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Investor Lesson 16 - What Is the Price of Becoming Rich
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Rich dad would tell me that there are many ways a person can become rich, and each one has a price.

1. You can become rich by marrying someone for his or her money. And we all know what that price is. Rich dad would scrunch up his face and say, “Both men and women marry for money, but can you imagine spending your life with someone you don't love? That is a very high price. ”

2. You can become rich by being a crook, a cheat , or an outlaw. He would say, “It is so easy to become rich legally. Why would people want to break the law and risk going to jail unless they really enjoyed the thrill of it all? To risk going to jail is much too high a price for me. I want to be rich for my freedom, so why risk going to jail? I would lose my self-respect. I could not face my family and friends if I were doing something illegal. Besides, I am a bad liar . I have a poor memory, and I could not keep track of all my lies, so it is best to just tell the truth. In my opinion, honesty is the best policy.”

3. You can become rich through inheritance. Rich dad would say,

“Mike often feels like he did not earn his keep. He wonders if he could have become rich on his own. I have therefore given him very little. I have guided him as I guide you, but it is up to him to create his own wealth. It is important for him to feel he has earned it. Not everyone fortunate enough to inherit money feels that way.”

As Mike and I had grown up together , both our families were relatively poor. By the time we were adults, however, Mike's dad had become very rich, while my real dad was still poor . Mike stood to inherit a fortune from his dad, the man I call my rich dad. I was starting with nothing.

4. You can become rich by winning the lottery. All rich dad could say to that was, “It's OK to buy a ticket now and then, but to bet your financial life on winning the lottery is a fool's plan on becoming rich. ”

Unfortunately, winning the lottery is how many Americans say they plan on becoming rich. Living your life with odds of one in a hundred million is a very high price to pay.

And if you do not have a plan on how to handle the problem of too much money, you will go back to being poor . Recently, there was a story in the paper of a man who won the lottery. He had a great time but was soon so deeply in debt that he considered filing bankruptcy. He was doing fine financially before he won the lottery. So to solve his problem, he went out and played the lottery again—and won. This time, he has financial advisors helping him with his money. So the moral of the story is: If you win the lottery once have a plan for the money. Not too many people win it twice.

5. You can become rich by being a movie star, a rock star, a sports

star, or someone outstanding in one field or another. Rich dad would say, “I am not smart, talented, good looking, or entertaining. So becoming rich by being outstanding is not realistic for me.”

Hollywood is filled with actors who are broke. Clubs are filled with rock bands dreaming of cutting a gold record. The golf courses are filled with golfers dreaming of becoming a pro like Tiger Woods. However , if you look closely at Tiger Woods, you will notice that he paid a high price to get to where he is today. Tiger started playing golf at the age of 3 and did not turn pro until he was 20. His price was 17 years of practice.

6. You can become rich by being greedy. The world is filled with people like this. Their favorite saying is : “I got mine and I am going to keep it. ” Greedy with their money and assets usually means they are also tight with other things. When asked to help other people, or to teach other people, they often do not have the time.

The price for being greedy is that you have to work even harder to keep what you want. Newton's Law states , “For every action there is a reaction.” If you're greedy, people will respond to you in kind.

When I meet people who are having a tough time with money, I ask them to start giving money away on a regular basis —to their church or favorite charity. Following the laws of economics and physics, give what you want. If you want a smile, first give a smile. If you want a punch, first throw a punch. If you want money, first give some money. For greedy people, opening up their fist or wallet can be very hard to do.

7. You can become rich by being cheap. This is the one that set rich dad's blood boiling. He said, “The problem with becoming rich by being cheap is that you are still cheap. The world hates rich people who are cheap. That is why people hated the character Scrooge in Charles Dickens' famous story, ‘A Christmas Carol. '” Rich dad would say, “It is people who become rich like Scrooge that give the rich a bad name. To live poor and die poor is a tragedy. But to live poor and die rich is insanity. ”

After he calmed down, he would say, “I think money is meant to be enjoyed, so I work hard, my money works hard, and I enjoy the fruits of our labor. ”

Affording the Good Life

A recent article reinforces my rich dad's point of view . The article, “Affording the Good Life in an Age of Change,” was in the Strategic Investment Newsletter, published by James Dale Davidson and Lord William Rees-Mogg. These two men have also co-authored several best-selling books: Blood in the Streets, The Great Reckoning, and The Sovereign Individual. These books have dramatically affected the way I invest and how I look to the future. Davidson is the founder of the National Taxpayers Union, and Rees-Mogg is a financial advisor to some of the world's wealthiest investors, a former editor of the Times of London, and vice-chairman of the British Broadcasting Corporation.

