Control over Yourself

The most important control of all is to take control over yourself and how you manage your money. If you can do that, you can build a rich ark and cap tain it wisely.

In 1996, I was in Peru looking for a gold mine to buy. Due to economic turmoil and terrorist attacks, many gold mines had been abandoned or left in the hands of poor management. Up at fifteen thousand feet, high in the Andes Mountains, a banker showed me a mine he thought I could buy. Due to the altitude, the best I could do was take three steps, stop, and gain con trol of my dizziness and my breathing.

Finally, down in the small, dark shaft of the mine, the banker, who owned the mine through foreclosure, pointed to a vein of quartz running through the rock. “Here,” he said. “Look at how rich the vein is.”

Stumbling over to the spot where he stood, I gazed at the spot his flash light was hitting. “Wow,” I said. “Look at all the gold.” I could not believe the sparkling glitter of gold reflected in the light.

Inching closer, I put my hand up to the milky green and white quartz vein and began touching the sparkling gold. I said, “I can't believe how beautiful it is.”

“Se ? or,” said the banker. “What you are looking at is not gold. That is iron pyrites, or fool's gold. The gold I am looking at is in the quartz below the fool's gold. The real gold is in the dark part of the quartz vein. The gold is the part of the vein that does not shine.”

When I was a little boy, rich dad often spoke of alchemy. Not knowing what alchemy was I asked rich dad for an explanation. He said, “Years ago, many people were trying to turn different materials such as iron or coal into gold.”

“No,” said rich dad. “No one has ever turned something into gold. Gold is just gold. But people have learned to create something even better than gold.” “What is better than gold?” I asked.

“Assets,” said rich dad. “Today's modern alchemists turn money, resources, or ideas into wealth via assets.”

Rich dad said, “That is correct. Today's modern alchemists can create as sets out of thin air. They turn their ideas into assets and those assets make them rich. A patent or trademark are examples of turning ideas into such as sets. Or they turn trash into an asset. Or they turn real estate into assets. That is modern-day alchemy.”

As I rode down the twisting and bumpy road with the banker, staring out at the spectacular vistas high on the Peruvian Andes, I knew the banker knew he had a fool, not an alchemist, as a potential investor. If I could not tell the difference between veins of fool's gold and the vein of real gold, what chance did I have of turning that abandoned mine into an asset? Needless to say, I did not do a deal in Peru. I am just grateful today there are many ways to be an alchemist other than mining for gold.

I began this book with my rich dad going over my personal and business financial statements in 1979. One of his comments is still appropriate today. As rich dad was going over my financials, rich dad said, “The world is filled with fools and alchemists. Fools turn cash to trash and alchemists turn trash to

cash. You and your partners are fools, not alchemists. You boys have taken a business and turned the cash into trash.”

“But our banker said he would lend us more money,” I replied. “We can't be doing that bad.”

Rich dad chuckled and smiled, then said, “First of all, bankers lend money to both fools and alchemists. Bankers do not really care as long as you have the money to pay them back. And secondly, if you are a fool, you will pay higher rates of interest. The bigger the fool, the higher the interest rate. So your bankers love you boys. Your business makes a lot of money and you boys are turning that cash into trash. These financials show that at one end of the business you are alchemists and at the other end you boys are fools. Why wouldn't a banker lend money to you?

“The problem is you boys are about to go broke. Instead of reinvesting the money from your business back into your business, I can see here in the lia-bility column of your financial statement that you boys have invested in one Porsche, two Mercedeses, and one Jaguar. Look at the interest rates you are paying on those cars. No wonder your banker loves you and no wonder you're going broke. You boys must look good driving around in your flashy cars. I'm sure the women love you. But when I look at your financials, your financials tell me that you have financial cancer. Your financials tell me that you are fools, not alchemists. You seem to have forgotten everything I have taught you.”

Rich dad then said something I recalled years later, as I rode down from the mine way on top of the Peruvian Andes. Sitting in the bumpy four-wheeldrive vehicle, I could hear rich dad saying, “All that glitters is not gold. Fools are fooled by the glitter. That is why it is called fool's gold. Alchemists can find gold in the darkness.”

