Principale Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money
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Chapter 1 What Is Financial Intelligence? When I was five years old, I was rushed to the hospital for emergency surgery. As I understand it, I had a serious infection in my ears, a complication from chicken pox. Although it was a frightening experience, I have a cherished memory of my dad, my younger brother, and my two sisters standing on the lawn outside the hospital window waving to me as I lay in bed recovering. My mom was not there. She was at home, bedridden, struggling with a weak heart. Within a year, my younger brother was taken to the hospital after falling from a ledge in the garage and landing on his head. My younger sister was next. She needed an operation on her knee. And the youngest, my sister Beth, a newborn baby, had a severe skin disorder that continually baffled the doctors. It was a tough year for my dad, and he was the only one out of six not to succumb to a medical challenge. The good news is that we all recovered and lived healthy lives. The bad news was the medical bills that kept coming. My father may not have become ill that year, but he did contract a crippling malady—overwhelming medical debt. At the time, my dad was a graduate student at the University of Hawaii. He was brilliant in school, receiving his bachelor’s degree in just two years, and had dreams of one day becoming a college professor. Now with a family of six, a mortgage, and high medical bills to pay, he let go of his dream and took a job as an assistant superintendent of schools in the little town of Hilo, on the Big Island of Hawaii. Just so he could afford to move our family from one island to another he had to get a loan from his own father. It was a tough time for him and for our family. Although he did achieve tremendous professional success and was finally awarded his doctorate degree, I suspect not realizing his dream of becoming a college professor haunted my father until his dying days. He often said, “When you kids are out of the house, I’m going back to school and doing what I love—teaching.; ” Instead of teach, however, he eventually became the superintendent of education for the state of Hawaii, an administrative post, and then ran for lieutenant governor and lost. At the age of fifty, he was suddenly unemployed. Soon after the election, my mom suddenly died at the age of forty-eight due to her weak heart. My father never recovered from that loss. Once again, money problems piled up. Without a job, he decided to withdraw his retirement savings, and invested in a national ice-cream franchise. He lost all his money. As he grew older my father felt he was left behind by his peers; his life’s career was over. Without his job as the head of education, his identity was gone. He grew angrier at his rich classmates who had gone into business, rather than education as he did. Lashing out, he often said, “I dedicated my life to educating the children of Hawaii, and what do I get? Nothing. My fat-cat classmates get richer, and what do I get? Nothing.” I will never know why he did not go back to the university to teach. I believe it was because he was trying very hard to become rich quickly and to make up for lost time. He wound up chasing flakey deals and hanging out with fast-talking con men. None of his get-rich-quick ventures succeeded. If not for a few odd jobs and Social Security, he might have had to move in with one of the kids. A few months before he died of cancer at the age of seventy-two, my father pulled me close to his bedside and apologized for not having much to leave his children. Holding his hand, I put my head on his hand and we cried together. Not Enough Money My poor dad had money problems all his life. No matter how much money he made, his problem was not enough money. His inability to solve that problem caused him great pain up till he died. Tragically, he felt inadequate, both professionally and as a father. Being from the world of academics, he did his best to push his financial problems aside and dedicate his life to a higher cause than money. He did his best to assert that money did not matter, even when it did. He was a great man, a great husband and father, and a brilliant educator; yet it was this thing called money that often called the shots, silently hounded him, and, sadly, towards the end, was the measure he used to evaluate his life. As smart as he was, he never solved his money problems. Too Much Money My rich dad, who began to teach me about money at the age of nine, also had money problems. He solved his money problems differently than my poor dad. He acknowledged that money did matter, and because he realized that, he strove to increase his financial intelligence at every chance. To him that meant tackling his money problems head-on and learning from the process. My rich dad was not nearly as academically smart as my poor dad, but because he solved his money problems differently, and increased his financial intelligence, my rich dad’s money problem was too much money. Having two dads, one rich and one poor, I learned that rich or poor, we all have money problems. The money problems of the poor are: 1. Not having enough money. 2. Using credit to supplement money shortages. 3. The rising cost of living. 4. Paying more in taxes the more they make. 5. Fear of emergencies. 6. Bad financial advice. 7. Not enough retirement money. The money problems of the rich are: 1. Having too much money. 2. Needing to keep it safe and invested. 3. Not knowing whether people like them, or their money. 4. Needing smarter financial advisors. 5. Raising spoiled kids. 6. Estate and inheritance planning. 7. Excessive government taxes. My poor dad had money problems all his life. No matter how much money he made, his problem was not enough money. My rich dad also had money problems. His problem was too much money. Which money problem do you want? Poor Solutions to Money Problems Learning at an early age that we all have money problems, no matter how rich or how poor we are, was a very important lesson for me. Many people believe that if they had a lot of money, their money problems would be over. Little do they know that having lots of money just causes even more money problems. One of my favorite commercials is for a financial services company and starts with the rapper MC Hammer dancing with beautiful women, a Bentley and a Ferrari, and a grossly oversized mansion behind him. In the background, high-end specialty goods are being moved into the mansion. MC Hammer’s one-hit wonder, “U Can’t Touch This,” is playing as all this is happening. Then the screen goes black and displays the words “15 minutes later.” The next scene is MC Hammer sitting on a curb in front of the same ridiculous mansion, his head in his hands, next to a sign that reads “FORECLOSED.” The announcer says, “Life comes at you fast. We’re here to help.” The world is full of MC Hammers. We all have heard of lottery winners who win millions and then are deeply in debt a few years later. Or the young professional athlete who lives in a mansion while he is playing and then lives under a bridge once his playing days are over. Or the young rock star who is a multimillionaire in his twenties and looking for a job in his thirties. (Or the rapper who is peddling financial services that he was probably already using when he lost his money.) Money alone does not solve your money problems. That is why giving poor people money does not solve their money problems. In many cases, it only prolongs the problem and creates more poor people. Take for instance the idea of welfare. From the time of the Great Depression until 1996, the government guaranteed money to the nation’s poor regardless of personal circumstance. All you had to do was qualify for the poverty requirements to receive a government check—perpetually. If you showed initiative, got a job, and earned more than the poverty requirement, the government cut off your benefits. Of course, the poor then had other costs associated with working that they didn’t have before, such as uniforms, child care, transportation, etc. In many cases they ended up with less money than before they had a job, and less time. The system benefited those who were lazy and punished those who showed initiative. The system created more poor people. Hard work doesn’t solve money problems. The world is filled with hardworking people who have no money to show for it, hardworking people who earn money, yet grow deeper in debt, needing to work even harder for even more money. Education does not solve money problems. The world is filled with highly educated poor people. They’re called socialists. A job does not solve money problems. For many people, the letters J.O.B. stand for just over broke. There are millions who earn just enough to survive but cannot afford to live. Many people with jobs cannot afford their own home, adequate health care, education, or even set aside enough money for retirement. What Solves Money Problems? Financial intelligence solves money problems. In simple terms, financial intelligence is that part of our total intelligence we use to solve financial problems. Some examples of very common money problems are: 1. “I don’t earn enough money.” 2. “I’m deeply in debt.” 3. “I can’t afford to buy a home.” 4. “My car is broken. How do I find the money to fix it?” 5. “I have $10,000. What should I invest in?” 6. “My child wants to go to college, but we don’t have the money.” 7. “I don’t have enough money for retirement.” 8. “I don’t like my job, but I can’t afford to quit.” 9. “I’m retired, and I’m running out of money.” 10. “I can’t afford the surgery.” Financial intelligence solves these and other money problems. Unfortunately, if our financial intelligence is not developed enough to solve our problems, the problems persist. They don’t go away. Many times they get worse, causing even more money problems. For example, there are millions of people who do not have enough money set aside for retirement. If they fail to solve that problem, the problem will get worse, as they grow older and require more money for medical care. Like it or not, money does affect lifestyle and quality of life—as well as afford conveniences and hassle-free choices. The freedom of choice that money offers can mean the difference between hitchhiking or taking the bus . . . or traveling by private jet. Solving Money Problems Makes You Smarter When I was a young boy, rich dad said to me, “Money problems make you smarter . . . if you solve the problem.” He also said, “If you solve your money problem, your financial intelligence grows. When your financial intelligence grows, you become richer. If you do not solve your money problem, you become poorer. If you do not solve your money problem, that problem often grows into more problems.” If you want to increase your financial intelligence, you need to be a problem-solver. If you don’t solve your money problems you will never be rich. In fact, you will become poorer the longer the problem persists. Rich dad used the example of having a toothache to illustrate what he meant by a problem leading to other problems. He said, “Having a money problem is like having a toothache. If you do not handle the toothache, the toothache makes you feel bad. If you feel bad, you may not do well at work because you are irritable. Not fixing the toothache can lead to further medical complications because it is easy for germs to breed and spread from your mouth. One day you lose your job because you have been missing work due to your chronic illness. Without a job, you cannot pay your rent. If you fail to solve the problem of rent money, you are on the street, homeless, in poor health, eating out of garbage cans, and you still have the toothache.” While an extreme example, that story stayed with me. I realized at a young age the importance of solving problems, and the domino effect caused from not solving a problem. Many people do not solve their financial problems when they are small and at the toothache stage. Instead of solving the problem they make it worse by ignoring it or not solving the root of the problem. For example, when short of money, many people use their credit cards to cover the shortfall. Soon they have credit card bills piling up and creditors hounding them for payment. To solve the problem, they take out a home equity loan to pay off their credit cards. The problem is they keep using the credit cards. Now they have a home equity mortgage to pay off and more credit cards. To solve this credit problem, they get new credit cards to pay