Fired to FIRE

Chapter Two

Lesson 2: Why Teach Financial Literacy?

How many people do you know that seem to have lifestyle inflation? Life style inflation is when they earn more money they tend to spend more money. I know a lot of people like this and in some ways I used to feel entitled to spend more when I’d start making more. Thoughts went through my head like, “why did I stay late at the office a couple nights this week if I wasn’t going to enjoy my money?” or “I had a rough week, I DESERVE this Frappuccino.”

Robert emphasizes that it’s not about how much money one makes… It’s about how much money one keeps. For example a person making 100k may be living paycheck to paycheck the very same way that someone making 32k is living paycheck to paycheck, one’s income and expenses are just amplified, a scalar of one another. Money comes in from their job and they pay out everything in expenses leaving them with nothing at the end. At the end of the day even though one person, the 100ker, may look richer (newer car, nicer apartment, etc.) each are not contributing to their assets, and their net worth remains the same.

Contributing to their assets you ask? Well first we need to start out with what is an asset? And what is a liability? Many people would say an asset is something that a person owns and could sell, if need be (car, house, artwork, gold, etc.). And I believe many people would say that a liability is an amount that you owe someone else (mortgage, car loan, credit card debt, student loan debt, etc.)

Kiyosaki prefers to use the definition that an asset is something that puts money in your pocket while a liability is something that takes money out of your pocket. By that definition a house for most people would not be an asset, unless one is house hacking well (getting paid to live in their home with roommates). He then continues to echo the rich dad’s sentiments that getting rich is easy. Understand the difference between an asset and a liability, and only buy assets. Sounds simple right?

I like his definition but feel it to be more of a purchasing decision label, which is fine. In my head I’ve used a term “net worth driver” to facilitate me making purchasing decisions. If you’ve followed my blog at all you’ll see every ten or so days I update my net worth and make a projection for the next ten day period. I always ask myself before acquiring something, “Will this increase my net worth, and will it EVENTUALLY lead to cash in my pocket?” One thing, specifically with debt, that isn’t captured solely by producing cash in pocket today but could be a huge driver to one’s net worth and COULD be great for cash flow in a few years is the loan paydown component.

Let’s say for example you get a lead on a quadplex from a couple going through a divorce and they’re willing to sell it for 50% off the market rate and require you to finance it through them. The only condition is that you pay it back in three annual payments, at the end of each year. Let’s say the sale price agreed upon is 60k at 5% annual interest. Furthermore let’s say the property brings in 2,250/month, or 27k per year. The payment to the former owners is 22,033 at the end of each year. For pondering let’s say we expect the extra expenses, for maintaining and managing the quadplex, are about 5k per year, bringing our expenses to, essentially, the same as our rents. Now in this case the cash today is not flowing into your pocket. BUT you got a deal on 60k in equity in the deal at the purchase date and you get the net worth increase from the loan paydown (if you want an introduction to amortization tables, like below An Intro to Amortization Tables – Fired to FIRE (fired-to-fire.com) ):

At the end of the three years you’d no longer need to make that payment and would have cash flowing into your pocket. Assuming no appreciation or depreciation one would have 120k in equity that one could also borrow from to purchase more assets. I would imagine that Kiyosaki would find this a good deal. I apologize for the tangent talk, but wanted to speak on this aspect.

One other thing that I liked from this chapter, that also made many appearances in Cashflow Quadrant, were Kiyosaki’s illustrations showing how different types of people utilize their cash. I actually believe that Kiyosaki’s ability to explain an income statement and balance sheet are really what make him special. Pictures speak volumes. Most people learn how to work for money. The Rich learn how to make their money work for them, using assets that they acquire. Most people are concerned with their income statement, but the wealthy are concerned with their balance sheet.

Favorite Quote: “I am concerned that too many people are too focused on money and not on their greatest wealth, their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer despite tough changes. If they think money will solve problems, they will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.”

“It’s not how much money you make. It’s how much money you keep.”