One of my routines is to get up and turn on the financial news on two financial networks. I check the mood of the market in the morning and then the mood of the market at the end of the day. One thing I have found interesting as a sideline is to watch which mutual fund, stock, public company, or financial advisory service is doing the most advertising. In other words, which one is glittering?

Many people, low-income wage earners to high-income wage earners, are in financial trouble because too much of their money goes to buy things that glitter. We have all heard of poor kids spending $150 for a new pair of name-brand athletic shoes. On my inspection tours of apartment houses I am interested in buying, I always find name-brand large-screen TV sets and video games in many of the apartments. I have friends who live in namebrand suburbs, drive European cars, and send their kids to private schools. In other words, when you look at their expense and liability columns, they are awash with glitter.

Many professional investors look only in the darkness. They do not follow Microsoft. Instead they are looking for the next Microsoft. They are looking for the small start-up company that will grow into an international giant. They are not looking for a name-brand CEO with the silver hair, the Ivy League de gree, and the movie star smile. Many are looking for an entrepreneur, labor ing away in a basement or garage, working on the next product that will solve the next big problem facing humanity.

When playing Monopoly my rich dad would remind me that many people also look for the glitter in real estate and want Boardwalk and Park Place, but the true wealth is from owning the other properties and loading them up with houses and hotels. It's not the glitter that counts, it's the cash flow. In fact, in a recent Harvard Business Review article by Phil Orbanes, titled “Everything I Know About Business I Learned from Monopoly” (March 2002), he references The Monopoly Companion: The Player's Guide when he quotes “Casual players don't know this, but the 28 properties around the Monopoly board are not equally valuable in terms of ROI. Boardwalk and Park Place, which many regard as the most precious, actually are not. It turns out that the oranges and reds have the hightest ROI and are the best properties to own.”

When I look for real estate investments, I generally do not go to the new home subdivisions where there are flags, helium balloons, large eye-catching signs, flashy model homes, and a sales trailer on site offering easy financing plans. I know these marketing ploys are to attract potential homeowners who are seeking emotional satisfaction. When I look for real estate, I am often looking at unattractive buildings, many with major problems, and generally in older neighborhoods. Often that is where the highest yielding investments are . . . but not always. I have bought brand-new real estate in hot new areas that has turned out to be a financial home run. I do know that sometimes things that do glitter are gold. Again it is financial education, being able to read financial statements, the deal, the trends, the needs of the buyer and seller, that can turn glittery fool's gold into glittery real gold. That is financial alchemy.

The point is, millions of people, rich and poor, are in financial trouble be cause they are fools for the glitter. In just a few years, millions of aging peo ple throughout the world will find out they are in financial trouble because their DC pension plans are invested in glitter but not gold.

When a banker or captain of an ark looks at the lines on the income state ment that the arrows are pointing to, and there is income there, they know that this ark has a cargo of assets on board.

If there are no lines and numbers under the salary line entry, a banker or captain of an ark knows this person has no cargo on board and is sailing empty, or, if there is cargo on board, this person has loaded his or her ark with fool's gold.

To find out if the ship is empty or loaded with fool's gold, the banker or ship's captain simply looks down at the balance sheet as shown on page 169. If the balance sheet, which is the cargo hold of an ark, shows the asset column as empty, they know the ship is empty. It could be the financial statement of a poor person or a young person just starting out. If the balance sheet shows a cargo manifest of a retirement plan, stocks, bonds, mutual funds, or real estate but no cash flow arrows to the income statement, the banker or the ship's captain becomes suspicious, suspecting that the cargo hold might have been filled with fool's gold. And if the assets are name-brand assets, then you know this person loaded the cargo hold with fool's gold that merely glitters.

As a student at the U.S. Merchant Marine Academy, I was taught to watch the cargo holds closely. We were taught to be careful about what type of cargo was being loaded, how it was being loaded, where it was stored, if it was securely stored, and how and where it was to be unloaded. The subject of cargo and cargo operations was a very big subject at the academy. It was a subject we studied in depth for four years.

