Building Wealth – A lesson too late?

I just finished reading ‘Rich Dad, Poor Dad’.  Wish I had read it 50 years ago!

The fact is that I am the perfect example of a ‘poor dad’.  I was convinced that a college education followed by a good job would protect me for life.

What a foolish concept!  You simply cannot become ‘wealthy’ by working for wages.  You must learn to make money work for you.

OK, it’s time to define wealth.  Wealth is when earnings exceed expenses.  And those earning are from your money, not your sweat.

I’ll admit that I never had that concept of wealth.  To me wealth was simply earning enough to provide for my comfort.  The misconception was ‘earning’.  All my life I have believed that meant using my knowledge to earn more income.  By my definition I was successful.  But I never became ‘wealthy’.

The wealthy live in a different world and now, probably too late in my life, I see the truth.

It’s not just the words in the book, but I now see that I’ve seen this happen to acquaintances, but I wasn’t inquisitive enough to recognize it.  I saw one friend turn his place from a poor farm to a string of rental homes that he now lives on the income generated by rent.

I always assumed that he got lucky in zoning and finding cheap houses.

More recently I’ve been reading essays by Mark Ford (Palm Beach Research Group) that re-enforce ‘Rich Dad, Poor Dad’ and goes further to show how wealth is built by reducing expenses and increasing income with that increased income used to invest in assets that generate even more income.

This makes sense to me, but does require a new and better definition of assets.  Most of us think of assets as the things we own such as a house, a car and other physical items that we all collect and cherish.

There is a different and I think better definition of an asset.  An asset puts money in your pocket, a liability takes money out of your pocket.  Pretty simple and it makes a lot of sense to me.

By this definition a house is certainly not an asset.  A car is not an asset.  That doesn’t mean we shouldn’t own a house or a car, but we must be honest with ourselves and recognize that they are not assets.  They don’t put money in your pocket.

I guess your job can be considered an asset, but it is not passive.  You must actively work at your job in order to have money put in your pocket.

To become wealthy we need passive assets.  Assets that generate money without your active participation.

Many wealth individuals such as my friend use rental property to generate the bulk of their income.  It becomes passive when you have enough property to justify a manager and you are no longer actively involved with the management or upkeep.

Obviously many have become wealthy by concentrating on a single passion.  Think of Bill Gates, Steve Jobs, or Mark Zuckerberg in modern times or Henry Ford and John D. Rockefeller in the past.

In the great expanse of humanity, these are rare examples.  A far more likely approach is to build an array of assets which each provide a cash flow.

Just as compounding increases the value of money, re-investing the proceeds quickly compounds the cash flow from these assets.

There are a multitude of assets that can generate a cash flow (income above expenses).  Some are small, some are large and some are very large.

Start small, reinvest the proceeds and watch your cash flow grow over time.  I don’t know how realistic it is, but one estimate is that in as little as 7 years you can develop cash flows adequate to meet your basic expenses.  At that time you can quite working, but it is probably better to continue building your wealth so that you can increase your standard of living.  It’s also more satisfying to work if you are able.  But you now have the luxury of working only as much and as hard as you like.

When is it too late to follow these guidelines?  Well if we take the seven years as realistic perhaps anyone older than 60 or 65 has little chance of achieving true wealth.

On the other hand we should certainly pass this wisdom and advice to our children and grandchildren.

It would be much easier to explain the theory and method if we had followed these ideas ourselves.

Can wealth be built by saving or investing alone?  Yes, but it takes much longer.  Just think a young person, say 20 years old, conceivably would be able to retire, or do whatever they wanted by their thirties or forties if they simply understood that they needed to acquire assets that generated a cash flow and not simply a fine car, a house, or the newest gadget.

Unfortunately they will not be taught that lesson in school, or by a poor dad.

I hope all my children and grandchildren will read and learn from ‘Rich Dad, Poor Dad”.

Many of Robert Kiyosaki’s books are available on You Tube.  Check them out.

 

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