The real tragedy is that the lack of early financial education is what creates the risk faced by average middle class people. The reason they have to play it safe is because their financial positions are tenuous at best. Their balance sheets are not balanced. Instead, they are loaded with liabilities and have no real assets that generate income. Typically, their only source of income is their paycheck. Their livelihood becomes entirely dependent on their employer. So when genuine “deals of a lifetime” come along, these people can’t take advantage of them because they are working so hard, are taxed to the max, and are loaded with debt.
As I said at the start of this section, the most important rule is to know the difference between an asset and a liability. Once you understand the difference, concentrate your efforts on buying income-generating assets. That’s the best way to get started on a path to becoming rich. Keep doing that, and your asset column will grow. Keep liabilities and expenses down so more money is available to continue pouring into the asset column. 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; $5,000 investments that are soon turned into $1 million or more; investments that the middle-class calls “too risky.” The investment is not risky for the financially literate.
If you do what the masses do, you get the following picture:
As an employee who is also a homeowner, your working efforts are generally as follows:
1. You work for the company.
Employees make their business owner or the shareholders rich, not themselves. Your efforts and success will help provide for the owner’s success and retirement.
2. You work for the government.
The government takes its share from your paycheck before you even see it. By working harder, you simply increase the amount of taxes taken by the government. Most people work from January to May just for the government.
3. You work for the bank.
After taxes, your next largest expense is usually your mortgage and credit-card debt.
The problem with simply working harder is that each of these three levels takes a greater share of your increased efforts. You need to learn how to have your increased efforts benefit you and your family directly.
Once you have decided to concentrate on minding your own business—focusing your efforts on acquiring assets instead of a bigger paycheck—how do you set your goals? Most people must keep their job and rely on their wages to fund their acquisition of assets.
As their assets grow, how do they measure the extent of their success? When does someone know that they are rich, that they have wealth?
As well as having my own definitions for assets and liabilities, I also have my own definition for wealth. Actually, I borrowed it from a man named R. Buckminster Fuller. Some call him a quack, and others call him a genius. Years ago, he got architects buzzing because he applied for a patent for something called a geodesic dome. But in the application, Fuller also said something about wealth. It was pretty confusing at first, but after reading it, it began to make some sense:
Wealth is a person’s ability to survive so many numbers of days forward—or, if I stopped working today, how long could I survive?
Unlike net worth—the difference between your assets and liabilities, which is often filled with a person’s expensive junk and opinions of what things are worth—this definition creates the possibility for developing a truly accurate measurement. I could now measure and know where I was in terms of my goal to become financially independent.
Although net worth often includes non-cash-producing assets, like stuff you bought that now sits in your garage, wealth measures how much money your money is making and, therefore, your financial survivability.
Wealth is the measure of the cash flow from the asset column compared with the expense column.
Let’s use an example. Let’s say I have cash flow from my asset column of $1,000 a month. And I have monthly expenses of $2,000. What is my wealth? Let’s go back to Buckminster Fuller’s definition. Using his definition, how many days forward can I survive? Assuming a 30-day month, I have enough cash flow for half a month.
When I achieve $2,000 a month cash flow from my assets, then I will be wealthy.
So while I’m not yet rich, I am wealthy. I now have income generated from assets each month that fully cover my monthly expenses. If I want to increase my expenses, I first must increase my cash flow to maintain this level of wealth. Also note that it is at this point that I’m no longer dependent on my wages. I have focused on, and been successful in, building an asset column that has made me financially independent. If I quit my job today, I would be able to cover my monthly expenses with the cash flow from my assets.
My next goal would be to have the excess cash flow from my
assets reinvested into the asset column. The more money that goes into my asset
column, the more my asset column grows. The more my assets grow, the more my
cash flow grows. And as long as I keep my expenses less than the cash flow from
these assets, I grow richer with more and more income from sources other than
my physical labor.
As this reinvestment process continues, I am well on my way to becoming rich. Just remember this simple observation:
• The rich buy assets.
• The poor only have expenses.
• The middle class buy liabilities they think are assets.
So how do I start minding my own business? What is the answer? Listen to the founder of McDonald’s in the next chapter.
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