One of the cargo operations instructors was a retired sea captain with years of experience. His classes were very interesting because he would tell us great stories as he explained the technical side of a rather boring subject. One of the stories he told was about a load of cargo that broke loose on the port side (left side) of the number two cargo hold (the large cargo hold, that is, second from the bow of the ship) during a storm. He said, “Suddenly there was a large cracking sound and the ship began to list [tilt] to starboard [the right side]. Immediately the ship began to sail off course and the helmsman [the seaman steering the ship] had to swing the wheel hard to port [turn the steering wheel to the left]. Immediately the large waves began to come over the ship from the port side instead of hitting the ship on the bow. As the helmsman fought to get the bow of the ship headed back into the

waves, there was another loud cracking sound. It was the cargo in number four hold [the biggest hold, just in front of the bridge of the ship] breaking loose. Instead of the ship correcting, the weight of the cargo in hold number four breaking loose and shifting to starboard made the list to starboard even worse. The monster waves were now hitting the ship broadside.”

As the old sea captain was speaking, the rest of the class was right there on board the ship with him. Since we were now seniors, we had all been to sea for a year. We knew what it was like to be out on the ocean on a large ship loaded with cargo. Many of us, myself included, had been through hurricanes, accidents, deaths, and other hazards and disasters associated with the industry. As the old captain spoke, I could feel the ship listing to starboard with the helmsman fighting to regain control over the forces of the cargo, the ship, the weather, and the ocean. We all knew that having your cargo break loose from its lashing at sea during a storm is a nightmare that few people live through.

The retired captain told us that the helmsman did eventually lose control of the ship. The ship's cargo continued to break loose and suddenly the ship rolled rapidly to starboard and capsized when a large wave hit it. Luckily, the crew was picked up two days later by another passing freighter. The teacher's final words were, “Before you leave the harbor, make sure your cargo is tied down securely. All it takes is one hold to be tied down improperly and the cargo that was supposed to make you rich could kill you.” The rest of the class, all of us students, paid especially close attention to a normally boring subject, the subject of how to check cargo ties and make sure they are secure.

When the next monster stock market crash comes, many people will find out that their cargo holds are not securely tied down. Many of their assets will suddenly turn into liabilities, as many did in March of 2000. Many will not be able to handle the financial storm because although millions of people have invested, they failed to become investors. When the financial crash comes, the real investors will be at the helm, working hard to keep the cash flowing from the asset column into the income column. Many of the people who invested but failed to become investors will find their little arks capsized and find themselves adrift at sea, hoping the government or some charitable organization rescues them.

The reason the financial statement is such an important financial tool is because it gives the banker or the captain of the ship a quick snapshot as to whether your cargo is gold or fool's gold. In book number four of the Rich Dad series, Rich Kid Smart Kid, the introduction to the book is entitled, “Why Your Banker Does Not Ask for Your Report Card.” The reason the banker does not ask you for your report card, or what your grade-point average was, or what school you went to is because your academic success or professional success has little to do with your financial success As the crew of the good ship SS Enron found out, employees with Ph.D.s, MBAs, CPAs, and JDs after their names were swimming right alongside employees who had not finished high school. Unfortunately, in just a few years, millions of highly educated people will also be swimming, swimming for their lives and hoping to be rescued.

The number one control if you are to be captain of your own ark is to take control of yourself, your financial statement, your cargo, how it is stored, and who is securing it. Your balance sheet is the cargo hold of your ark. In large financial storms, which do occur on a regular basis, people will find out that Porsches, Ferraris, Rolexes, their home, mutual funds, stocks, real estate, suddenly shift in value . . . a shift from the port side (assets) to the starboard side (liabilities) in a flash. When that happens, and it will, people will find out how worth less their net worth really is. So, the message is, if you love the glitter, you should not be captain of the ship. If you are to become captain, you must control the fool in you that tends to be attracted to the glitter rather than the gold. To be captain of your ship, take control of your-self, which means taking control of your income statement and your balance sheet. Always remember that your balance sheet is the cargo hold of your ark regardless if you load it or not.

“If you want to be rich, you must know the difference between an asset and a liability,” rich dad repeatedly said to his son and me. The reason he spent so much time on our financial education is because without a solid financial education a person cannot tell the difference between an asset and a liability. One of the fundamentals of building a rich ark is to know the difference be tween an asset and a liability.

