do all of these activities have in common? They all rely on luck for monetary gain, which is not a sound practice for managing money. It’s safe in instances of entertainment, but not so much then it’s a way to pay your bills or fund your retirement. Before you plunk down a penny when gambling, understand that you may most likely never see that money again, and be OK with that.

Managing money: The hidden risks of ‘safe’ investments

Instead of leaving it all to lady luck, investors like Robert and Kim Kiyosaki invest in cash flow assets to increase their net worth. Now,let’s pause here for a moment, as this is the point where most people say, “Wait! Investing is risky, too! How’s it any different than gambling?”

Yes, there is risk involved with both activities. Gambling requires a lot of hopes and prayers. You give your money to the casino and “the luck of the draw” determines whether you win or lose.

With cash flow investments — whether you buy a property, invest in commodities, start a business, or something else — there is always some level of fear or anxiety present. However, there is one big difference between these two activities: Control! So, let’s explore that concept, which is essentially risk management.

What you may think is a “safe” investment, savvy investors probably view as risky. Again, look at this through a lens of control or risk management. For example, many financial planners advise “safe” investments, such as savings plans, mutual funds and 401(k)s.

But are they really “safe” investments? Let’s take a look:

Investment #1: Savings accounts

When you put your money in a savings account, it sits there… doing nothing. As the dollar decreases in value, the money you are saving is worth less and will buy you less in the future.

Plus, how much are you paying in bank fees? You may be paying more to have your money in a savings account than you are earning by keeping it there! This is not an asset that puts money in your pocket; it’s a liability because you are losing money!
As summarized in It’s Rising Time! : by saving money, in many cases, you are losing money. We’ll touch more on this a bit later.

Investment #2: Mutual funds

A mutual fund is a collection of stocks, bonds and securities. According to Investopedia, as of 2018 there were almost 10,000 mutual funds in the United States. And about 11 percent of Americans are investing in mutual funds, according to Lexington Law.

That’s a lot of people investing in thousands of funds and hoping for a nice retirement. But these same people probably do not have a financial education, because if they were managing money differently, they could probably get a higher return on their investment elsewhere.

As John Bogle, the founder of Vanguard and the author of “The Battle for the Soul of Capitalism,” explains, the mutual fund system is failing investors because of the fees (some hidden): “The financial system put up zero percent of the capital, took zero percent of the risk, and got almost 80 percent of the return,” he states. “And you, the investor in this long time period, an investment of a lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only about 20 percent of the return.”

Investment #3: 401(k) plans

A 401(k) is a popular retirement plan where you contribute a portion of your salary to be invested in mutual funds. This is an easy route for many because you just sign on the dotted line and start automatically saving for retirement. But when you do this, you basically give up control of your money to others, and that increases your risk. Plus, most of these plans assume you will retire in a lower tax bracket than you are now. If people knew about the hidden costs of 401(k)s, they’d probably never contribute to them.

What was the common theme you noticed in these three examples? Yep, you guessed it: a lack of control or risk management.

Gambling vs. financial education

When you’re investing in true cash-flow opportunities, you’re in the driver’s seat. This means that you know how to manage your money, what to look for, and the appropriate actions to take when an opportunity presents itself. You have control over your decisions and your cash, and this improves your chances of increasing your wealth. That’s risk management at its finest.

Now, we’ve all heard the one-off stories of success in a scenario where there was no control. There are always those lucky people who win at the casinos and come home with a small fortune. The same goes for some investors who hand all of their money over to a financial planner, spouse or family friend and do well.

Gambling may seem like an easy way to make money, but it’s very risky. On the other hand, getting a financial education to increase your cash flow is not difficult — and the rewards usually far outweigh the risks.

Risk management starts with a financial education

Whether you turn your money over to a financial advisor or control your own investments, there will always be risks involved. However, you increase your investment risk when you have no financial education, don’t understand what you are investing in, let others keep the majority of the returns, and depend too much on others to control your investments.

Your investments are “safer” when you get a financial education, actively invest your money in investments you understand, get the majority of the returns, and become your own financial advisor. Managing your money properly means managing risk properly. Below are a few examples of ways to actually manage your money properly.