off the old credit cards. Feeling depressed because of mounting money problems, they use the new credit cards to take a vacation. Soon they cannot pay their mortgage or their credit cards, and decide to declare bankruptcy. The trouble with declaring bankruptcy is that the root of the problem is still there, just like the toothache. The root of the problem is a lack of financial intelligence, and the problem caused by a lack of financial intelligence is an inability to solve simple financial problems. Rather than address the root of the problem—spending habits, in this case—many ignore the problem. If you don’t pull a weed up by the root, and only cut off the top, it will come back quicker and bigger. The same is true for your financial problems. While these examples may seem extreme, they are not uncommon. The point is that financial problems are a problem, but they are a solution as well. If people solve problems they get smarter. Their financial IQ goes up. Once smarter, they can now solve bigger problems. If they can solve bigger financial problems they get richer. I like to use math as an example. Many people hate math. As you know, if you do not do your math homework (practicing solving math problems), you can’t solve math problems. If you can’t solve math problems, you can’t pass the math test. If you can’t pass the math test, you get an F for your math course. Getting an F in your math course means you can’t graduate from high school. Now the only job you can get is at McDonald’s earning minimum wage. This is an example of how one small problem can turn into one big problem. On the other hand, if you diligently practice solving math problems, you become more and more intelligent, and able to solve more complex equations. After years of hard work, you are a math genius, and things that seemed hard before are now simple. We all have to start at 2 + 2. Those who succeed don’t stop there. The Cause of Poverty Poverty is simply having more problems than solutions. Poverty is caused by a person’s being overwhelmed by problems he or she can’t solve. Not all causes of poverty are financial problems. They can be problems like drug addiction, marrying the wrong person, living in a crime-ridden neighborhood, not having job skills, not having transportation to get to work, or not being able to afford health care. Some of today’s financial problems, such as excessive debt and low wages, are caused by circumstances beyond an individual’s ability to solve, problems that have more to do with our government and a smoke-and-mirrors economy. For example, one of the causes of low wages is high-paying manufacturing jobs moving overseas. Today there are plenty of jobs, but they are in the service sector, not manufacturing. When I was a kid, General Motors was the nation’s largest employer. Today Wal-Mart is the nation’s biggest employer. We all know that Wal-Mart isn’t known for its high-paying jobs—or its generous pensions. Fifty years ago, it was possible for a person without much education to do well financially. Even if you had only a high school degree, a young person could get a relatively high-paying job manufacturing cars or steel. Today, it’s manufacturing burgers. Fifty years ago, the manufacturing companies provided health care and retirement benefits. Today, millions of workers are earning less, while at the same time needing more money to cover their own medical expenses and save enough for retirement. Every day these financial problems are not solved, they grow bigger. And they stem from a larger national problem that is beyond the power of the individual to change or solve. They stem from poor economic policies and cronyism. The Rules of Money Have Changed In 1971, President Nixon took us off the gold standard. This was a poor economic policy that changed the rules of money. It is one of the biggest financial changes in the history of the world, yet few people are aware of this change and its effect on the world economy today. One of the reasons so many people are struggling financially today is because of Nixon’s actions. In 1971, the U.S. dollar died because it was no longer money—it became a currency. There is a big difference between money and currency. The word “currency” comes from the word “current,” like an electrical or an ocean current. The word means movement. In overly simple terms, a currency needs to keep moving. If it stops moving, it rapidly loses value. If the loss of value is too great, people stop accepting it. If people stop accepting it, the value of the currency plummets to zero. After 1971, the U.S. dollar began moving to zero. Historically, all currencies eventually go to zero. Throughout history, governments have printed currencies. During the Revolutionary War, the U.S. government printed a currency known as the Continental. It was not long before this currency went to zero. After World War I, the German government printed a currency in hopes of paying its bills. Inflation exploded and the German middle class had its savings wiped out. In 1933, frustrated and broke, the German people elected Adolf Hitler to power in the hopes he would solve their financial problems. Also in 1933, Franklin Roosevelt created Social Security to solve the money problems of the American people. Although very popular, Social Security and Medicare are financial disasters about to erupt into massive financial problems. If the U.S. government prints more funny money, i.e. currency, to solve these two massive financial problems, the value of the U.S. dollar will die faster, and the financial problem will get bigger. This is not a future problem. It is happening now. According to a recent report by Bloomberg, the U.S. dollar has lost 13.2 percent of its purchasing power since George W. Bush took office in January 2001. Nixon’s change in the U.S. dollar is one of the reasons so many people are in debt, just as the U.S. government is in debt. When the rules of money changed in 1971, savers became losers, and debtors became winners. A new form of capitalism emerged. Today, when I hear people saying, “You need to save more money,” or “Save for retirement,” I wonder if the person realizes that the rules of money have changed. Under the old rules of capitalism, it was financially smart to save money. But in the new capitalism, it’s financial insanity to save a currency. It makes no sense to park your currency. In the new capitalism, currency must keep moving. If a currency stops flowing, it becomes worth less and less. A currency, like an electrical current, must move from asset to asset as quickly as possible. A currency’s purpose is to acquire assets, assets that are either appreciating in value or producing cash flow. A currency must move quickly to acquire real assets with real value because the currency itself is rapidly declining in value. Prices of real assets such as gold, oil, silver, housing, and stocks inflate in price because the value of the currency is declining. Their inherent value does not change, only the amount of currency it takes to acquire them. Gresham’s law states, “When bad money comes into circulation, good money goes into hiding.” In 1971, the U.S. began flooding the world with funny money—bad money. In the new capitalism, it actually makes more sense to borrow today and pay back with cheaper dollars tomorrow. The U.S. government does it. Why shouldn’t we do it? The U.S. government is in debt. Why shouldn’t we be in debt? When you cannot change a system, the only way to succeed is to manipulate it. Because of the 1971 change in money, housing prices have soared as the purchasing power of the dollar has plunged. Stock markets rise because investors are seeking safe havens for their dollars. While economists call this inflation, it’s really devaluation. It makes homeowners feel more secure because their home’s value appears to go up. In reality, the purchasing power of the dollar goes down as the net worth of homeowners appears to go up. Higher home prices and lower wages, however, make it harder for young people to buy their first home. If young people do not recognize that the rules of money have changed they will be far worse off than their parents as the U.S. currency continues to devalue. Another Change in the Rules of Money Another change in the rules of money occurred in 1974. Prior to 1974, businesses took care of an employee’s retirement. They guaranteed the retiree a paycheck for as long as the retiree lived. As you probably already know, that is not the case any longer. Pension plans that pay an employee for life are called defined benefit, or DB, pension plans. Today, very few companies offer these plans. They are simply too expensive. After 1974, a new type of pension plan emerged, the defined contribution (DC) plan. Today such plans are known as 401(k)s, IRAs, Keoghs, etc. Simply put, a DC plan has no guarantee of a paycheck for life. You only get back what you and your employer contribute . . . if you and your employer contribute anything. The newspaper USA Today found in a survey that the greatest fear in America today is not terrorism, but the fear of running out of money during retirement. One of the reasons for this pervasive fear can be traced back to the 1974 change in the rules of money. And the fear is valid. The U.S. education system doesn’t equip its citizens with the financial knowledge required to successfully invest for retirement. If schools teach anything about money, they teach kids to balance their checkbooks, pick a few mutual funds, and pay bills on time—hardly enough financial education to handle the financial problems we face. Beyond that, most people don’t realize that the rules of money have changed and that if they are savers, they are losers. Underfunded retirement plans will be the next major U.S. economic crisis. Government Safety Nets? This lack of a secure financial future led to Social Security and Medicare, government safety nets created to solve financial problems for people who do not know how to solve their own problems. Both plans are bankrupt. Medicare is already operating in the red. Social Security will soon be operating in the red. In 2008, the first of 78 million baby boomers begin to retire, and most of them do not have enough retirement income to survive on. According to the U.S. government, the obligations for Social Security are approximately $10 trillion, and the obligation for Medicare is $64 trillion. If these numbers are accurate, that means the $74 trillion owed to retirees by the U.S. government is more money than all the money available in all the world’s stock markets. This is a big problem that needs financial intelligence to solve. Throwing more money at the problem will only make it worse. It may even collapse the entire system of funny money, sending the dollar closer to zero. Why the Rich Get Richer That the rules of money changed, that those changes make you poorer, and that they are out of your control may seem unfair. And it is. The key to becoming rich is to recognize that the system is unfair, learn the rules, and use them to your advantage. This takes financial intelligence, and financial intelligence can only be achieved by solving financial problems. Rich dad said, “The rich get richer because they learn to solve financial problems. The rich see financial problems as opportunities to learn, to grow, to become smarter, and to become richer. The rich know that the higher their financial IQ, the bigger the problem they can handle, hence the more money they make. Instead of running, avoiding, or pretending money problems do not exist, the rich welcome financial problems because they know that problems are opportunities to become smarter. That is why they get richer.” How the Poor Handle Money Problems When it came to describing the poor, rich dad said, “The poor see money problems only as problems. Many feel they are victims of money. Many feel they are the only ones with money problems. They think that if they had more money, their money problems would be over. Little do they know that their attitude towards money problems is the problem. Their attitude creates their money problems. Their inability to solve, or avoidance of them, only prolongs their money problems and makes them bigger. Instead of becoming richer, they become poorer. Instead of increasing their financial IQ, the only thing the poor increase is their financial problems.” How the Middle Class Handle Money Problems While the poor are the victims of money, the middle class are prisoners of money. In describing the middle class, rich dad said, “The middle class solve their money problems differently. Instead of