In January of 2002, I was asked to give a talk to a small group of very promi nent business people in Phoenix, Arizona. After my talk, a senior vice presi dent of a large regional bank asked, “I understand your book Rich Dad Poor Dad has sold more than 11 million copies, in over thirty-five languages, worldwide. Is that true?”

Nodding, I said, “Yes, and the numbers sold keep increasing. Rich Dad Poor Dad has been on best-seller lists for years, lists such as those of the New York Times and the Wall Street Journal. Have you read the book?”

“No I haven't,” he replied pleasantly. “Tell me what the book is about.” “It's a book on accounting,” I said with a smile.

“What?” stammered the banker. “How can a book on accounting be a worldwide best-seller? That makes no sense. I have an accounting degree and accounting could never be the subject of a best-seller.”

I spent the next few minutes telling him the story of my poor dad and my rich dad. I explained how my poor dad was an advocate of word literacy and my rich dad was an advocate of financial literacy. After explaining the story behind the book, I then asked the banker, “How many of your customers are financially illiterate?”

The banker shook his head, smiled and said, “Some of my clients are very financially literate. Many of the richest clients are well versed financially. But most of my clients have no idea what a financial statement is, much less anything about accounting. Many of them make a lot of money but they have no idea what to do with their money. It's good for me since most of them keep their money in savings. So yes, you are correct. Most of the people I meet are not financially literate.”

Those of you who have read Rich Dad Poor Dad know how important the basics of accounting . . . the income statement and balance sheet . . . were to my rich dad. Rich dad often said, “Without both the income statement and a balance sheet, you really cannot tell the difference between an asset and a liability.” In Rich Dad Poor Dad, the part of the book that caused such a roar of protest was the idea that your home was not an asset. In most cases, a person's home is a liability. Some people put the book down after that point and refuse to read further. My rich dad never said not to buy a home . . . in fact he encouraged home ownership. His main point was that we need to know the difference between an asset and a liability. Rich dad's point was that many people struggled financially simply because they pur chased liabilities they thought were assets.

Smiling, I said, “Well, it's more than a book on accounting. It's also a book on personal accountability.”

“Personal accountability?” replied the banker. “Why personal accountability?”

“First of all, understanding accounting gives me control over my finances and my future. I can run my own businesses and I don't need someone else to do my investing for me,” I said. “Secondly, personal accountability means I do not let people lie to me.”

“Lie to you?” said the banker. “What do you mean by lie?” “Well look at this Enron case.”

Warren Buffett, America's richest investor, believes that understanding ac counting is a form of self-defense. On this subject he said:

“When managers want to get across the facts of a business to you, it can be done within the rules of accounting. Unfortunately, when they want to play games, at least in some industries, it can also be done within the rules of

accounting. If you can't recognize the differences, you shouldn't be in the equity-picking business.”

When the Enron affair broke, one of the questions asked was, “What is proforma accounting?” which was one of the methods of accounting Enron was using when the roof caved in. Rich dad would say, “Proforma accounting is an accounting report that should begin with the words, “Once upon a time . . .” Or, “In a perfect world . . .” Or, “If everything goes as planned . . .”

In 1999, at the height of the stock market boom, I was invited to a school to talk about the importance of teaching young people financial literacy. A teacher raised his hand and proudly said, “We do teach financial literacy in our school. We're teaching kids how to pick stocks.”

“Do you first teach them to read the annual reports and financial state ments?” I asked.

“No. I just have them read the reports from the market analysts. If the an alyst gives the stock a buy recommendation, we buy, and when they recom mend a sell, we sell.”

Not wanting to be obnoxious, I simply smiled and nodded my head say ing, “How are they doing?”

I smiled and thanked him for teaching. I did not say anything after the word teaching. I did not want to say what I feared he was teaching those kids to be. Just before the Enron scandal broke, sixteen out of seventeen market analysts were giving Enron a buy recommendation.

When Warren Buffett says, “If you can't recognize the differences, you shouldn't be in the equity-picking business,” he means if you are not financially literate, you shouldn't be picking stocks. Rich dad would say, “Picking stocks without first knowing how to read a company's financial statements is gambling . . . not stock picking.” In rich dad's mind, ERISA forced millions of people to become gamblers . . . not investors . . . gambling with their future financial security. Instead of filling their retirement arks up with gold, they spent a lifetime being fooled and filled their arks with fool's gold. So the problem of a worldwide lack of financial literacy is a problem far beyond just the ENRON and the Arthur Andersen scandal.

