This post Are You Playing by the Rules of the Rich? appeared first on Daily Reckoning.
When I was a young boy in elementary school, my rich dad was already putting ideas in my head about the differences between the rich, the poor, and the middle class.
My rich dad would say, “If you want job security, follow your dad’s advice” — my real father — “if you want to be rich, you need to follow my advice.”
Rich dad then went on to show me the difference between his investment plan and my dad’s investment plan.
“My business buys assets with pre-tax dollars,” said rich dad as he drew the following diagram. “Your dad tries to buy assets with after-tax dollars. His financial statement looks like this,” said rich dad.
To sum it up nicely, rich dad combined the two diagrams to highlight the difference between my dad and him.
Playing by Different Rules
The point that rich dad was making was that even though we live in a free country, not everybody plays by the same rules. The rich have laws of their own that allow them to become richer.
Rich dad went on to teach me that because my dad was an employee, he had to pay his taxes first and then invest. That meant that up to 50% or more of his income would be spoken for before he could even begin investing.
As a business owner, rich dad was able to buy assets through his business and then pay taxes on what income was left over. He bought his assets first and paid his taxes later.
“I pay my taxes on net income,” he said. “Your dad pays taxes on his gross income, and then tries to buy assets. Because of that, it is very, very hard for him to achieve any kind of wealth.”
If we were to map this to the CASHFLOW Quadrant, rich dad’s points would look like this:
How my poor dad invested
How my rich dad invested
“Always remember,” said rich dad, “that the rules are different for the different quadrants. Make your decisions about your future wisely. Decide which rules you want to play by.”
You Can Do This Too
I try to pass on the bits of wisdom I learned from my rich dad. Today, as my rich dad taught me, I invest through my businesses, and I teach others to do the same.
When I speak on this, invariably people raise their hands and say things like:
“But I’m an employee, and I don’t own a business.”
“Not everyone can own a business.”
“Starting a business is risky.”
“I don’t have the money to start a business, let alone invest.”
To these types of statements, I remind people that less than 100 years ago, approximately 85 percent of people in the US did own their own businesses as either independent farmers or small shopkeepers. Only a small percentage of the population was employee-based. I know my grandparents were small business owners.
Today, in just a couple generations, it seems that the Industrial Age—with its promise …read more
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