solving the money problem, they think they can outsmart their money problems. The middle class will spend money to go to school, so they can get a secure job. Most are smart enough to earn money and put up a firewall, a buffer zone, between them and their money problems. They buy a house, commute to work, play it safe, climb the corporate ladder, and save for retirement by buying stocks, bonds, and mutual funds. They believe their academic or professional education is enough to insulate them from the cruel, harsh world of money. “At the age of fifty,” said rich dad, “many middle-aged people discover that they are a prisoner in their own office. Many are valued employees. They have experience. They earn enough money, and have enough job security. Yet deep down they know they are trapped financially, and they lack the financial intelligence to escape from their office prison. They look forward to surviving fifteen more years when, at age sixty-five, they can retire and then begin to live, on a leaner budget, of course.” Rich dad said, “The middle class think they outsmart their money problems by being smart academically and professionally. Most lack financial education, which is why most tend to value financial security rather than take on financial challenges. Instead of becoming entrepreneurs, they work for entrepreneurs. Instead of investing, they turn their money over to financial experts to manage their money. Instead of increasing their financial IQ, they stay busy, hiding in their offices.” How the Rich Handle Money Problems When looking at financial intelligence, it becomes easy to see that there are five core intelligences an individual must develop to become rich. This book is about those five financial intelligences. This book is also about integrity. When most people think of the word “integrity,” they think of it as an ethical concept. That is not what I mean when I use the word. Integrity is wholeness. According to Webster’s, it is “the quality or state of being complete or undivided.” A person who has mastered the five financial intelligences I write about in this book has achieved financial integrity. When the rich have money problems, they use their financial integrity, developed through many years of facing and solving problems with the five financial intelligences, to solve those problems. If the rich don’t know the answer to their money problems, they don’t walk away and throw in the towel. They seek out experts who can help them solve their problems. In the process, they become financially more intelligent and are that much more equipped to solve the next problem when it comes around. The rich don’t quit. They learn. And by learning, they grow richer. Solving Other People’s Financial Problems Rich dad also said, “Many people work for rich people, solving rich people’s money problems.” For example, an accountant goes to work to count the rich person’s money. The salesperson sells the rich person’s products. The office manager manages the rich person’s business. The secretary answers the rich person’s phones and treats the rich person’s customers respectfully. The maintenance man keeps the rich person’s buildings and machines running smoothly. A lawyer protects the rich person from other lawyers and lawsuits. A CPA protects the rich person’s money from taxes. And the banker keeps the rich person’s money safe. What rich dad was getting at was that most people work at solving other people’s money problems. But who solves the worker’s money problems? Most people go home and are faced with many problems, money being one of them. If a person fails to handle his or her money problems at home, the problem, like a toothache, leads to other problems. Many of the poor and middle class work for the rich and then fail to solve their own money problems at home. Instead of looking at financial problems as opportunities to get smarter, they go home, sit in the lawn chair, have a drink, put a steak on the grill, and watch TV. The next morning, they return to work once again solving someone else’s problems and making someone else richer. Poor Dad’s Solution My poor dad tried to solve his money problems by going back to school. He liked school. He did well in school, and felt safe. He obtained higher degrees, and became a PhD. With advanced degrees, he looked for a higher-paying job. He tried to outsmart his money problems by becoming academically and professionally smarter, but failed to become financially smarter. He was a well-educated, hardworking man. Unfortunately, being well-educated and hardworking did not solve his money problems. His money problems only grew bigger as his income went up because he avoided financial problems. He tried to solve his financial problems with academic and professional solutions. Rich Dad’s Solution My rich dad looked for financial challenges, which is why he started businesses and actively invested. Many people thought he did what he did only to make more money. In reality, he did what he did because he loved financial challenges. He looked for financial problems to solve, not just for the money, but to make him smarter and to increase his financial IQ. Rich dad often used the game of golf as a metaphor to explain his money philosophy. He would say, “Money is my score. My financial statement is my scorecard. Money and my financial statement tell me how smart I am and how well I am playing the game.” Simply put, rich dad got richer because the game of money was his game . . . and he wanted to be the best he could be at his game. As he got older, he got better at his game. His financial IQ went up and the money poured in. Playing the Game In the following chapters, I will go into the five financial intelligences people need to develop if they want to increase their financial IQ and achieve financial integrity. While developing the five financial intelligences may not be easy and may take a lifetime to develop, the good news is that very few people know of the five financial intelligences, much less have the drive to develop their financial IQ and improve their score. Just by knowing these intelligences you are better equipped than 95 percent of society to solve your money problems. Personally, my days are dedicated to increasing the five financial intelligences. For me, my financial education never stops. At the start, my process to increase my financial IQ was difficult and clumsy . . . just like my golf game. There was a lot of failure, a lot of money lost, a lot of frustration, and a lot of personal doubt. At first, my classmates made more money than me. Today, I make much more money than most of my classmates. While I do enjoy the money, I work primarily for the challenge. I love learning. I work because I love the game of money, and I want to be the best I can be at my game. I could have retired a long time ago. I have more than enough money. But what would I do if I retired? Play golf? Golf is not my game. Golf is what I do for fun. Business, investing, and making money is my game. I love my game. I am passionate about the game. So if I retired, I would lose my passion, and what is life without passion? Who Should Play the Game of Money? Do I think everyone should pay this game of money? My answer is, like it or not, everyone is already playing the game of money. Rich or poor, we are all involved in the game of money. The difference is some people play harder, know the rules, and use them to their advantage more than others. Some people are more dedicated, more passionate, more committed to learning and to winning. When it comes to the game of money, most people are playing—if they know they are playing at all—not to lose rather than playing to win. Since we are all involved in the game of money anyway, better questions may be: • Are you a student of the game of money? • Are you dedicated to winning the game? • Are you passionate about learning? • Are you willing to be the best you can be? • Do you want to be as rich as you can be? If you are, then read on. This book is for you. If you are not, there are easier books to read and easier games to play. For just as in the game of golf, there are many professional golfers but only a few rich professional golfers. In Summary In 1971 and 1974, the rules of money changed. These changes have caused massive financial problems worldwide, requiring greater financial intelligence to solve them. Unfortunately, our government and schools have not addressed these changes or the problems. So the financial problems today are monstrous. In my lifetime, America went from the richest country in the world to the biggest debtor nation in the world. Many people hope the government will solve their financial problems. I do not know how the government can solve your problems when it cannot solve its own money problems. In my opinion, it is up to individuals to solve their own problems. The good news is that if you solve your own problems you get smarter and richer. The lesson to be remembered from this chapter is that, rich or poor, we all have money problems. The only way to get rich and increase your financial intelligence is to actively solve your money problems. The poor and middle class tend to avoid or pretend they do not have money problems. The problem with this attitude is that their money problems persist, and their financial intelligence grows slowly, if at all. The rich take on financial problems. They know that solving financial problems makes them smarter, and increases their financial IQ. The rich know that it is financial intelligence, not money, that ultimately makes you rich. The problem with the poor and middle class is they don’t have enough money. The rich have the problem of too much money. Both are real and legitimate problems. The question is, which problem do you want? If you want the problem of having too much money, read on. Chapter 3 Financial IQ #1: Making More Money After four years at the U.S. Merchant Marine Academy at Kings Point, New York, I graduated in 1969 and got my first job with Standard Oil of California sailing on their oil tankers. I was a third mate sailing between California, Hawaii, Alaska, and Tahiti. It was a great job with a great company. I only worked for seven months and then had five months off, got to see the world, and the pay was pretty good at approximately $47,000 a year—that’s the equivalent of $140,000 today. A salary of $47,000 was considered a lot of money for a kid right out of college in 1969. It still is. Yet when compared to some of my classmates, my pay was low. Some of my classmates were starting their careers at $70,000 to $150,000 a year as third mates. Today that would be the equivalent of $250,000 to $500,000 a year as starting pay. Not bad for twenty-two-year-olds fresh out of school. The reason my pay was lower was because Standard Oil was a non-union shipping company. My classmates in the higher pay scales were working for union wages. After only four months as a third mate, I resigned from my high-paying job with Standard Oil and joined the Marine Corps to fight in the Vietnam War. I felt an obligation to serve my country. At the time, many of my friends were doing everything they could to avoid the draft. Many were going on to graduate school; one ran and hid in Canada. Others were coming up with strange diseases and hoping to be classified 4-F, medically unable to be drafted. I was draft-exempt because I was in a Non-Defense Vital Industry classification. Because oil is essential for war, and I worked for an oil company, the draft board couldn’t get its hands on me. I didn’t have to avoid the war as my friends were doing. Many friends were surprised when I volunteered to go and fight. I didn’t have to; I wanted to. For me, going to war and fighting was not the hardest part of my decision. I had already been to Vietnam in 1966 as a student studying cargo operations in Cam Ranh Bay. From my naïve vantage point, the war actually seemed kind of exciting. I was not concerned about fighting, killing, and possibly being killed. The toughest part of my decision was the pay cut I would have to take. Marine Corps second lieutenants were being paid $2,400 a year. At Standard Oil, I was making that in two weeks. On top of that, when you factor in that I was working only seven months a year with five months’ vacation, I was giving up a lot. I was earning nearly $7,000 a month for seven months and then taking a five-month vacation without pay and without the fear of being fired for not working. Not a bad deal. There are many people who would take that deal today. Being a great patriotic company, Standard Oil was very understanding when I