Increase your financial IQ
Increase
your financial IQ – Robert Kiyosaki
It is not the love of money that is evil—it is the lack of
money that causes evil.
Many people believe that it takes money to make money. This
is not completely true. Always remember that if you can lose money investing in
gold, you can lose money in anything. Ultimately, it is not gold, stocks, real
estate, hard work, or money that makes you grow—it is what you know about gold,
stocks, real estate, hard work, and money that makes you rich. Ultimately, it
is your financial intelligence, your financial IQ that makes you grow.
Although Change is the only constant thing in this world,
when it comes to finance related habits there is reluctance to change. Most of
us live with some individual policies that we follow for unnecessarily long
time.
Why is LIC the top insurance company in India by a big margin?
Why is SBI the biggest bank in India?
Why is FD the savings option opted by the most of Indians?
Although “Safety!” is the answer to the above three questions, lack of
willingness to learn and explore other options is the real reason.
Some notions of people we’ve been noticing are ….I will never invest in
Stocks!.....Real estate is a big no for me!.....I never take assets on Loans!
and many more…
These notions remain beneficial for certain phase, but not all through
the life. It needs to change.
The way technology updates are accepted, the thinking over finance matters
also needs to be updated.
Obsolete Advice
Those who follow the “work hard and save money” mantra of
old capitalism will struggle financially in the era of new capitalism. 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
Golf Lessons or Golf
Clubs
Many spend a lot in playing golf but do not spend a dime on
golf lessons. Hence the golf game remains the same, even though she/he has the
latest golf tools. The same nutty phenomenon occurs in the game of money.
Billions of people invest their hard-earned money in assets such as stocks and
real estate, but invest almost nothing in information. Hence their financial
scores remain about the same.
Finding Your
Financial Genius
Become financial genius by utilizing all three parts of your
brain. As most of us know, the three parts of our brain are the left, right,
and subconscious brain. The reason most people do not become rich is because
the subconscious brain is the most powerful of the three parts. For example,
people may study real estate and know exactly what to do via their left and
right brains, but the powerful subconscious part of their brains can take
control, saying, “Oh, that’s too risky. What if you lose your money? What if
you make a mistake?” In this example, the emotion of fear is causing the
subconscious brain to work against the desires of the left and right brain.
Simply said, to develop your financial genius it is important to first know how
to get all three parts of your brain to work in harmony rather than against
each other.
Controlling the third
part of the brain:
One of the reasons poor people remain poor is because they
have a poor person’s subconscious mind. In many ways the subconscious brain
controls your life, regardless if you are an A or F student. The weak subconscious brain forces a person to
gain sympathy from near and dear ones. The subconscious brain wants the person
to be a “Bechara” with the hope of the
dear and the near ones to help him/her out. The people who grow fast are the
ones who avoid being ‘Centre of sympathy’ in the poverty or a problem
situation. They prefer fighting quickly.
Remember! You could be a left-brain genius and a
subconscious moron.
Which Brain Controls
Your Money?
In most cases, it’s the subconscious fear of failing that
holds people back. It is this fear of failing that teachers use to motivate
people in school. I remember my teachers and parents saying to me, “If you
don’t get good grades, you won’t get a good job.” Later in life, when the stud
students who got the good jobs want to make career changes, their fear holds
them prisoner.
Mirror neurons:
Most people on the traffic signal, do not observe the lights
but they see the others near them. When someone breaks the signal, most others
follow. That’s because of Mirror neurons in the brain. Neuroscientists have recently discovered that
the brain has mirror neurons. Many of these scientists believe this discovery
is more important than the discovery of DNA. A neuro-mirror, in overly simple
terms, is the equivalent of monkey see, monkey do or birds of a feather flock
together. That is, our brains are programmed to imitate what we see others do.
It explains why poor people stay poor even though they earn a lot of money, and
why a child raised in England will speak a different dialect of English with a
different accent than a child born in the U.S. or Australia. People generate
followers’ tendency simply because of mirror neurons.