Become an expert in your personal financial statement

Simply put, financial literacy begins by understanding your personal financial statement.

But what exactly is a personal financial statement? It tracks your income, expenses, assets, liabilities and cash flow - each is a critical aspect to your financial standing and are barriers to entry when it comes to any investment opportunities. You can see the intricate relationship between these concepts in the Rich Dad personal financial statement, which you can download here.

It’s in this step that you’ll also learn the difference between assets and liabilities. In short, an asset is something that puts money in your pocket, whereas a liability actively takes money out of your pocket. (Hint: your house is a liability, not an asset!).

Saving vs investing

Surely you’ve heard the advice time and time again “save your money!”

Well, at Rich Dad, we believe firmly that savers are losers. Why? For several reasons:

For starters, interest rates on savings throughout much of the world are extremely low, almost nonexistent in some parts; so basically, your savings account is actually a loan to your bank, who in turn loans it out to its customers at a much higher interest rate than they pay you.

Inflation is the other downside to letting your money sit in a savings account. Today, governments who fear that their countries will fall into a depression are printing money to artificially prop up the economy and give the illusion that the economy is stronger than it really is.

That means that while your dollar sits, it will eventually buy less and less over time. your favorite brand of shoes or jeans will cost you many more dollars, euros, yen, or pesos in the future than they do today.

The problem with saving money is, of course, that as it sits in savings, gaining very little to no interest, it doesn’t grow at the pace of inflation. Your money becomes worth less and less.

By investing, however, you can put your money in assets that hedge against inflation by growing in worth as inflation grows.

Cash flow vs capital gains

When considering investing, make sure to be clear about how you plan to do so. There are two types of investment income, for example: cash flow, vs. capital gains.

Capital gains is essentially the game of buying and selling for profit (like those "fix it up or flip it” tv shows).

In real estate, let’s say you buy a single-family house for $100,000. You make some repairs and improvements to the property, and you sell it for $140,000. Your profit is termed “capital gains.” Any time you sell an asset or investment and make money, your profit is capital gains. Of course, there are also capital losses (which occur when you lose money on a sale).

The challenge with capital gains is that it is riskier than cash flow, in that it’s a formula you have to keep repeating over and over again - buying, selling, buying, selling, and so on. Additionally, if the real estate market plummets, “flippers” are left with inventory they can’t sell.

Cash flow, on the other hand, is realized when you purchase an investment and hold on to it, and every month, quarter, or year, that investment returns money to you. Cash flow investors, unlike capital gains investors, typically do not want to sell their investments because they want to keep collecting the regular income of cash flow. If you aren’t already familiar with the Rich Dad motto, cash flow is queen!

Chase your financial education

So what are you going to do today to take control of your money and make better investment choices?

Hopefully, the answer is: get a financial education. If you don’t know where to begin, it’s as easy as 1-2-3:

  1. Immerse yourself in the topic.

    Learn about investments that put money in your pocket (assets). This information is easily accessible online, at libraries and local investment clubs, workshops, events, books, and more. Here’s a free investing class to get you started.

  2. Start small.

    Practice what you learn when the stakes are low. For example, there’s no risk involved when you learn by playing the free, CASHFLOW® game.

  3. Take action.

    There comes a point in everyone’s life when you just have to stop sitting on the sidelines and take that big leap forward!

It’s all part of the Triple-A Triangle™: Aspire, Acquire and Apply. Once you have a financial education on managing money and take action on what you learn, you can expand your cash flow infinitely! That’s a lot better than hoping for a big, one-time win in Vegas.

Managing money skills are more important than ever

According to a Gallup Poll, 64% of Americans admit to having gambled in the last year (whether they bought a state lotto ticket, visited a casino, participated in an office pool or bet on a sporting event). If you are one of these people, why not “gamble” on something with better odds?

If you want to be rich infinitely, invest your time and effort in a financial education and discover what you need to do to increase your cash flow. Then, take action on what you learn.

Yes, there is some risk involved, and it can be scary. But if you don’t take control of your cash and move forward, you will be at the same place you are now, or probably much worse, in the future. It’s Rising Time! And your big jackpot of financial freedom awaits!

Original publish date: July 12, 2012

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