informed them that I was leaving to serve my country. They said I could have my job back—if I came back alive. My time in the service would also count towards seniority with the company. To this day, I recall walking out of their San Francisco office on Market Street with this horrible feeling in my stomach. I kept asking myself, “What are you doing? Are you nuts? You don’t have to go. You don’t have to fight. You’re draft-exempt. After four years of school, you’re finally making a lot of money.” With the thought of going from earning $4,000 a month to $200 a month rattling in my head, I nearly turned around to ask for my job back. Taking one last look at the Standard Oil building, I drove to Ghirardelli Square to spend money like a rich man at my favorite bar, the Buena Vista. Realizing that I would now be earning $200 a month as a Marine, I knew this might be my last chance to feel rich and spend rich. I had a lot of cash in my pocket, and I wanted to enjoy it. The first thing I did was buy the bar a round of drinks. This got the party going. Soon I met a beautiful young woman who was attracted to the cash flowing from my wallet. We left the bar. We wined and dined. We laughed and howled. In my mind, it really was eat, drink, and be merry, for tomorrow I might die. At the end of the evening, the lovely young lady shook my hand, kissed me on the cheek, and sped off in a cab. I wanted more, but she just wanted my money. The next morning, I began my drive from San Francisco to Pensacola, where my flight training was about to begin, and in October of 1969 I reported to flight school. Two weeks later, I nearly died when I saw what a $200-a-month paycheck looked like, after taxes. Five years later, with one year spent in Vietnam, I was honorably discharged from the Marine Corps. My first and immediate challenge was financial IQ #1: making more money. I was twenty-seven years old and had two great professions to fall back on, one as a ship’s officer, the second as a pilot. For a while, I considered returning to Standard Oil and asking for my job back. I liked Standard Oil, and I liked San Francisco. I also liked the pay. I would have started at about $60,000 a year, since Standard Oil counted my time in the Marine Corps towards seniority. My second option was to get a job as a pilot with the airlines. Most of my fellow Marine pilots were being offered great jobs with a pretty good starting pay of about $32,000 a year. Although the pay was not as good as Standard Oil, being an airline pilot appealed to me. On top of that, whatever the airlines would pay me had to be better than the $985 a month the Marine Corps was paying me to be a pilot after five years of service. Instead of returning to Standard Oil or flying for the airlines, however, I took a job with the Xerox Corporation in downtown Honolulu. My starting pay was $720 a month. Once again, I took a pay cut. My friends and family thought the war had made me crazy. Now, you may ask why I would take a job paying only $720 a month in a very expensive city like Honolulu. The answer is found in the theme of this book: increasing financial IQ. I took the job with Xerox not for the pay, but to increase my financial intelligence—especially financial intelligence #1: making more money. I’d decided that the best way for me to earn money was as an entrepreneur, not an airline pilot or ship’s officer. I knew that if I were to become an entrepreneur, I needed sales skills. There was only one problem: I was terribly shy and dreaded rejection. My problems were shyness and a lack of sales skills. Xerox was offering professional sales training. They had the problem of needing salespeople. I was looking to become a salesperson. So it was a great deal. We both solved each other’s problems. Soon after I was hired, the company flew me to their corporate training headquarters in Leesburg, Virginia. My sales training officially began. The four years I spent working for Xerox, from 1974 to 1978, were very hard. For the first two years I was almost fired a number of times because I couldn’t sell. Not only was I not selling and in danger of losing my job, but I was also not making any money. But I had a goal to become the top salesman in the Honolulu branch, and I faced my challenges with determination. After the first two years, the sales training and on the street experience began to pay off, and I finally reached my goal of becoming number one in sales at the Honolulu branch. I had solved the problem of being shy and hating rejection, and had learned to sell. Even better, I was making a lot more money than I would have as a ship’s officer or an airline pilot. If I had just settled into a job after the war, I would never have overcome my fear of rejection and my shyness, and I would never have reaped the rewards of facing those challenges and conquering them. I learned a valuable lesson from my experience at Xerox: solving the problem was the path to wealth. Once I reached my goal and became number one in sales, I resigned to take on my next challenge—building a business. Anyone who has built his or her own business knows the first problem is, once again, financial IQ #1: making more money. Since I now had absolutely no money coming in, I had to solve financial IQ #1 quickly. Before You Quit Your Job In my previous book, Before You Quit Your Job, I wrote about the process of building my first major business, a business that brought to market the first nylon and Velcro surfer wallets. In that book I wrote about the eight components that make up any business, and about how not having all eight of those business components is the reason why so many businesses fail and remain unprofitable. I believe it’s a very important book for anyone who wants to be an entrepreneur and start their own business. It is important to read that book before you quit your job. In the book, I wrote about how my business went to extreme success in about a year, making me a millionaire, and then failed suddenly. I described the feelings of depression and loss, and a strong desire to run away and hide after the business collapsed. I was deeply in debt and facing the biggest financial problem of my life up to that point. Rich dad, however, encouraged me to face my problems and rebuild the business instead of run and declare bankruptcy. He reminded me that solving this messy problem would increase my financial intelligence. It was some of the best advice I’ve ever received. Although painful, the process of facing my problem and rebuilding the business was the best education I could have asked for. It took a number of years to solve the problem and rebuild the business, but the process increased my financial IQs #1 through 5 and made me a financially smarter entrepreneur. Rebuilding the wreckage of my business was my business school. The first thing I had to do was put together the eight parts of my business, the B-I triangle. The second thing I had to do was redefine my business by finding a competitive niche. You see, by 1981, the year I was rebuilding the business, the market was inundated by other wallet makers. Nylon wallets from countries such as Korea, Taiwan, and Indonesia were flooding the world market. Prices for wallets dropped from $10 at retail, the price I had established, to $1 a wallet on the streets of Waikiki and the world. Nylon wallets had become a commodity, and as you know, the market for commodities goes to the lowest-priced producer. In order to compete as a commodity, I needed a market niche. I needed to become a brand. That opportunity came in the form of rock and roll. As described in Before You Quit Your Job, I stumbled into the rock and roll business, and saved my business by licensing the rights to use rock band names on my wallets. Soon I was producing wallets for Van Halen, Judas Priest, Duran Duran, Iron Maiden, Boy George, and others. Because I was a legally licensed product, I got my retail price back up to $10 a wallet. Although I now had to pay a royalty to the bands, being a legally licensed rock and roll product opened doors to retailers across America and throughout the world. My business boomed and money came pouring back in. As I’ve said, the way to increase one’s financial intelligence is by solving the problem in front of you. By 1981, I had solved the problem of rebuilding my business. Then the next problem appeared: beating my low-priced competitors, and the imitators who took my product and were making money while I was losing money. This problem came in the form of pirates. The very people who copied my first product, the original nylon wallet, were now copying my competitive niche. They started producing the same licensed products I was producing, selling at lower prices, only not paying a royalty to the bands. After a few months of fighting the pirates, I realized the only people getting rich were my attorneys who were charging me to fight them in court but not winning. The pirates were smarter and quicker than my attorneys. All my attorneys could tell me was that they needed more money to fight. It didn’t take me long to realize I was just paying another group of pirates, and these pirates (my attorneys) were supposed to be on my side. I was learning another valuable lesson in business and money, which will be covered in the next chapter—financial IQ #2: protecting your money. There is a saying that goes, “If you can’t beat them, join them.” Tired of hemorrhaging money in a losing battle, I fired my attorneys and flew to Korea, Taiwan, and Indonesia to join forces with the pirates. Instead of fighting them in court, which was costing me much more money than I was making, I licensed my competitors to produce my wallets for me. My production costs dropped, my legal fees went down, and I had better factories behind me. I could now do what I did best—sell. Business boomed again. Soon our products were in department stores and at rock concerts. In 1982, a new television network hit the airwaves, MTV. Our business went through the roof and, once again, money poured in. In January of 1984, I sold my share of the rock and roll nylon wallet business to my two partners. Kim and I left Hawaii and moved to California to start our business education company. I had no idea there would be such a difference between selling a product and selling education. Nineteen eighty-five was the worst year of our lives. Our savings ran out, and soon the problem of not enough money was a major one. I’d been broke before, but Kim hadn’t. That she stayed with me is a testament to her character—not my good looks. Yet, we worked together and built an international business teaching entrepreneurship and investing with offices in the U.S., Australia, New Zealand, Singapore, and Canada. In 1994, Kim and I sold the business and retired with enough passive income from our real estate investments to support us for the rest of our lives. But . . . we got bored. After our brief retirement, Kim and I produced our board game CASHFLOW in 1996, and Rich Dad Poor Dad was released as a self-published book in 1997. In mid-2000, Oprah Winfrey had me on her program for an hour, and the rest is history. Today, The Rich Dad Company is an international business. Much of the success is due to lessons learned from the failures and successes of my previous businesses. If I hadn’t learned from solving my problems, I would never have made it this far. If I had thrown in the towel and let circumstances overwhelm me, you wouldn’t be reading this book right now. Every Goal Has a Process As we all know, every worthwhile goal has a process and takes work. For example, to become a medical doctor there is a rigorous process of education and training. Many people dream of becoming a doctor, but the process gets in their way. In the last few pages you just read about my process, and let me tell you, it was work. One of the reasons people lack financial IQ #1: making more money, is because they want the money but not the process. What many people do not realize is that it’s the process that makes them rich, not the money. One of the reasons many lottery winners or kids who inherit family wealth are soon broke is because they received the money, but didn’t have to go through the process. Many other people fail to become rich because they value a steady paycheck more than the learning process of becoming financially smarter and richer. They are held back by the fear of being poor. It is this very fear that keeps them from taking the chances and solving the problems required to become rich. We Are All Different We are all different, and have different strengths and weaknesses. We all have different