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197 pages, Paperback
Published January 1, 2008
WHAT IS FINANCIAL INTELLIGENCE?
"Rich or poor, we all have money problems." This means that getting rich does not make your money problems disappear. Money alone, hard work, education, or a job are poor solutions to money problems. Financial intelligence is the smart solution because "money problems make you smarter if you solve the problem."
The rules of money have changed from the old ones (work hard, save money, get out of debt, invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds) to new ones. This change occurred for two reasons:
1. In 1971, President Nixon took the United States off the gold standard. Accordingly, "the U.S. dollar died because it was no longer money – it became a currency." The main difference between money and currency is that currency means movement. Currency "must move from asset to asset as quickly as possible … Assets are either appreciating in value or producing cash flow."
2. Since 1974, businesses stopped defined benefit, which is guaranteeing the retiree a paycheck for as long as the retiree lived and started new pension plans called defined contribution, like 401 (k)s.
The rules of money have changed and are changing. "In the new rules of money, we need to know how to borrow currency to acquire assets, since we no longer save money."
Robert Kiyosaki admits that the financial system is unfair. However, he is not trying to change it. He simply wants to play by the rules. From his observation:
1. The poor are the victims of money
2. The middle class think they outsmart their money problems by being smart academically and professionally.
3. The rich outsmart their money problems by being financially intelligent.
THE FIVE FINANCIAL IQS
Kiyosaki defines financial intelligence as "that part of our mental intelligence we use to solve our financial problems" and financial IQ as "the measurement of that intelligence." He does not consider financial intelligence to be the most important of all intelligences, but it does affect everything that is important.
Financial intelligence is important especially for those who want to be entrepreneurs or investors. It is not that important to those who want to be employees or self-employed.
There are five basic financial IQs. They are:
FINANCIAL IQ #1: MAKING MORE MONEY – measured in gross number $
People lack Financial IQ #1 because they want the money but not the learning process. They stick with what they know. As Kiyosaki sees it, "it is the process that makes you rich, not the money." So, you need to choose the best way for you to make more money, and then choose your learning process. And remember that the process is more important than the goal.
"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."
FINANCIAL IQ #2: PROTECTING YOUR MONEY – measured in percentages
Financial IQ #2 measures the percentage of income a person keeps against the percentage of income financial predators take. Real-world financial predators include:
"Taxes are our single largest expense … Taxes are sold to us as being good for society, and some are. Society’s problems, however, only get bigger because bureaucrats only know how to throw money at problems. "When money does not solve a problem they create new taxes with clever names."
Three different types of income exist: earned, portfolio, and passive. "Knowing the differences is important, especially when it comes to protecting your money from bureaucrats." Earned income is the hardest to protect. That is why "it is often the people who earn the least who pay the highest percentage in taxes."
2. Bankers: Bankers are the biggest financial predators of all.
"Broker" is another word for "salesperson." Choose your broker carefully, because good brokers can make you rich, and bad brokers can make you poor. You can differentiate between them by:
1. Attending classes on investing so you can tell an educated broker from a salesperson
2. Look for brokers who are students of their profession
3. Know if they invest in what they are selling
4. Look for a relationship with your broker, not a transaction
"All businesses have something to sell." Before you buy a product ask yourself "is this business’s product or service making me richer [i.e., educational products] or poorer?" Some people struggle financially because they buy products that make them poorer with credit cards.
5. Bridges/Beaus: A prenuptial agreement and exit strategies are important before getting married.
6. Brothers-in-law: "Those with a high financial IQ have wills, trusts, and other legal means of protecting their wealth and final wishes from death predators."
They are lawyers who want to take your money using the court system. There things you can do to protect yourself from them:
1. keep nothing of value in your name
2. Buy personal liability insurance immediately. You must buy it before you need it
3. Hold assets of value in good legal entities (C corporations, S corporations, LLCs, LLPs)
FINANCIAL IQ #3: BUDGETING YOUR MONEY – measured in percentage, the percentage of income that reaches your asset column
Budget is defined as "a plan for the coordination of resources and expenditures." Notice that the definition says "coordination of resources" not "coordination of money."
Two kinds of budgets exist:
1. Budget deficit: "Excess of spending over income, for a government, corporation, or individual." – makes you poorer. When faced with a financial problem, most people reduce their spending instead of increasing their income.
2. Budget surplus: "Excess of income over spending for a government, corporation, or individual over a particular period of time." – makes you rich. You can create it by increasing income, not reducing expenses. Budget your money like a rich person. Try to save and invest as much as you can no matter how much money you make.
Lessons about budgeting for a budget surplus:
Budget Tip #1: A budget surplus is an expense.
- List your saving, tithing, and investing as an expense (not an asset) on your financial statement.
- Pay yourself first and increase income in case you come up short.
- Save in gold and silver, not in cash.
Budget Tip #2: The expense column is the crystal. You can predict a person’s future by looking at his/her expenses column.