Rich Dad Poor Dad is a book about accounting, but it is also a book about accountability. As accounting questions continue to surface with com-panies such as with Enron, WorldCom, and Xerox, it is obvious that the ba-sics of financial accountability, not just accounting, are being overlooked.

Enron used “off balance sheet” accounting to account for liabilities. In other words, its financial statement did not correctly show all liabilities. This would be similar to a person who doesn't want to list all of his credit card debt on his own financial statement. It's not only bad accounting, it's a lack of accountability.

With the financial collapse of WorldCom, we have to consider Rich Dad's definition of assets versus that of the conventional “banker's” definition. Rich dad told us that an asset puts money in your pocket. When an expense is “capitalized” (moved to an asset) and then amortized or depreciated over time (gradually expensed), it increases assets and decreases expenses. But, re-member that Rich Dad told us that an asset has to put money in your pocket. Changing an expense into an asset doesn't put more money in your pocket.

Should savvy analysts have discovered the shortcomings of the WorldCom accounting? It stands to be the largest accounting fraud in history at close to $4 billion, and new allegations of additional irregularities are arising every day. It seems a careful study of the Statement of Cash Flows could have revealed this alarming exercise of re-classifying expenses to assets. The net impact was to increase revenue (by decreasing expenses) and increase assets—all while the cash was flowing out of the company!

Many analysts and accountants place too much reliance on the accrual form of accounting, which is reflected in the Income Statement and Balance Sheet, where WorldCom as overstating its revenues and assets. Warren Buf-fett in his 2001 Annual Report for Berkshire Hathaway, stated: “When companies or investment professionals use terms such as ‘EBITDA' and ‘pro forma,' they want you to unthinkingly accept concepts that are dangerously flawed. (In golf, my score is frequently below par on a pro forma basis: I have firm plans to ‘restructure' my putting stroke and therefore only count the swings I take before reaching the green).” Later in the same report, he continued with: “Those who believe that EBITDA is in any way equivalent to true earnings are welcome to pick up the tab.”

In fact, the creation of the Statement of Cash Flows is usually one of the last statements put together for the financial statements. It seems the ac countants start with two known amounts, beginning cash and ending cash, and the rest is a jigsaw puzzle until the difference is explained. Could more time analyzing the Statement of Cash Flows have prevented many of the ac counting irregularities in corporate America today?

Is a company a good investment? The answer is shown by reviewing all parts of all of the financial statements—the Balance Sheet, the Income Statement, and especially the Statement of Cash Flows. Look for which way the cash flows for an investment. Does it flow in or does it flow out? Look for the clues that can give evidence of the Board's accountability. Cash flow is a good place to start, but no one line item can ever give the answer as to a company's viability.

1. “Many studies have pointed to a critical need to improve financial literacy, the lack of which leaves millions of Americans vulnerable to unscrupulous business practices.”

4. “Improved financial literacy would help prevent younger people from making poor financial decisions that can take years to overcome.”

As I watched Greenspan on TV delivering this speech, what I was most impressed with was his emphasis on the need for the American civilization to evolve . . . and given the financial complexities we all face today, financial literacy is important for that evolution.

At the same Senate Banking Committee meeting, Treasury Secretary Paul O'Neill said, “People need to be able to read, write, and speak basic concepts in order to make informed investment decisions.” He continued, “Financial literacy is more important now with the decline in the number of companies offering defined benefit pension plans and the growth in pension plans in which workers make their own investing decisions.” In the year 2002, these prominent men sound very much like my rich dad did a couple of decades ago. At least they share the same concerns.

In Rich Dad Poor Dad, I wrote about my rich dad teaching me to become fi nancially literate starting at the age of nine. I believe one of the reasons for the success of the book is because it really never gets above a nine-year-old child's level of understanding.

For those who have not read the book, I will go over some of the core points it covered. For those of you who have read the book, I will add a few more important bits of information as I cover what rich dad taught me years ago.