processes, different challenges, and different problems. Some people are natural salespeople. I wasn’t. My first problem was my inability to overcome my fear of selling and the terror of being rejected. Some people are natural-born entrepreneurs. I wasn’t. I had to learn to be an entrepreneur. I make this point because I’m not saying you need to learn to sell, or that you need to learn to be an entrepreneur. That was my process. It may not be yours. The first step to increasing your financial IQ #1: making more money, is to decide what the best way for you to make more money is. If it’s to become a medical doctor, get ready for medical school. If it’s to become a pro golfer, start putting. In other words, choose your goal, and then choose your process. Always remember that the process is more important than the goal. Emotional Intelligence At this point it is important to point out that financial intelligence is also emotional intelligence. Warren Buffett, the world’s richest investor, says, “If you cannot control your emotions, you cannot control your money.” The same is true for your process. One of the toughest parts of my process was not quitting when I was depressed, not losing my temper when I was frustrated, and to continue to study when I wanted to run. Another reason many people fail in their process is they cannot live without instant gratification. The main reason I mention the low pay I received at the start of my life was to illustrate the importance of delayed gratification. Many will sacrifice a richer tomorrow for a few bucks today. I did not make much money in my twenties and thirties, but I make millions today. Controlling the highs and lows of my emotions, and delaying short-term gratification, was essential in developing my financial intelligence. In other words, emotional intelligence is essential to financial intelligence. In fact, I would say that when it comes to money, emotional intelligence is the most important intelligence of all. It is more important than academic or professional intelligence. For example, many people fail to chase after their dreams because of fear. If they start, they quit when they fail, and then they blame others when they should be taking responsibility for their failures. Quitters Rarely Win There is a young man who worked for me a few years ago. He was very bright, charming, had his MBA, and earned a lot of money. In his spare time, he and his wife tried many business ventures. They tried real estate, and failed. They bought her a small franchise, and failed. Then they bought a nursing home, and nearly lost everything when patients died unexpectedly. Today, both are back at work with high-paying jobs, but an unsettling feeling of inadequacy. The reason I mention this young couple is because they failed to learn. They let the learning process beat them. When the going got tough, they quit. While it’s commendable that they tried new ventures, they stopped when their problems seemed too big to be solved. They failed to push through their failure and learn from their mistakes. They failed to realize that the process, not the money, made them rich. One of the toughest lessons I had to learn from my rich dad was to stick with the process until I won. When I ran into trouble at Xerox because I could not sell, I wanted to quit. Because I could not sell, I was not making money. In fact, it was costing me more to live in Honolulu than I was earning. Rich dad said, “You can quit when you win, but never quit because you’re losing.” Not until 1978, after becoming the number one salesperson for Xerox, did I quit. The process had made me richer, both mentally and financially. By overcoming my problem of not being able to sell, I was able to overcome my problem of not making money. While working at Xerox I started my nylon wallet business in my spare time. In 1978, I went full-time into my wallet business. The business took off, and then failed. Again, I wanted to quit; and again, rich dad reminded me that the process is more important than the goal. Many times he reminded me, while I was deeply in debt, without much money, that if and when I solved this problem, I would never need money again. I would know how to build a business, and I would be a little more financially intelligent. But first I had to solve the problem in front of me. Too Much Money At the start of this book, I wrote that there are two kinds of money problems. One problem is not enough money, and the other is too much money. In 1974, as I was leaving the Marine Corps, I had to make up my mind which problem I wanted. If I wanted the problem of not enough money, I would take either the job with Standard Oil or the airlines. If I wanted the problem of too much money, I would take the job with Xerox, even if it paid the least. As you know, I took the problem of too much money. I wanted an education, not just money. I chose Xerox because I knew I could be a ship’s officer, and I knew I could be a pilot. I didn’t know if I could be an entrepreneur. I knew I could fail. I also knew I would learn the most if I faced the risk of failing. If I let fear of failure—of being poor—win, I wouldn’t ever have gotten off the ground. One of the reasons people do not increase financial IQ #1 is because they stick with what they know. Instead of taking on a new challenge and learning, they play it safe. Now, this doesn’t mean you should do stupid and risky things. There are many things we could do but choose not to. For example, I could have chosen to climb Mount Everest. Or I could have signed up for NASA’s astronaut program. Or I could have entered politics and run for public office. My point is that I chose my next challenge carefully, not haphazardly. I asked myself, “What will my life be like if I take on this challenge and succeed?” It’s the same question I ask you to ask yourself. Helen Keller, the subject of the great movie The Miracle Worker, once said, “Life is a daring adventure . . . or nothing.” I agree. In my opinion, one way to increase your financial intelligence #1 is to look at life as a learning adventure. For too many people, life is about playing it safe, doing the right things, and choosing job security over life. Your life does not have to be risky or dangerous. Life is about learning, and learning is about adventure. That is why I didn’t go back to sailing ships or flying planes, even though I loved both professions. It was time for a new adventure. Intelligence is not about memorizing old answers and avoiding mistakes—behavior our school system defines as intelligent. True intelligence is about learning to solve problems in order to qualify to solve bigger problems. True intelligence is about the joy of learning rather than the fear of failing. Making More Money Putting the financial statement and the CASHFLOW Quadrant diagrams together, you may get a clearer picture about your choices for financial IQ #1: making more money. [image: art] What this diagram explains is that E’s and S’s work for money. They work for a steady paycheck, for a commission, or by the hour. B’s and I’s work for assets that produce either cash flow or capital appreciation. One of the reasons I make more money than my classmates who sailed ships or flew planes is because they worked for paychecks. I on the other hand wanted to build assets as an entrepreneur and acquire assets as an investor. In other words, E’s and S’s focus on the income column of the financial statement, and B’s and I’s focus on the asset column. One of the hardest things to get across to an E or an S is that a B or I doesn’t work for money. A B or I technically works for free, which is a tough concept for many to grasp. E’s and S’s work to be paid, and they must be paid before they work. Working for free, possibly for years, is not in their emotional or professional makeup. E’s and S’s may volunteer for charities, or work pro bono for worthy causes, but when it comes to personal income, they work for money. As a general rule, they do not work to build or acquire assets. In accounting terms, an E or S works for earned income, and a B or I works for passive or portfolio income. In the next chapter on financial IQ #2: protecting your money, you will find out why the kind of income a person works for makes a big financial difference. Earned income is the hardest income to protect from financial predators. That is why working for earned income is not the financially smartest thing to do. Many self-employed people do not own a business. They own a job. If self-employed people stop working, their income also stops or declines. By definition a job is not an asset. Assets put money in your pocket whether you work or not. If you would like to know more about the differences between the E, S, B, and I quadrants, I encourage you to read my second book in the Rich Dad series, Rich Dad’s CASHFLOW Quadrant. Why the Rich Get Richer Looking at the diagram below, it is easy to understand why the rich get richer. [image: art] One of the reasons the poor and middle class struggle is that they work for money and a steady paycheck. The problem with working for money is you have to work harder, longer, or charge more to make more money. The problem with physically working harder and longer is that we all have a finite amount of time and energy. One of the reasons why the rich get richer is that every year they work to build or acquire more assets. Adding more assets does not require working harder or longer. In fact, the higher a person’s financial IQ, the less he or she works while acquiring more and better-quality assets. You see, assets work for the rich by producing passive income. Every year, Kim and I set goals as to how many new assets we want. We do not set goals to make more money. When Kim first started investing in real estate, in 1989, she had a goal of twenty residential properties in ten years. At the time, it seemed like a major task. She started with a two-bedroom, one-bath house in Portland, Oregon. Eighteen months, not ten years, later she blew past her goal of twenty properties. After she reached her goal, she sold the units, taking capital gains of over a million dollars, and upgraded for bigger and better units in Phoenix, Arizona, tax-free. In 2007, her personal goal is to add an additional 500 rental units to her portfolio. She already has over 1,000 units paying her passive income, the least taxed income, every month. She makes more money than most men, and she has accomplished all of this as an entrepreneur in the I quadrant. My focus is to increase my cash flow from business assets and commodities. I invest heavily in oil, gold, and silver companies. As an educational entrepreneur, each time I write a book I receive income for years in the form of royalties from approximately fifty publishers in different parts of the world. I’m also adding a franchise system of distribution to the business. I learned from my rock and roll business that it is better to be the licensor than to be the licensee. Although I love real estate, I enjoy entrepreneurship in the B quadrant a lot more. I do not write about this to brag. In fact, I hesitate to disclose our wealth and how we made it. There are people who resent those who make a lot of money. As you will find out in the next chapter on financial predators, it’s dangerous to let people know you are rich. One big reason why I risk disclosing what we do and make is because Kim and I are committed to your financial education and increasing your financial IQ. A massive problem with financial education is that most of the people selling or sharing financial education come from the E and S quadrants. They are employees or self-employed people. Most are not really rich. Many are journalists who write about money but have little money themselves. Or they are salespeople such as stock and real estate brokers. Many of these financial experts have what other E’s and S’s have. They have retirement plans filled with stocks, bonds, and mutual funds. Many are counting on the stock market for financial survival and will be wiped out if there is a massive market crash during their retirement. Many will struggle if the U.S. dollar continues to decline in purchasing power and inflation takes off. In short, many financial experts handing out financial advice do not know if their retirement plans will work. If they did, many would have retired. Kim and I know our retirement plan works. We know because passive income pours in every month from our assets. We are not putting money in savings, bonds, or mutual funds for the future. If we are wiped out, which is always possible, our real asset will