Mirror neurons also act like television transmitters and
receivers. Even though we are not physically talking to one another, our brains
are communicating at very deep levels. For example, when we walk into a room,
most of us can immediately sense who likes us and who doesn’t, even though
nothing is said. Our Mirror neurons also generate opinions quickly. Look at
some stranger to notice that your brain has already figured out the kind of
person you’ve observed. The rest of the time we spend in conforming our beliefs
triggered by the superfast Mirror neurons.
These neurons also generate option about oneself. When the opinion is negative it is the worst
part. If I did not feel good about myself, people won’t feel good about me. In
many instances, another person is only sending back what I am broadcasting. In
other words, if I think I am a loser, other people will think of me as a loser.
Graduates from Ivy League schools are better than graduates of state
universities, who are better than graduates of community colleges. It’s a lot
because of self-belief.
What solves money
problems?
1. Money alone does
not solve your money problems.
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. All you had to do was qualify
for the poverty requirements to receive a government help—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.
2. 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.
3. Education alone does
not solve money problems.
The world is filled with highly educated poor people.
They’re called socialists. A job does not completely 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. 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.
Timely solutions solve money problems. “Having a money
problem is like having a prolonged 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.” There is a domino effect
caused from not solving a 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. Lesson to be learnt is; to fix the financial
problems on time.
Why is money called Currency?
Money is called currency, derived from the word ‘current’.
Imagine I’ve found `30k kept in the
corner of my old cupboard. This money was misplaced by my father 25 years ago.
Those `30k are not carrying enough
value by current standards. Dad could’ve managed the annual fee of my sisters Medical
College then. Now with that money I can’t even pay the coaching class fee of my
son. Dad made the currency static for 25 years. Most people don’t realize that
the rules of money have changed and that if they are improper savers, they are
proper losers.
Why the Rich Get
Richer? Or the Wise become wiser?
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.” A
person with sound knowledge is aware of her/ his drawbacks and has willingness
to work on those.
How the Poor handle
Money Problems?
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. Instead
of increasing their financial IQ, the only thing the poor increase is their
financial problems.
How the middle class
people handle Money Problems?
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.
One of the reasons our school systems do not teach students
much about money is because most school teachers operate from the E quadrant,
and thus our schools prepare people for the E(Employee) and S(Small
businessmen) quadrants. If you plan on operating out of the B (Big businessmen)
and I(investors) quadrants, then the five financial intelligences are
essential, and you won’t learn them in school. The five financial IQs are:
1. Financial IQ #1: Making more money.
2. Financial IQ #2: Protecting your money.
3. Financial IQ #3: Budgeting your money.
4. Financial IQ #4: Leveraging your money.
5. Financial IQ #5: Improving your financial information.
1. Financial IQ #1:
Making more money.
What many people do not realize is that it’s the process
that makes them rich, not the money. Spot the biggest problem and solve it. 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.
There is no point throwing a towel and letting the
circumstances overwhelm. By being proactive prioritize the avenues of
scalability. For example, a shoe
designer designs once and the author writes once and earns through royalties
for the rest of their lives. There’s lot of scalability.
One of the toughest part of process is not quitting when
depressed, not losing temper when frustrated, and continue learning. Another
reason many people fail in their process is they cannot live without instant
gratification. One of the toughest lessons Robert had to learn from his rich
dad was to stick with the process until he won. “You can quit when you win, but
never quit because you’re losing.”
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.
Financial IQ #2:
Protecting Your Money
Continuing on with his “B” theme of bunnies, birds, and bugs
for labeling farmers’ predators, rich dad’s list of real-world financial predators
included: bureaucrats, bankers, brokers, businesses, brides/beaus,
brothers-in-law, and barristers.
The First B:
Bureaucrats
Unfortunately, the problem with most politicians and
bureaucrats is that they are very good at spending money. Most public servants
do not know how to make money. Since they do not know how to make money, but
love to spend it, bureaucrats spend a lot of time figuring out more and
creative ways to take our money via taxes.
The Second B: Bankers.
Banks were created to protect your money from bandits. But
what if you found out your banker were also a bandit?