He taught me that this accounting form is called a balance sheet, simply because it was supposed to balance. In other words, your assets had to bal ance your liabilities. At that point he said, “This is where the confusion in ac counting begins for most people.”

My poor dad sincerely believed our house was an asset. My rich dad would say, “If your dad were financially literate, he would know that his house was not an asset, it was a liability.”

Rich dad explained to me that the reason so many people called their home an asset is simply because a home is listed under the asset column. That meant that even accountants and bankers call your home an asset because that is the column your home is listed under. For example, let's say your home costs $100,000; you put $20,000 as a down payment, and take out an $80,000 mortgage. The balance sheet would then look like this:

The difference between assets and liabilities is net worth, in this case your $20,000 deposit. The balance sheet balances and the accountants are happy and the new homeowner is happy.

For most people, this is all they want to know about accounting . . . and all they believe they need to know about the subject of accounting. For many people there is a lot of emotional comfort, pride, and a feeling that they are doing the right thing because they purchased a home and because in their mind they think it is an asset. The word asset sounds better than liability.

In teaching his son and me to be business owners and investors, rich dad often said, “If you want to be wealthy, you need to know more than the av erage person knows about accounting.” Starting at the age of nine, he began pushing our financial education far beyond the financial education of most adults . . . and he did it in very simple language.

Rich dad said, “It is impossible to tell the difference between an asset and a liability, just by looking at a balance sheet. To know that difference, you must also have an income statement. Without both an income statement and balance sheet, it is impossible to tell the difference between an asset and a liability.”

To make his point, rich dad drew the following diagram for his son and me. The book Rich Dad Poor Dad is really a book about the relationship between the income statement and balance sheet as much as it is the story of two dads and two sons. Without understanding the relationships it is easy to be fooled.

Rich dad then said, “The most important words in business are the words cash flow.” He went on to explain that rich people are rich because they can control cash flow and poor people are poor because they cannot. “One of the most important life skills to develop is to learn to gain control of your cash flow. Most financial problems are caused by personal lack of control over cash flow.” This is one of the most important lessons I learned as a nineyear-old boy.

To repeat Alan Greenspan's words: “Improved financial literacy would help prevent younger people from making poor financial decisions that can take years to overcome.”

Rich dad's lesson, “One of the most important life skills to develop is to learn to gain control of your cash flow,” parallels Alan Greenspan's statement. When I saw the picture of that fifty-eight-year-old Enron employee on the front page of USA Today's “Money” section, I saw a picture of a person who found out late in life that he had very little control over which way his cash was flowing. Alan Greenspan's reference to “making poor financial decisions that can take years to overcome” is especially prophetic here.

In March of 2000, millions of employees in America found out that they have no control over the cash flowing out of their retirement plans . . . out of what they were led to believe were assets. To rich dad and to me, that is one of the greatest flaws of these new DC pension plans. The worker puts money in, hoping that the money grows. But instead, what workers are finding out is that they do not have much control over their cash flow once their cash buys a stock, bond, or mutual fund. Again, to repeat:

“One of the most important life skills to develop is to learn to gain con trol of your cash flow. Most financial problems are caused by personal lack of control over cash flow.” This is one of the most important lessons I learned as a nine-year-old boy. As I grew up, I had to gain more and more control over my cash flow . . . not less.

Kim and I were able to retire early in life because we took control over which direction our cash flowed. When the stock market went up, we made money because we had control over our cash flow. When the market crashed, we made even more money because we had control over our cash flow. We do not sit around watching our money flowing down the drain doing nothing as most people did after the March 2000 crash.

When I said to that banker that my book Rich Dad Poor Dad was a book on accounting and accountability, I believe it is the word accountability that was more important. The question from this Enron scandal is, How can workers be accountable for their own lives if they never learned to account for their money and they have no control over which way their retirement money flows? Millions, and I do mean millions, of people all over the world are in grave financial danger simply because they never learned accounting, how to be accountable, have little control over the cash flow in their retire-ment accounts . . . and hence have little to no control over their later lives.

Continuing on with rich dad's simple yet most important lesson, he said, “Which direction the cash is flowing determines if something is an asset or a liability.”

He said, “Assets cash flow money into the income column,” as the dia gram illustrates on the next page.