My rich dad would say, “There are two ways to become rich. One way is to earn more. The other way is to desire less. The problem is that most people are not good with either way. ” The article and this book are about how you can earn more so you can desire more. Here are excerpts from the article “Affording the Good Life in an Age of Change” as published in the Strategic Investment Newsletter.

“Being frugal is the cornerstone of wealth-building.” Thomas J. Stanley & William Danko

The Millionaire Next Door 1996

This reminds me of my complaint with the reasoning of the popular books, such as The Millionaire Next Door, by Stanley and Danko, and Getting Rich In America: 8 Simple Rules for Building a Fortune and a Satisfying Life by my friend Dwight Lee. Both books define success downward by suggesting that anyone who lives an abstemious lifestyle and pinches pennies will become “rich.” …

Yes. If you never earn more than $50,000 a year, you may become a millionaire by pinching pennies. But there is a limit to the amount of wealth you can acquire by living as though you were poor . Even eating Spam or canned spaghetti from Chef Boyardee at every meal would not save enough money to make you a multimillionaire. This helps explain why only one-in- 10 millionaires reaches a net worth of $5

million…Simply penny pinching, per se, is only a preliminary step that would permit someone without inherited capital or a significant annual cash flow to make the kind of investment that would lead to riches . For Americans, becoming a “millionaire” is a necessary step to allow you to participate as an “accredited investor” in private placements for private, high growth companies. This is the main route to riches. I was a millionaire in my early 20s. But I quickly recognized even then that a few millions did not amount to much. I could not afford my preferred lifestyle on such a small fortune.

…My conclusion is that the best way to make real money is to undertake private stage investments in private companies.

“Affording the Good Life in an Age of Change” discusses why being cheap is not a way to really become wealthy. Davidson's point is that while it is possible to become rich by being cheap, there is a huge price to pay. In fact, there are many prices to pay. One such price is that being cheap and scrimping money will get you only so far . Being cheap does not necessarily mean that you have the competence to become richer. All you know how to do is to be cheap, and that is an expensive price to pay.

Davidson disagrees and I disagree with the popularity of ideas such as cut up your credit cards and live below your means. That may be a good idea for some people, but it is not my idea of becoming rich and enjoying the bounties of the good life.

The Importance of Being Frugal

In contrast to Davidson's article, however, I did enjoy The Millionaire Next Door. It makes many fundamental points about frugality. There are differences between being cheap and frugal. Rich dad was more concerned with being frugal than being cheap. He said, “If you want to be really rich, you need to know when to be frugal and when to be a spendthrift. The problem is that too many people know how to be cheap only. That is like having only one leg to walk on.”

A Million Dollars Is the Starting Point

Davidson also said it is best to acquire wealth with financial competence. Being a millionaire today does not mean that much. Today, $1 million is just the starting point to beginning to invest like the rich. So Davidson is in reality recommending choice #8 as the means to becoming rich. To rich dad, being financially smart included knowing when to be frugal and when not to be.

8. You can become rich by being financially smart . It was learning to be finanically smart where I began to harness the same investing power I had witnessed at the age of 12 standing on the beach looking at rich dad's new piece of ocean front land. Many people become rich by being very smart with knowledge from the B and I quadrants. Many of these individuals operate behind the scenes and manage, control, and manipulate the world's business and financial systems.

Millions of people faithfully place their retirement savings and other monies into the market. However, the decision-makers of the marketing and distribution system of the underlying investments actually make the large sums of money, not necessarily the individual investor or retiree. As rich dad taught me years ago, “There are people who buy tickets to the game, and there are people who sell tickets to the game. You want to be on the side that is selling the tickets.”

Why the Rich Get Richer

When I was younger, my rich dad said to me, “The rich get richer partly because they invest differently than others; they invest in investments that are not offered to the poor and the middle class. Most importantly, however, they have a different educational background. If you have the education, you will always have plenty of money. ”

Davidson points out that the dollar has lost 90% of its value in the last century. Being a cheap millionaire is therefore not enough. To qualify to invest in the investments of the rich, the price is at least $1 million of net worth. Even then, you may not be competent enough to safely invest in what the rich invest in.