CLIPPING COINS During the Roman Empire, many emperors played
games with their coins. Some clipped the coins, shaving a little gold and
silver from the edges. This is why coins today have grooves on the periphery. With
the reeded periphery, you just need to feel around the coin to know if it was
shaved or not.
In many ways, banks are the biggest financial predators of
all. Every day, they rob savers of their wealth by printing more and more funny
money. For example, the bankers’ rules allow them to take in your savings and
pay you a small percentage interest. Then for every dollar you save, the bank
is allowed to lend out at least twenty more dollars and charge a higher interest
on that money. For example, you deposit one dollar and the bank pays you 5
percent interest for that dollar over a year. Immediately, the bank is allowed
to lend out twenty dollars and charge you 20 percent interest to use your
credit card. The bank pays you 5 percent for one dollar and makes 20 percent on
twenty dollars. That is how bankers get rich. If you and I did this, we would
go to jail. It is known as usury.
In the new rules of money, we need to know how to borrow
currency to acquire assets, since we no longer save money. In other words,
smart borrowers are the winners in the new capitalism, not those who save money
in a bank savings account
The Third B: Brokers
“Broker” is another word for “salesperson.” In the world of
money there are brokers for stocks, bonds, real estate, mortgages, insurance,
businesses, etc. One of the problems today is that most people are getting
their financial advice from salespeople, not rich people. If you meet a rich
broker, you need to ask if the broker got rich from his or her sales ability or
financial ability. Warren Buffett once observed, “Wall Street is the place
people drive to in their Rolls-Royce to take advice from people who ride the
subway.” Rich dad said, “The reason they are called brokers is because they are
broker than you are.”
Two Choices
When it comes to financial IQ #3: budgeting your money,
there are only two choices—deficit or surplus. Many people choose a budget
deficit. If you want to be rich, choose a budget surplus, and create one by
increasing income, not reducing expenses.
What Is Leverage?
In very simple terms, the definition of leverage is doing
more with less. A person who puts money in the bank, for example, has no
leverage. It’s the person’s money.
Net worth:
My Worth Is Not based upon Net Worth. The wealth effect is
rooted in the illusion of net worth. Net worth is the value of your possessions
minus your debt.
When most financial advisors recommend diversification, they
are not really diversifying.
There are two reasons why the diversification they recommend
is not diversification. The first reason is that financial advisors invest in
only one category of asset: paper assets. As the market crash of August 9 and
10, 2007, revealed, diversification did not protect paper asset values. The second
reason is that a mutual fund is already a diversified investment. It is a
hodgepodge of good and bad stocks. When a person buys several mutual funds, it
is like taking several multivitamins. When a person takes multiple
multivitamins, the only thing that goes up in value is the person’s urine.
Professional investors don’t diversify. As Warren Buffett says,
“Diversification is a protection against ignorance. Diversification is not
required if a person knows what they are doing.”
Three Types of Investors When it comes to capital gains or
cash flow, there are three general types of investors. They are:
1. Those who invest only for capital gains.
In the world of stocks these people are called traders, and
in the real estate market they are called flippers. Their investment objectives
are generally to buy low and sell high.
2. Those who invest only for cash flow. Many investors like
savings or bonds because of the steady income.
3. The investor who invests for capital gains as well as
cash flow.
There are three more advanced investment strategies,
investment strategies that require a higher level of financial intelligence.
The three advanced leverage strategies are OPM(other person money), ROI, and
IRR.
1. OPM: Other people’s money. There are many ways to use
OPM. With the 300-unit apartment building, I am using 80 percent leverage.
First of all, the beauty of using the bank’s money is that it is tax-free
money. The other benefits of the bank’s money are:
Me Bank
1.
Appreciation 100% 0%
2.
Income 100% 0%
3.
Tax benefits 100% 0%
4.
Amortization 100% 0%
As you can see from these numbers, the bank puts up 80
percent of the money but I receive 100 percent of the benefits. What a great
partner.