He then said, “Liabilities cash flow money into and out of the expense column,” as the diagram on page 178 illustrates.

The lesson again is that it is the relationship of cash flow between an income statement and a balance sheet that tells if something is an asset or a liability. More simply stated, rich dad often said, “If you stop working, assets will put money into your pocket and liabilities will take money out of your pocket.” More graphically he said, “If you stop working, assets feed you and liabilities eat you.” After March of 2000, millions of people, not just Enron workers, found out that their arks, their retirement plans, were eating them alive, simply because they had no control over which way the cash was flowing.

A liability is anything that takes money from your pocket. That means a personal residence, the dream of the middle class, is more often a liability, rather than an asset. If a person rented out that home and the rental income was greater than all the expenses, then that same home would shift from the liability column to the asset column.

As a young boy, I learned that a house could be either an asset or a liability. That simple little lesson changed the direction of my life because I was less apt to be fooled . . . fooled into blindly believing my house is an asset. If not for that simple little lesson early in life, I am certain I would have wound up like my parents, buying a house, car, furniture, television sets, jewelry, believing in my mind and in my heart that I was buying assets. My mom and dad truly believed in their hearts they were buying assets . . . instead they were fooled by popular cultural myths, the financial myths of the middle class and poor.

Now I can hear some of you saying, “What if I do not have a mortgage on my house? What if it is free and clear?” Or “What about all the appreciation my house has gained?” Or “What about my car? Isn't that an asset?”

Those questions are answered in Rich Dad Poor Dad and in other books and tapes. But in short, the answer is the same—it is cash flow that deter mines if something is an asset or a liability. In other words, a house without debt can still be a liability . . . because it is not debt that determines if some thing is an asset or liability . . . it is the direction of cash flowing between the income statement and balance sheet.

The point of this book is not to discuss the idea of your home being an asset or liability. The point of this book is to point out that millions of peo ple have their retirement in jeopardy because they have not been buying assets . . . they have been buying liabilities for their retirement arks. Mil lions and millions of workers are opening their retirement account state ments and wondering where the money went. In other words, which way did the cash flow? In millions of cases, the cash flowed out, meaning they had invested in liabilities they thought were assets.

Many people think that accounting is dealing with facts . . . and in some ways that is true. Yet . . . for the most part, accounting is based upon opinions . . . not facts. I promised those who have read my other books or listened to my audio products that I would go deeper into what rich dad taught me. This is where we go deeper. The point that accounting is made up of opinions rather than facts . . . is a very, very important point to grasp.

Rich dad tells this story on how to find a good accountant. He said, “When interviewing the first accountant you ask him, ‘How much is 1 + 1?' If the first candidate answers ‘2,' don't hire him because he is not smart enough. If the second accountant answers ‘3' to the same question, again don't hire him because he's stupid. If the third candidate answers the question with ‘What do you want 1 + 1 to be,' hire him because you have found your accountant.”

Taking this point that accounting is primarily opinion rather than fact, I use this example. When I ask people “Is your retirement plan an asset?” most people would say yes. After all, they may have several hundred thousands of dollars or even millions of dollars in it. After pension reform, rich dad saw his employees' 401(k)s as liabilities . . . not assets, even though there was money, stocks, bonds, or mutual funds in the accounts. The question is, who was right?

In February 2002, General Motors happily announced to the world that they would be posting a profit. Given the tough economic environment of 2001, that news was worth celebrating. Yet critics began to talk about GM's underfunded liability, their pension plan. As I watched a discussion on television, one commentator was calling the billions of dollars in General Mo-tors' pension plan an asset. The second commentator was calling the same billions of dollars a major liability. Again, they were talking about the same billions of dollars, yet one expert called it an asset and the other called it a liability. The point here is that accounting is more often a matter of opinion rather than fact.

Starting at a very young age, a major part of rich dad's financial education was to teach us to be critical thinkers. Now I use the word critical because I can hear some of the readers at this point being cynical, not critical. I can hear some of you saying, “Well, a billion dollars is an asset no matter which way you look at it.” In other words, that person is cynical rather than being simply critical, and here is a very big difference between critical and cynical.

