FINANCIAL LITERACY

Robert T. Kiyosaki says that if you want to be rich, you need to be financially literate. You must study ACCOUNTING, which is admittedly a boring subject.

ACCOUNTING

Profit & Loss Statements and Balance Sheets

Accounting deals with Profit & Loss Statements and Balance Sheets. A profit & loss statement shows income and expenses. A balance sheet balances assts and liabilities. The relationship between the Profit & Loss Statement and the Balance Sheet is very important information one should understand.

If you want to be rich, you have got to read and understand numbers.

Assets & Liabilities

Two most important words in financial literacy are Assets and Liabilities. The primary cause of financial struggle for most people is simply their not knowing the difference between an asset and a liability.

An ASSET may be defined simply as something that puts money in your pocket. What define an asset are not words but numbers. You must be able to read the numbers and realize what they are telling. Examples are: profitable business, investments which pays you bonus and appreciates, rental properties, etc

A LIABILITY is something that takes money out of your pocket. Examples are: mortgage payments on your house, EMI payments on purchases, interest payments on loans, etc.

Rule 1 to become rich is “know the difference between an asset and a liability, and then buy assets.

Rich people acquire assets. Poor people acquire liabilities, thinking that they are assets.

FINANCIAL APTITUDE

People leave schools and colleges without financial skills. They pursue their profession successfully, but later find themselves struggling financially. They work hard, but do not get ahead financially. What is missing from their education is not how to make money, but how to spend money-what to do after you make it. It is called financial aptitude.

Financial aptitude involves knowledge of how you spend your money, how to keep people from taking it away from you, how long you keep it, and how hard the money works for you.

CASH FLOW

Cash flow shows how the money is moving in a person’s financial statements. It is the cash flow that tells the story of how a person handles his money.

Most people think that money would solve all their problems. But money will often not solve the problems. In fact, it may actually accelerate the problem. Money often puts a spot light on what we do not know. That is why a person who comes into a sudden fortune- like winning a lottery, getting a pay raise, or coming into a huge inheritance- soon returns to the same financial mess he was in before.

Money only accentuates the cash flow pattern running in your head. If your pattern is to spend everything you get, more money will not make a difference to your condition. Remember the saying: “a fool and his money is one big party”.

Poor people often allow the power of money to control them. Mostly they do not fully understand money. Instead of trusting their inner vision, they go along with the crowd. They do things because everybody else does it. They conform rather than question.

THE RAT RACE

The middle class finds itself in a constant state of financial struggle. Their primary income is through wages. As their wages increase, so do their taxes. Their expenses tend to increase in equal increments as their salary increase. They spend money on liabilities rather than on income producing assets.  Irrespective of the level of their finance, they are always trying to make the ends meet. This state of affairs is called the RAT RACE.

MUTUAL FUND MENTALITY

Most of the middle class people, who have surplus income, buy mutual funds. Mutual funds are popular because they represent safety. The average mutual fund buyer is too busy working to pay taxes and mortgages, save for their children’ education, and pay off credit cards. He does not have time to study to learn how to invest, so he relies on the expertise of the manager of the mutual fund. Middle class believes in playing it safe and avoiding risk. The reason they have to pay it safe is that their financial positions are tenuous at best. Their balance sheets are not balanced. They are loaded with liabilities with no real asset that generates income. Their only source of income is the paycheck. Their livelihood becomes entirely dependent on their employer. They must play it safe, simply because they are working so hard, are taxed to the maximum, and are loaded with debt. So when a genuine ‘deal of a lifetime’ comes along, these people are unable to take advantage of the opportunity, as the rich people do.

WHY THE RICH GET RICHER?

The most important thing, if you want to become rich, is to know the difference between an asset and a liability. Once we understand the difference, concentrate our efforts on only buying income-generating assets. Keep doing that, and our assets will grow. Focus on keeping liabilities and expenses down. This will make more money available to buy more assets. Soon the asset base will be so deep that you can afford to look at more speculative investments, investments that may have returns of 100 percent to infinity.. Middle class calls such investments ‘too risky’. Rich realize that such investments are not risky, but lack of simple financial intelligence causes the individual to be too risky.

As a rich man acquires enough assets which generate more than enough income to cover expenses, he can reinvest the balance in more assets. His assets thus continue to grow, and, therefore, the income they produce.

KIYOSAKI’S DEFINITION OF WEALTH

When does someone realize that he is rich? Borrowing from Buckminster Fuller, Kiyosaki defines wealth in terms of the number of days one can survive without working. If you stopped working today, how long can you live the life at your familiar level?

Wealth is the measure of cash flow from assets as compared to that from expenses. Wealth measures how much money your money is making and, therefore, your financial survivability.

Net worth-the difference between assets and liabilities- is commonly taken as a measure of wealth. Kiyosaki does not consider net worth to be a true measure of wealth.