be our financial IQ. We can rebuild again because we focused more on learning rather than earning. We learned to manage our own money, rather than turn our money over to an E or S. As rich dad said, “Just because you invest or are self-employed, does not mean you are an investor or a business owner.” In Summary The secret to making more money is found in the following diagram: [image: art] In order to grow wealthy, you must come to terms with the fact that problems will never go away. Each time you find a solution to a problem, a new one will pop up. The key is to realize that the process of solving those problems makes you rich. And once you start solving not only your own problems, but others’ as well, then the sky is the limit. People will pay money for you to solve their problems. For example, I will pay money to my doctor to keep me healthy. I pay money to my housekeeper to keep my house tidy. I shop at my local supermarket because my problem is hunger and starvation if I don’t eat. I pay the person who runs a local restaurant for providing great food and a great dining experience. I pay taxes to public servants to provide a well-run government. I put money in the offering plate at church to support my spiritual guidance and education. Kim makes a lot of money because she solves a big problem, the problem of quality housing at an affordable price. The more she works to solve that problem, the more money she makes. I work hard to solve the problem of the need for financial education. Simply put, there are trillions of ways to make more money because there are trillions of, if not infinite, problems to solve. The question is, which problems do you want to solve? The more problems you solve, the richer you will become. Many people want to get paid for doing nothing, and are unwilling to solve any problems. Or they want to be paid more than the problem they are solving is worth. One of the reasons I did not join a union shipping company is because I am a capitalist, not a laborer. In fact, one of the reasons there are fewer U.S. ships today is because it costs too much money to operate a U.S. merchant ship. And that is one reason why most cargo and passenger ships in U.S. ports are not manned with U.S. citizens. The high cost of operating a U.S. ship is why so many graduates of my school, Kings Point, cannot find jobs when they graduate today. This is the problem of wanting to be paid more and doing less. My poor dad was a union man. In fact, he was the head of the teachers’ union of Hawaii. I understand his point of view that teachers had more power as a collective group. Without a union, teachers would be paid even less and have fewer benefits. Without a teachers’ union, education would suffer more than it suffers today. My rich dad was a capitalist. Capitalists believe in producing a better product for a better price. If you cannot deliver a better product at a better price to more people, then the market will punish you. In other words, a capitalist gets paid to solve problems, not create problems—unless you make puzzles. Many think of capitalists as pigs. And many are greedy pigs. Yet there are capitalists who do a lot of good, such as provide health care, food, transportation, energy, and communications to the world. As a capitalist who does my best to make the world a better place, my problem is with people who want to be paid for doing nothing or paid more to do less. In my opinion, a person who wants to be paid more and do less, or nothing, is also a greedy pig. Those who want to be paid more for doing less will find life harder as the world changes. For example, labor unions that demand higher wages and benefits for less work are the major reason why jobs move overseas. Today in America, a unionized autoworker is paid about $75 an hour, including benefits. In China, the same autoworker is paid about 75 cents an hour. As I write, Chrysler has signed a deal with China’s Chery Motors to produce cars there. Price: less than $2,500 a car. That is about the same price as health insurance costs add to every American car. A true capitalist is simply someone who recognizes a problem and creates a product or service to address that problem. You can charge a higher price if your product or service has a higher perceived value, but there needs to be added value. For example, I charge more money for my books and games because to some people there is more perceived educational value in them. For many other people, my books and games are not worth the price. Many do not value my brand of financial education because my brand of financial education does not solve their financial problem. Many people do not believe the rules of money changed in 1971 and 1974, and want to believe that they can keep working hard, saving money, investing in mutual funds, and expecting more pay for less work. For their sake and their families’ financial future, I hope those beliefs and actions solve their financial problems. For your sake, I hope you do not believe that. I have a hunch that you don’t, since you are reading this book and actively increasing your financial intelligence by doing so. Begin now to think about what problems you need to solve, engage those problems head-on, and the money will follow. And once you have that money, you’re going to need to use every ounce of your financial intelligence to protect it. That’s what the next chapter is all about, financial IQ #2: protecting your money. Chapter 8 The Integrity of Money “Integrity” is an interesting word. I have heard it used in many different ways and in different contexts. I believe it is one of the more misused, confused, and abused words in the English language. Many times I have heard someone say, “He has no integrity,” or “If they had any integrity, they would be more successful.” Someone else might say, “That house has integrity of design.” Before discussing the integrity of money, I think it best I give my definition of “integrity.” Webster’s offers three definitions for “integrity.” They are: 1. Soundness: An unimpaired condition. 2. Incorruptibility: Firm adherence to a code of especially moral or artistic values. 3. Completeness: The quality or state of being complete or undivided. The Integrity of a Car All three definitions are required to discuss money and integrity. To better illustrate, I use the example of the integrity of an automobile. An automobile is made up of systems: the brake system, fuel system, electrical system, hydraulic system, and so on. If the systems are not operating in integrity, the car will not function, it will not be sound. For example, if the fuel system is corrupted, the entire car stops. The integrity of the car is compromised and broken. The car is not whole. The Integrity of Health and Wealth A similar example can be made with the human body. Some of the systems of the body are the arterial system, respiratory system, nervous system, skeletal system, digestive system, and so on. If the integrity of the human body’s system is not sound, corrupted with clogged arteries for instance, health declines and disease or death soon follows. Just as health can break down from a literal lack of integrity, so can wealth be compromised by a lack of integrity. Instead of disease or death, which comes from a breakdown in the body’s integrity, symptoms of a lack of financial integrity are low income, crippling taxes, high expenses, excessive debt, bankruptcy, foreclosure, increased crime, violence, sadness, and despair. Earlier, I listed five different financial intelligences. Once again they are: Financial IQ #1: Making more money. Financial IQ #2: Protecting your money. Financial IQ #3: Budgeting your money. Financial IQ #4: Leveraging your money. Financial IQ #5: Improving your financial information. The integrity of all five intelligences is required if a person wants to grow rich, stay rich, and pass his or her wealth on for generations. Missing one or more of the financial intelligences is like someone who doesn’t know how to drive attempting to drive a car that has brakes without pads, and water in the gas line. When a person is struggling financially, one or more of these financial intelligences is out of whack, financial integrity is not sound, and the person is not complete. For example, I have a friend who earns a lot of money as a manager of a small business. Her problem is she has no protection against taxes, plus she does not budget well, spends impulsively to buy clothes and take vacations. Her leverage is a big home because she thinks real estate only goes up in price. She gets her financial advice from her husband and his financial planner. Her husband is a great guy but, like his wife, he has similar challenges with all five financial intelligences. They are nice people, educated, honest, churchgoing, and hardworking. They enjoy life and raise great kids. The problem is a lack of financial integrity. This lack of financial integrity shows up as worry about borrowing the equity out of their home to pay off credit card bills, affording a college education for their three kids, and having enough for retirement. These are typical money problems, symptoms of a lack of financial integrity. The problem is they don’t think they have a problem. They get up every day, send the kids off to school, and go to work. They come home, play with the kids, help them with their homework, watch a little TV, and go to bed. They know something is wrong, but they’d rather not find out what. They’re hoping something will change. Financial Report Card Like most people, my friends don’t have personal financial statements. They don’t even know what financial statements are or why they are important. Like most college graduates, my friends left school not knowing the difference between a credit application, a credit score, and a financial statement. Without a personal financial statement, however, they do not know where they are financially, what might be wrong, and where they might be out of financial integrity. Without a financial statement and the five financial intelligences, it may be difficult to determine what is wrong and what needs to be corrected. In my opinion, this is where the lack of integrity begins. It begins in our school system—with financial IQ #5: improving your financial information. In 1974, when businesses began requiring employees to invest for their retirement, the school system should have added or improved financial education in the curriculum. This lack of financial education in our schools is sending shock waves through the financial integrity of the world. A Reflection of Financial Integrity As my rich dad said, “My banker has never asked me for my report card.” The reason bankers don’t ask for an academic report card is because they are looking for financial intelligence, not academic intelligence. This is why they ask for a financial statement. A financial statement is a reflection of your financial integrity. It is the equivalent of your financial report card. Bankers are looking for answers that relate to the five financial intelligences. Obviously, they want to know how smart people are at making money, protecting their money, budgeting their money, leveraging their money, and how informed they are. A financial statement will give the bank the information it is looking for. Out of Financial Integrity If a person is out of financial integrity—as shown by excessive debt, not budgeting well, spending more than he or she earns, foreclosures, and bankruptcies—the banker will probably not want this person as a client. It is a matter of professional integrity. In 2007, with the crash of the credit markets, it became obvious that the credit, banking, and investment institutions have been out of financial integrity. Greed replaced sound lending practices. The economy cannot expand on credit alone. By failing to teach much about money and to expand financial intelligence in school, the system creates adults who are unprepared for our brave new world. Billions of adults across the planet do not have a personal financial statement, cannot read a business’s financial statement, and do not know the financial condition of their country. This is a breakdown in educational integrity. Intrinsic Value Warren Buffett does not diversify. Instead he looks for a company with intrinsic value, a company with financial integrity. He wants to know if the business has the five financial intelligences. In overly simplified terms, Buffett wants the answers to the following questions: 1. Can the business make more money? 2. Does the business have a protected niche? 