Repeating Warren Buffett's statement: “When managers want to get across the facts of the business to you, it can be done within the rules of accounting. Unfortunately, when they want to play games, at least in some industries, it can also be done within the rules of accounting. If you can't recognize the differences, you shouldn't be in the equity-picking business.”

Warren Buffett is advising a person to be a critical thinker, not a cynical thinker. He is saying, if your mind cannot discern the finer differences, you can easily be fooled.

Millions of people believe their DC pension plans are assets. Another person can see those same pension plans as liabilities. The point rich dad would make is that to be a more sophisticated investor, you need to see it both ways. If you cannot see it both ways, as Buffett says, “you shouldn't be in the equity-picking business.”

Another vitally important lesson rich dad taught his son and me was that all assets could become liabilities. He said, “All assets have the potential to turn into liabilities in the blink of an eye. That is why you must be careful when you buy an asset and be even more careful after you buy it.”

Millions of people may have technically bought assets before March of 2000 but those same so-called assets quickly turned into liabilities after March of 2000. It is this shift, the sudden shift from the perception that they had assets in their retirement accounts to the reality that they have pur chased liabilities, that causes so many millions of people today to feel uncer tain about their retirement.

Today millions of people want to know what a real asset is and what a real liability is. The real answer is that all assets are also liabilities. That is why, if you want to build a rich ark, you must do as Alan Greenspan, Warren Buffett, Treasury Secretary Paul O'Neill, and rich dad recommend, which is to become financially literate. Financial literacy is essential to building a rich ark because if you are not financially literate, you may spend years filling your ark with fool's gold, rather than real gold.

This book is being written in spring 2002. Given the needs of the massive baby-boom generation, the generation generally defined by those born in America between 1946 and 1964, a mass of approximately 75 million people, 83 million when immigrants are measured, there should be another stock market boom . . . a big one, when they are ready to start retiring.

Many of these baby boomers will be forced once again to enter the stock market through their DC pension plans. This last-chance gasp for some degree of financial security will cause the big boom before the big bust. This means that we all have till approximately 2012 to load our arks with good assets rather than bad assets . . . assets that will break loose in the storm and turn into liabilities. Two thousand twelve is only ten years from now! Of course, the big crash could happen tonight or tomorrow night. If nothing happens, the big bust may take till 2016 . . . but the big bust will come. It will come simply because there are too many millions of baby boomers and their parents who are not in control of their arks, or don't have the financial education to be in control of their arks during rough seas.

This book is not so much about predicting the exact date as much as it is about preparing . . . and the good news is that we all have time to prepare. I point out action steps to assist in your preparation for the coming perfect storm, a storm that will probably cause a giant boom and a giant bust. Re member rich dad's words, “If you want to become rich, start out investing a lot of time before you begin investing a lot of money.”

We have developed an electronic curriculum called Rich Kid Smart Kid that will be offered to schools throughout the world for free. We at richdad.com feel it is important that we give to the children of the world the vital financial education required for the Information Age.

As stated earlier in this book, “Government pushes financial problems forward.” We at richdad.com believe it is up to people and business to solve this problem. As Alan Greenspan emphasized, financial education for chil dren is important if we are to evolve as a civilization.

So we at richdad.com and all of our supporters are happy to be part of the solution rather than part of the problem. For those of you who have purchased our products, participated on our Web site, and attended our seminars, we at richdad.com say thank you because your support assists us in giving back to the children of the world. Again thank you to all of you who support our efforts, our business, and the mission statement of our organi zation to elevate the financial well-being of all humanity.

The Rich Dad Organization is a learning company. Our goal is for our em ployees and all members of our team to become financially independent. Once a month, we close the office in the afternoon and play CASHFLOW so we can continue learning together.

Cecilia came to the Rich Dad Organization as a two-week temporary employee. It is now four years later and she still works with us as an independent contractor. To quote her, “Now I choose to work here, for the priceless finan-cial education I receive and the support I receive from the Rich Dad Team.”

Cecilia and her husband, George, have taken control of their future. In addition to their incomes from their professions, they have recently pur chased a Laundromat and are hoping to own three in the next year. Their goal is to have passive income from these businesses to allow them to have the freedom to work only when they choose to.