Budget Tip #3: My assets pay for my liabilities.
Before purchasing your luxury liabilities, you should require assets by paying yourself first. With the cash flow from the assets, you then purchase your luxury liabilities. "There is nothing wrong with enjoying liabilities – as long as you continue to pay yourself first and purchase them through the income generated by you assets."
Budget Tip #4: Spend to get rich. Knowing when to spend and when to cut back is a sign of high financial intelligence.
There are two types of debt:
1. Good debt: debt that makes you richer and someone else amortizes (pay off) for you.
2 Bad debt: debt that makes you poor. And that you have to amortize yourself. Bad debt is debt from a liability.
FINANCIAL IQ #4: LEVERAGING YOUR MONEY – measured in return on investment
Invest wisely so that "the ups and downs of markets do not affect why [you] invest or what [you] invest in." Kiyosaki explains why he was excited to buy properties when people panicked. It is all about two financial concepts: control and leverage. When you have control (over your income, expense, asset, and liability columns) and leverage over your investment, you will not be affected by market crashes.
Without control over them, investments become risky. And without control, you should not use leverage. And without leverage, you cannot put enough money aside for your future, because the more money you save the less valuable it becomes.
The wealth effect is described as follows: "Due to inflation, which is not really an increase in asset value but a decline in purchasing power of the [currency], many people feel wealthier as their home’s value appears to increase. When they feel wealthier, they borrow more money (leverage) and spends more money on liabilities."
The wealth effect is caused by the illusion of net worth. Net worth is the value of your possessions minus your debt. Kiyosaki considers net worth to be worthless for three reasons:
1. Net worth is often an estimate based upon opinions, not facts
2. Net worth is often based upon possessions that have a declining value
3. Net worth going up is often caused by the dollar going down
For him, the value of his apartment house is not based upon inflation or the price of the building. It is based upon the rent his tenants pay.
Investments in paper assets such as savings, stocks, bonds, mutual funds, and index funds lack control.
There are seven points about leverage and control:
Point #1 There are many types of leverage
Point #2 Most investors invest in paper assets, assets they have very little control over
Point #3 An increase in returns does not mean an increase in risk
Point #4 Most financial advisors are not investors
Point #5 Financial education increases financial intelligence
Point #6 Leverage can work in two ways
Point #7 When most financial advisors recommend diversification, they are not really diversifying
Investors invest for two things:
1. Capital gain – It is like gambling. More risky and more money.
2. Cash flow – It is investing for income. Less risky and less money.
So there are three types of investors:
1. Those who invest only for capital gains
They are traders (in the world of stocks) and flippers (in the real estate market). “Traders and flippers are actually in the S quadrant, not the I quadrant.”
2. Those who invest only for cash flow
3. Those who invest for capital gains as well as cash flow
Kiyosaki occasionally buy paper assets, but for cash flow, not capital gains.
Three important points:
1. Being born poor and financially uneducated does not mean you cannot become rich
2. Start small and take baby steps
3. Dream big
FINANCIAL IQ #5 IMPROVING YOUR FINANCIAL INFORMATION
There have been four economic ages of humanity:
1. The Hunter-Gatherer Age: There was only one class of people. Everyone was poor.
2. The Agrarian Age: There were two groups, the rich and the peasants.
3. The Industrial Age: There were three groups, the rich, the middle class, and the poor.
4. The Information Age: There are four groups, the poor, middle class, rich, and super-rich.
"Information is the single greatest asset of this era … The widening gap between the super-rich and everyone else is made by information." But, the problem is that information has become overloaded. That is why we need to classify information according to:
1. Time: Tomorrow’s information is obsolete today.
3. Classification: Have access to inside information
4. Relative information: Watch the trends
5. Deceptive information: Like "the pump and dump" and "the sleight of hand."
Lessons about classifying information:
Lesson #1: Facts vs. opinions. "One of the reasons so many people think investing is risky is because they do not know the difference between facts and opinions."
Lesson #2: Insane solutions. "An insane solution occurs when a person uses information that is an opinion as a fact."
Lesson #3: Risky actions. "Generally a person who invests for capital gains is investing on an opinion. A cash flow investor invests for facts. If possible, a smart investor will invest using both opinion and facts, and invest for both cash flow and capital gains."
Lesson #4: Control over the asset.
Lesson #5: What are the rules?
"If there are no rules, there is no asset" and "in the world of investing, different assets have different rules." So you should know the rules and do not ignore or break them. Having good accountants and lawyers is important if you want to be rich.
Two important things:
1. Rules provide a valuable source of information about how the game of money is played.
2. Without rules, assets decline in value.
Lesson #6: Trends.
"A trend is developed when an investor takes information from a set of facts and then forms an opinion."
Important points to know about trends:
1. Global vs. local markets: gold is priced in global market. Real estate is priced in local market. You need to have information relevant to the market you are dealing with.
2. "Information is just information. Intelligence is the ability to take information and make it meaningful."