3. Does the business budget its money and resources well? 4. Can the business be leveraged and expanded? 5. Is it run by a team of smart, well-informed people? In even simpler terms, intrinsic value means: 1. Niche. This means the business has a core competence, something that will make money in good times and bad. Coca-Cola fits this requirement. People will always drink sugared water regardless if plain water is better for them. A big advantage Coca-Cola has is its trademark, which is protected by law. You may recall that financial intelligence #2 is protection. In this case, Warren likes this product because it’s a product that is a legally protected brand, not just a commodity. A well-recognized brand, protected and defended from pirates, increases Coca-Cola’s intrinsic value. The brand Rich Dad is a trademark protected by law in every country we do business in. Being a brand gives my business greater intrinsic value. Many authors write books but fail to build a brand. As you know, Harry Potter is a megabrand. So is Donald Trump. If you are not a brand, you are a commodity. Brands have more intrinsic value, and to maintain this value, a brand must be true to its message and customers. A few years ago, a large mutual fund company approached me and asked if I would endorse its fund. Although the fee it would have paid me was very high, I turned the offer down. In my mind, endorsing a mutual fund would not be true to the Rich Dad brand. To me, it would have shown a lack of integrity, which would diminish the brand’s intrinsic value. Besides, I couldn’t do it with a straight face. 2. Leverage. This point separates the small business owners from the big business owners. For example, if I am a doctor, it is hard for me to leverage my value if my patients come only to see me. But if that same doctor invented a new cure or kind of medicine, then that doctor’s medical intelligence can be leveraged via a product. The world is filled with small business owners and professionals who are not able to leverage because they are the product. Most employees fall into this category. They don’t know how to leverage their services and trade time for dollars. Most of us know musicians who work hard but do not earn much money simply because they fail to leverage their talents. The world is filled with musicians who produce a CD, which is a form of leverage, but are not able to leverage the distribution and sale of their CD. This is why amateur programs such as American Idol are so popular. People who think they can sing want the leverage of national television, even if Simon criticizes them. 3. Expandability. Once a product or business can be leveraged, the next question Warren wants to know is, “How far can the leverage be expanded?” Warren loves Coca-Cola because its leverage is expandable throughout the world. Warren says, “Every time someone in the world drinks a Coke, I make a little money.” When I wrote Rich Dad Poor Dad, the book was my leverage. Instead of my teaching in person, my book and my games could now do the teaching. The next task was to expand the product into different countries by printing the books and games in different languages. This was done by licensing the rights to produce Rich Dad products to businesses in different parts of the world. Instead of having my company print, inventory, and distribute my products, there are now publishers in 109 countries that do that for me. This is my example of leverage and then expandability. 4. Predictability. What Warren Buffett wants to know is how predictable revenue is. He doesn’t want peaks and valleys in income. He wants to know that come rain or shine, the money will come in like clockwork. One of the reasons I love my apartment houses is that rain or shine, the money comes in. I am not worried about the price of real estate going up or coming down. I want my money coming in 24/7 from all over the world and from my apartment houses. This is why Warren Buffett does not diversify. Instead he focuses on a business’s intrinsic value. Recognizing intrinsic value requires the five financial intelligences. When a business has intrinsic value, the business has integrity. When a business has integrity, it has a better chance to grow and remain profitable, regardless of changing economic conditions. Before investing in a company, a professional investor looks at the business’s financial statement. The professional investor is looking for business integrity. The same is true when a real estate investor buys an apartment house. Knowing about the internal rate of return (IRR) is intrinsic value applied to real estate. The problem for most people, due to a lack of financial education in school and not being able to read a financial statement, is that they don’t know if the company or real estate they are investing in has financial integrity and intrinsic value. The Language of Business Warren Buffett says, “Accounting is the language of business.” If you do not know the language, it’s hard to tell if the business has integrity. The reason the Rich Dad Company produces our CASHFLOW games for adults and children is because we strongly believe that financial intelligence and being able to speak the language of business are crucial in a world of greed and questionable integrity. Government Financial Integrity Governments also require the five financial intelligences. Governments need to make money, protect their money, budget their money, leverage their money, and seek the best financial information. If a government operates in integrity, the government and its people flourish. If a government is out of integrity, the government and its people struggle and grow poorer. Higher taxes and excessive debt are signs that the U.S. government is struggling with financial integrity. In 1971, when Nixon took the U.S. off the gold standard and got the world to accept our currency as the reserve currency of the world, the U.S. went out of financial integrity. Today, rather than being the richest country in the world, we are the biggest debtor nation in the world. While many people have become very rich because of this change in the rules of money, me included, millions more have fallen behind financially. The financial gap is growing wider and becoming dangerous. The problem for America began at financial intelligence #3: budgeting your money. When America began to import more than it exported, we changed the rules of money and began accumulating trillions of dollars of debt instead of solving the problem, which would have been the intelligent thing to do. When looking at financial intelligence #4, it becomes apparent the U.S. government doesn’t leverage money . . . instead it leverages debt. Today, the richest people in the world are in debt to the poorest people in the world. Talk about being out of integrity. The U.S. went out of financial integrity when it asked the world to accept a dollar “backed by the full faith and credit” of the U.S. government. No one likes investing in the U.S. and seeing the value of the dollar drop. When the world demands the money back, it will be financial intelligence #2, protection from predators, that will be tested. I believe that the U.S. will become a giant predator, possibly defaulting on some of its loans and its promises to senior citizens for health care and Social Security. It will allow inflation to destroy workers’ earnings and raise taxes on the young. To me, this is out of integrity. The current way for the U.S. government to increase financial intelligence #1: making more money, is by raising taxes, printing more money, borrowing more money, fighting a new war, and not paying a few bills. Obviously, this will cause many more financial problems, which could have been avoided if the earlier problems had been solved in the first place. The Age of Integrity History does repeat. Our leaders and educators have been aware of what happens when governments violate the integrity of money. This has happened before. Copernicus in 1517 wrote that inflation was one of the “scourges that debilitate kingdoms.” In 1776, Adam Smith said inflation causes “the most pernicious subversion of the fortunes of private people.” Smith’s warning came true more recently in Germany, when Hitler rose to power, after the Weimar government subverted the integrity of its currency. The only reason the U.S. and world public isn’t finding out about the difference between money and currency is because our school systems simply are out of educational integrity, failing to produce a financially literate populace. Personally, I believe we as a people, a nation, and the world are all heading for a perfect storm. After being out of integrity for so long, I believe the financial, political, environmental, and spiritual forces will demand that the pendulum swing in the other direction. Exactly what will happen, I do not know. It may have already started. Unfortunately, the super-rich—those who benefit the most from the current system—will be least affected by the coming financial upheavals. It is the rest of us that will feel the forces of nature and be required to do our best to battle the storm, and the poor will suffer the most. The good news is that the problems ahead will make us smarter if we take them on with courage, and do not run from them. Inside every problem is a gem of wisdom, a gem that makes us smarter, stronger, and able to do better regardless of economic conditions. Even more good news is that a few national governments are beginning to implement financial education courses into their educational systems. I predict that the country that has the best financial education will lead the world into a new era of economic prosperity. After all, this is the Information Age. Increase Your Intrinsic Value In the meantime, it is important for each of us to prepare for the potential storm ahead. My recommendations are: 1. Put your house in order. Just like a sailor preparing his boat for a storm, start making your financial boat more seaworthy. Take a look at the five intelligences and ask yourself which intelligence you need to work on now. Which one needs the most work? Which one is your biggest problem? Focus on that one and address it now. Do not attempt to take all five on at once. That would be overwhelming. I believe you will find that all five are related, so by focusing on one, you will ultimately improve all five intelligences. Then take your time, learning a little every day. Always remember, no golfer became a professional in one day. Not even Tiger Woods. By increasing your five financial intelligences you are increasing your financial integrity and your own intrinsic value. If you are not sure what to do, please do not be afraid or ashamed to ask for help. In the next chapter on finding your financial genius, I write about how much I depend upon smart people for help. No one is above needing help. 2. Invest in assets with intrinsic value. Take another look at some of the criteria Warren Buffett uses to establish a business’s intrinsic value. Then for practice, start asking yourself which businesses around you meet the requirements. Even if you do not invest, this is a great exercise for increasing your financial IQ. Intrinsic Value of Real Estate One of the reasons I like real estate is because I am able to see, touch, and control much of the property’s intrinsic value. But always remember, most real estate is not a good investment. A great exercise, regardless if you have money, is to look at a number of properties and analyze their intrinsic value. One of the beauties of real estate is creativity. For example, I can use creative financing, creative improvements, or creative ways to increase the value of the property. Creativity is not as much an advantage when picking a stock or buying mutual funds. But in real estate, creativity plus integrity can make you very rich. 3. Batten down the hatches. As they taught us at the U.S. Merchant Marine Academy, when a storm approaches, it is time to batten down the hatches. This means to protect the integrity of the ship. In my few years of going to sea, I had the opportunity to sail through four typhoons in the Pacific. Today, I can still see monstrous waves, a mountain of water, crashing over the entire ship. I can see, feel, and hear the ship creaking and straining, doing its best to maintain structural integrity and come out from under the wave. I am glad the engineers designed a great ship, and that the ship’s crew was trained and ready to take on the storms. Chaos is going to increase as the Industrial Age ends and the Information Age takes control. As oil goes up in price, the dollar drops, China and India start