Rich dad said, “If you want to invest in the same investments the rich invest in, you need:

1. Education,

2. Experience, and

3. Excessive cash.”

At each level of what rich dad called the three Es, you find a different type of investor with a different level of education, experience, and excessive cash. The price of being financially free requires time and dedication to gain the education, experience, and excessive cash to invest at those levels. You know you are financially smarter or increasing in sophistication when you can tell the differences between:

1. Good debt and bad debt

2. Good losses and bad losses

3. Good expenses and bad expenses

4. Tax payments versus tax incentives

5. Corporations you work for versus corporations you own

6. How to build a business, how to fix a business, and how to take a

business public

7. The advantages and disadvantages of stocks, bonds, mutual funds, businesses, real estate, and insurance products as well as the different legal structures and when to use which product

Most average investors know only of:

2. Bad losses, which is why they think losing money is bad

3. Bad expenses, which is why they hate paying bills

4. Taxes they pay, which is why they say that taxes are unfair

5. Job security and climbing the corporate ladder instead of owning the

ladder

6. Investing from the outside, and buying shares of a company rather than selling shares of a company they own

7. Investing only in mutual funds, or picking only blue chip stocks

9. You can become rich by being generous. This was the way rich dad became rich. He often said, “The more people I serve, the richer I

become.” He also said, “The problem with being on the E and S side of the Quadrant is that you can serve only so many people. If you build large operating systems in the B and I Quadrants, you can serve as many people as you want. And if you do that, you will become richer beyond your dreams.”

Serving More and More People

Rich dad shared this example on how to become rich by serving more and more people, “If I am a doctor and I know how to work with one patient at a time only, there are just two ways for me to make more money. One is to work longer, and the other is to raise my rates. But if I keep my job and work in my spare time to find a drug that cures cancer, then I will become rich by serving many more people.”

The Definition of Rich

Forbes magazine defines rich as $1 million in income and $10 million in net worth. Rich dad had a tougher definition: a consistent $1 million in passive

income, which is income that comes in regardless of if you work or not, and $5,000,000 in assets, not net worth. Net worth can be an elusive and much-manipulated figure. He also felt that if you could not maintain a 20% return from capital invested, you were not really an investor .

The price to reach rich dad's goal, starting from nothing, is actually measured in rich dad's three E's: education, experience, and excessive cash. When I returned from Vietnam in 1973, I had very little of all three. I had to make a choice: Was I willing to invest my time to attain all three of the Es? Rich dad did, his son Mike did, and many of my friends are still investing their time to gain the three Es. That is why they got richer and richer.

It Starts with a Plan

To be a rich investor , you must have a plan, be focused, and play to win. An average investor does not have a plan, invests in hot tips, and chases the hot investment products of the day, flitting from technology stocks to commodities to real estate to starting his or her own business. It's OK to invest on a hot tip now and then, but please do not delude yourself that one hot tip will make you rich forever .

In addition to the three Es, rich dad had a list of what he called the five Ds that were required to become very rich, especially when you start with nothing. They are:

1. Dream 4. Data

2. Dedication 5. Dollars

3. Drive

Most people focus on the last two, data and dollars. Many people go to school and think that the education or data they gain there will get them the dollars. Alternatively, if they don't have a formal education, they say, “I can't be rich

because I don't have a college education” or “It takes money to make money” or “If I work harder and make more money, then I'll be rich.” In other words, many people use the lack of education or money as their excuse for not being rich as investors.

Rich dad concluded his discussion on the five Ds by saying, “In reality, it is the focus on the first three Ds that ultimately gains you the data and dollars you need to become very, very rich.” In other words, the data and the dollars are derived from having a dream, being dedicated, and having the drive to win. In my classes , I often find people who want more data before they begin doing anything, or think that first earning more money will make them rich. In most cases, exclusively trying to get more data or more dollars does not make a person rich. While data and dollars are important, it really takes just getting out there and doing it, especially if you are starting with nothing.

End of Phase One

This completes Phase One, which is , in my opinion, the most important phase. Money is just an idea. If you think money is hard to get and you'll never be rich, then it will be true for you. If you think that money is abundant, then that can be true.

The remaining four phases cover the specifics of rich dad's plan and how they were similar to the plans of some of the richest people in the world. As you read, consider how rich dad's plan conflicts, adds to, subtracts from, or agrees with your personal financial plan.

I caution you to use the information provided as a guide and not as hard data. Much of it is subject to legal interpretation and should be considered based on your individual circumstances. Its application is not always black and white and should be carefully reviewed. We advise you to consult with your legal and financial advisors to make sure you develop the plan most appropriate for your needs and goals.

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