2. ROI: Return on investment.
The Most Important Asset:
Bible scholar often says, “Without knowledge, my people will
perish.” Today many people are perishing because they are without knowledge
about money. We live in the Information Age. Even in very remote areas of the
world, I have seen young people text messaging while at the same time riding
the family’s donkey cart. Never before has the entire world been so connected
so quickly. Information is the single greatest asset of this era. In previous
ages, you owned factories, cattle ranches, gold mines, oil wells, or
skyscrapers to be rich. In the Information Age, information alone can make you
very rich. You don’t need tangible resources like land, gold, or oil. The young
entrepreneurs who created My Space and YouTube have proved that. With just a
few dollars, some information, and the leverage of technology. Likewise, poor
or mistaken information is a liability. Poor information creates poor people.
One of the reasons so many people are struggling financially is simply because
they have obsolete, biased, misleading, or erroneous information powering their
most powerful asset, their brain. Examples of Industrial Age information are
ideas such as, “I need a good education to get a high-paying job.” An example
of Agrarian Age information is, “Land is the basis of all wealth.”
The Gap
The widening gap between the super-rich and everyone else is
made by information. The good news is that information is abundant and free.
Today, it’s relatively easy for a person, even the very poor or the young, to
go from nothing to super-rich without much money. To be rich today, you do not
have to be a conquistador, sailing to foreign lands and robbing the indigenous
people of their resources. You do not need to raise millions of dollars in the
stock market to build a car factory or employ thousands of workers. Today,
information and a very inexpensive computer can transport you from poor to
super-rich while you’re sitting at home. All it takes is the right information.
Information Overload
The good news is that information is abundant and free. The
bad news is that irrelevant information is abundant and free. The irony of the
Information Age is that there is too much of it. Today, people complain about
information overload. At any given moment a person can be watching television,
surfing the Internet, and talking on the phone—while driving past digital
billboards. In previous ages, no one complained about too much land or oil. Yet
in the Information Age, people complain about having too much information and being
overloaded with the very asset that could make them super-rich.
Understand the
difference between facts and information.
Insane solutions. An insane solution occurs when a person
uses information that is an opinion as a fact. In war this can kill you. In
business it can ruin you. For example:
QUESTION: “Why did you buy that house when you knew you
couldn’t afford it?”
ANSWER: “I bought it because my broker said it was going to
go up in value. I thought that I could buy the house, live in it, and then sell
it for a profit, which would solve my money problems.”
QUESTION: “Why did you stay at a job you hated for so many
years?” ANSWER: “I thought I might get promoted.”
QUESTION: “Why do you invest in those mutual funds?” ANSWER:
“Because my supervisor told me to. She said it was a good investment.”
The Power of Environments
We have a better chance of success by going to a gym rather
than going to a restaurant. If we want to study, it might be better to study in
the quiet of a library. And if you want to become financially rich, you need to
find an environment that is conducive to becoming richer, an environment that
strengthens all three brains. Ironically, work and school are not those
environments for most people.
Feedback is important. It can be a very important source of
information about us and our environment. The problem is, if we do not like the
feedback, our subconscious minds may block out, distort, diminish, or deny the
importance of the information coming from feedback.
There are three important things to know about feedback:
1. Have the courage to be open to feedback. If you want to
improve, seek more feedback. This is why coaches and mentors are important to
successful people. Successful people seek more feedback.
2. Offer feedback or advice only if it’s asked for. Nothing
infuriates people more than feedback they did not ask for . . . even if it’s
feedback they know they need. As that ancient bit of wisdom goes, “Don’t teach
pigs to sing. It wastes your time and it annoys the pig.”
3. Con men will tell you what you want to hear rather than
tell you what you need to hear.
In nutshell, one needs to be well informed in order to grow.
To get the correct information, create conducive surrounding, good habits, and
be ready to explore and experiment.
Disclaimer: The above
article is just an attempt to save good points that Robert Kiyosaki has made in
his book. In this process, I’ve used my experience, discretion and forecast to
land on a point.
Vinay Wagh
Bulls Eye
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