producing cars and planes, manufacturing jobs disappear, corporations move offshore, baby boomers expect to be taken care of by the government, terrorism increases, wars we cannot afford are fought, and debt that has to be repaid is increased, problems previously swept under the rug will be exposed. In the Information Age, information such as the five financial intelligences will be your greatest of assets. I believe the financial integrity of the world is going to be challenged as never before in history. I believe this because there has been too much greed, misinformation, and corruption running our businesses, governments, and schools. In August of 2007, when the credit markets crashed, I believe we were touching the ragged outer limits of the brewing storm. The eye of the storm is still a few years away. Take this time to prepare for the ride of your life. Be brave and get smart because it’s going to get exciting. It’s going to be a great time to become even richer and become even smarter. But you’ve got to be brave, and you’ve got to develop your financial genius. Foreword I first met Robert Kiyosaki in 2004. We wrote a bestselling book together in 2006. As we head into 2008, it’s become even clearer to me that what Robert talks about and teaches is more important than ever. Financial education is crucial to this country at this point, and Robert’s acumen in this area cannot be disputed. Just look at what was discussed in our book, Why We Want You To Be Rich, and then take a look at what has happened since then. I’d say we knew what we were talking about. Robert is taking you one step further with Rich Dad’s Increase Your Financial IQ and I have every reason to believe he will be as prescient as we were in 2006. I would advise you to pay attention to what he has to say. Robert and I have shared concerns and we have traveled similar paths as teachers and businessmen. Both of us had rich dads who helped to shape our lives, our spirits, and our many successes. We are both entrepreneurs and real estate investors, and we are successful because we had financial education. We know its importance and are serious when it comes to financial literacy. Robert has said, “It’s financial education that enables people to process financial information and turn it into knowledge . . . and most people don’t have the financial education they need to take charge of their lives.” I couldn’t agree more. One thing I noticed immediately about Robert is that he is not complacent. He’s very successful already—because he loves what he’s doing. That’s another thing we have in common. That’s fortunate for you, because he has a lot of very good advice to give. As I said in Why We Want You To Be Rich, what’s the point of having great knowledge and keeping it to yourself? Robert answers that question with every book he writes, and you’re lucky he’s sharing it with you. One of the first steps to getting richer by getting smarter with your money is to take advantage of opportunities when they present themselves. Right now you are holding a great opportunity. My advice to you is to read Rich Dad’s Increase Your Financial IQ and to pay attention. You will be on the right path to financial freedom, and on the right path to big success. By the way, don’t forget to Think Big. We’ll see you in the winner’s circle. Donald J. Trump Author’s Note Money Is Not Evil One of the greatest failures of the educational system is the failure to provide financial education to students. Educators seem to think that money has some sort of quasi-religious or cultlike taint to it, believing that the love of money is the root of all evil. As most of us know, it is not the love of money that is evil—it is the lack of money that causes evil. It is working at a job we hate that is evil. Working hard yet not earning enough to provide for our families is evil. For some, being deeply in debt is evil. Fighting with people you love over money is evil. Being greedy is evil. And committing criminal or immoral acts to get money is evil. Money by itself is not evil. Money is just money. Your House Is Not an Asset The lack of financial education also causes people to do stupid things or be misled by stupid people. For example, in 1997, when I first published Rich Dad Poor Dad and stated that “Your house is not an asset . . . your house is a liability,” howls of protest went up. My book and I were severely criticized. Many self-proclaimed financial experts attacked me in the media. Ten years later, in 2007, as the credit markets crumbled and millions of people were in financial free fall—many losing their homes, some declaring bankruptcy, others owing more on their house than it was worth as real estate dropped in value—these individuals painfully found out that their homes are indeed liabilities, not assets. Two Men, One Message In 2006, my friend Donald Trump and I wrote a book entitled Why We Want You To Be Rich. We wrote about why the middle class was falling behind and what we thought the causes of the decline were. We said that many of the causes were in the global, government, and financial markets. This book was also attacked by the financial media. But by 2007, most of what we said had come true. Obsolete Advice Today, many financial experts continue to recommend, “Work hard, save money, get out of debt, live below your means, and invest in a well-diversified portfolio of mutual funds.” The problem with this advice is that it is bad advice—simply because it is obsolete advice. The rules of money have changed. They changed in 1971. Today there is a new capitalism. Saving money, getting out of debt, and diversifying worked in the era of old capitalism. Those who follow the “work hard and save money” mantra of old capitalism will struggle financially in the era of new capitalism. Information vs. Education It is this author’s opinion that the lack of financial education in our school systems is a cruel and evil shame. In today’s world, financial education is absolutely essential for survival, regardless of whether we are rich or poor, smart or not smart. As most of us know, we now live in the Information Age. The problem with the Information Age is information overload. Today, there is too much information. The equation below explains why financial education is so important. Information + Education = Knowledge Without financial education, people cannot process information into useful knowledge. Without financial knowledge, people struggle financially. Without financial knowledge, people do things such as buy a house and think their home is an asset. Or save money, not realizing that since 1971, their money is no longer money but a currency. Or do not know the difference between good debt and bad debt. Or why the rich earn more yet pay less in taxes. Or why the richest investor in the world, Warren Buffett, does not diversify. Leaping Lemmings Without financial knowledge, people look for someone to tell them what to do. And what most financial experts recommend is to work hard, save money, get out of debt, live below your means, and invest in a well-diversified portfolio of mutual funds. Like lemmings simply following their leader, they race for the cliff and leap into the ocean of financial uncertainty hoping they can swim to the other side. This Book Is Not about Financial Advice This book will not tell you what to do. This book is not about financial advice. This book is about your becoming financially smarter so you can process your own financial information and find your own path to financial nirvana. In sum, this book is about becoming richer by becoming smarter. This book is about increasing your financial IQ. FREE AUDIO DOWNLOAD from Robert Kiyosaki Visit www.richdad.com/FIQ to access your free download The Rich Dad Company www.richdad.com or call 1-800-308-3585 to order books visit www.twbookmark.com For more information: CASHFLOW® Technologies, Inc. 4330 N. Civic Center Plaza • Suite 100 Scottsdale, AZ 85251 PHONE / 800-317-3905 • FAX / 480-348-1349 EMAIL / email@example.com CASHFLOW Clubs The Benefits of Joining a CASHFLOW Club Invest Time Before You Invest Money The philosophy of The Rich Dad Company is that there are only two things you can invest: time and money. We recommend you invest some time studying and learning before you invest your money. The CASHFLOW games offer the opportunity to learn and ‘invest’ with ‘play money’—before you invest real money. Meet New Friends from Around the World When you visit or join a CASHFLOW Club (or play the CASHFLOW games on line) you’ll meet like-minded people—from all over the world. The world is filled with people with negative attitudes, know-it-all attitudes and loser attitudes. The type of person a CASHFLOW Club attracts is a person who is open minded, wants to learn and wants to develop his or her potential. Have Fun Learning Learning should be fun! Too often financial education is dull, boring and fear-based. Many financial experts want to educate you on how risky investing is and why you should trust them. That is not the Rich Dad philosophy on learning. We believe that learning should be fun and cooperative and lead you toward becoming smarter about money so you can tell the difference between good and bad financial advice. Find a CASHFLOW Club near you: www.richdad.com Bestselling Books by Robert T. Kiyosaki & Sharon L. Lechter Rich Dad Poor Dad What the Rich Teach Their Kids About Money that the Poor and Middle Class Do Not Rich Dad’s CASHFLOW Quadrant Rich Dad’s Guide to Financial Freedom Rich Dad’s Guide to Investing What the Rich Invest In that the Poor and Middle Class Do Not Rich Dad’s Rich Kid Smart Kid Give Your Child a Financial Head Start Rich Dad’s Retire Young Retire Rich How to Get Rich Quickly and Stay Rich Forever Rich Dad’s Prophecy Why the Biggest Stock Market Crash in History is Still Coming... And How You Can Prepare Yourself and Profit from it! Rich Dad’s Success Stories Real-Life Success Stories from Real-Life People Who Followed the Rich Dad Lessons Rich Dad’s Guide to Becoming Rich Without Cutting Up Your Credit Cards Turn “Bad Debt” into “Good Debt” Rich Dad’s Who Took My Money? Why Slow Investors Lose and Fast Money Wins! Rich Dad Poor Dad for Teens The Secrets About Money—That You Don’t Learn In School! Rich Dad’s Escape from the Rat Race How to Become a Rich Kid by Following Rich Dad’s Advice Before You Quit Your Job 10 Real-Life Lessons Every Entrepreneur Should Know About Building a Multimillion-Dollar Business Chapter 5 Financial IQ #3: Budgeting Your Money My poor dad often advised, “Live below your means.” My rich dad said, “If you’re going to be rich, you need to expand your means.” In this chapter, you will find out why living below your means is not a financially intelligent way to become rich. You will learn about budgeting and that there are two kinds of budgets. One is a budget deficit, and the other is a budget surplus. The reason financial IQ #3 is so important is because learning how to budget for a surplus is the key to becoming rich and staying rich. A Budget Is a Plan One of the definitions of the word “budget” is: a plan for the coordination of resources and expenditures. Rich dad said a budget is a plan. He went on to say, “Most people use their budget as a plan to become poor or middle class rather than a plan to become rich. Most people operate their lives on a budget deficit rather than a budget surplus. Instead of working to create a budget surplus, many people work to live below their means, which often means creating a budget deficit.” The First Type of Budget: A Budget Deficit The definition of a budget deficit in Barron’s Finance and Investment Handbook is: “Excess of spending over income, for a government, corporation, or individual.” Notice the words “excess of spending over income.” Spending more than you make is the cause of a budget deficit. The reason so many people operate on a budget deficit is because it’s so much easier to spend money than to make money. When faced with a crippling budget deficit, most people choose to cut back on their spending. Instead of cutting back on spending, rich dad recommended increasing income. He thought it smarter to expand your means by increasing income. BUDGET DEFICIT OF A GOVERNMENT When talking about the budget deficit of a government, Barron’s states, “A budget deficit accumulated by the federal government of the United States must be financed by the issuance of Treasury bonds.” In the previous chapters of this book, I wrote about how the U.S. government was financing its problems by selling debt (i.e., treasury bonds) that future taxpayers must pay for. The Social Securit