Unfair Advantage - The Power of Financial Education
By Robert T. Kiyosaki
Published by Plata Publishing, LLC at Smashwords
Copyright 2011 Plata Publishing, LLC
Smashwords Edition, License Notes
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A Message from Robert
This book is dedicated to those who step up
and become part of the solution.
A Message from Robert
It’s Not Cool
I thought long and hard about sharing with you our financial success, especially during times like these. I know that millions of people have lost their jobs, their homes, and their businesses. I also know that, in most situations, it is not polite to talk about financial success. Bragging is never cool, especially about money.
Yet, I decided to write about real-life investments. I want you to understand how we gained our financial education, how we use that education, and why it is an unfair advantage, especially in a declining economy. I write not to brag. I write to encourage people to learn, study, practice, and possibly see the world differently. In 2011, there is a lot of money in the world. There are trillions of dollars looking for a home because governments of the world are printing trillions in counterfeit money, aka fiat currency. Governments do not want the world to go into a depression, so they print more funny money. This is why the price of gold and silver go up and why savers are losers.
The problem is that this phony money is in the hands of only a few people. So, the rich get richer, the poor and middle class grow poorer, the economy worsens, and the problem grows bigger.
According to the U.S. Census Bureau, poverty in America increased to nearly 15 percent of the population in September 2010. This means over 4 million people moved from the middle class into poverty, just as Donald Trump and I predicted in our book Why We Want You To Be Rich. This is dangerous. This is not healthy.
At the risk of sounding like a braggart, I decided to write this book about real-life investments. I believe it is uncool to know something and not share what I know. That would be greedy. I write because I believe we need real financial education before the world economy can truly recover. Ultimately, I write because I believe it is better to teach people to fish than to give people fish.
Robert Kiyosaki
My rich dad said,
“Choose your teachers wisely.”
Introduction - HOW DO YOU CATCH A MONKEY?
Natives of Africa and Asia have used this technique to catch monkeys for thousands of years: The hunter finds a tree with a small hole in the tree trunk and places fruits or nuts inside the hole. A monkey comes along, puts their fist in the hole and grabs onto the fruit or the nuts. The monkey’s fist, now clenched and filled with the fruit or nuts, cannot be withdrawn from the hole, trapping the monkey. Rather than let go of the fruits or nuts, the monkey twists and turns, pulls and tugs, but refuses to let go. The native returns, and at their leisure, kills or captures the monkey.
Humans are similar to monkeys. Rather than cling to fruits or nuts, humans cling to job security, their possessions, and money. Due to a lack of financial education, like the trapped monkey, most people will spend their lives as wage slaves of their employers and tax slaves of the government.
When the global financial crisis began in 2007, many people clung even more tightly to their jobs in the hope of not being one of those who were laid off. Millions held on tightly to their homes, even though they could not pay the mortgage. Most cut back on their spending and saved more, even though the federal government was printing trillions of dollars, destroying the purchasing power of their savings. Workers stuffed even more money into their retirement plans, even though the stock market had crashed, wiping out their prior gains. And school enrollments boomed, as more people headed back to school, even though unemployment was soaring.
Most People Do Not Know What to Do
By 2010, most people knew there was a global financial crisis. Unfortunately, most people do not know what to do about it. Rather than let go, most people clench their fists tighter and wait for the crisis to pass, praying that their political leaders can solve this global crisis and that happy days will return.
A few know they must make changes. Yet without a strong financial education, they do not know what to do or how to change.
A Decade of Crisis
The problem is that the coming decade, the years from 2010 to 2020, will prove to be the most volatile world-changing decade in world history.
Unfortunately, the people clinging to the relics of the past—relics such as job security, savings, a home, and a retirement plan — will be those who are most ravaged by the global financial storm approaching. I can make this statement with certainty for the following five reasons:
1. It is the end of the Industrial Age.
The Industrial Age began around 1500 and ended around 2000.
In 1945, at the end of World War II, the United States was the world’s most powerful nation, the biggest of the few remaining empires of the Industrial Age.
During the Industrial Age, countries with industrial technology, factories, great schools, and weapons ruled the world.
During the Industrial Age, the auto industry, airline industry, radio and television industry, and the weapons industry dominated the world of business.
During the Industrial Age, a worker could find a high-paying job for life, be protected by a labor union, and receive a retirement paycheck for life.
Financial education was not important in the Industrial Age.
In 1989 the World Wide Web was born. The Industrial Age ended and the Information Age began.
In the coming decade, more jobs will be replaced by technology as our factories are dismantled, shipped, and rebuilt in low-wage countries. The idea of a high-paying job for life and a retirement paycheck for life is an obsolete idea.
Today, the United States is the biggest debtor nation in world history. The United States cannot afford social programs such as Social Security and Medicare.
In the Information Age, the age where job security and a pension for life are not guaranteed, financial education is essential.
Unfortunately, like a monkey with its fist caught in a tree, millions of workers cling to Industrial-Age ideas such as going to school, job security, steady paychecks, medical benefits, early retirement, and government support for life.
In this book, you will find out what kind of education is best for preparing you for the Information Age.
2. The rules of money were changed in 1971.
In 1971, President Nixon took the U.S. dollar off the gold standard, and the rules of money changed.
In 1971, the U.S. dollar stopped being money and became an instrument of debt. After 1971, savers became losers.
Since 1971, the U.S. dollar has lost 95 percent of its purchasing power. It will not take another forty years to lose the remaining 5 percent.
Tragically, like a monkey with a clenched fist in a tree, millions of people still cling tightly to their savings in a bank.
In this book you will find out why saving money is foolish and what you can do instead.
Since the banks can print money, why can’t you? You will find out how you can in this book—but it takes financial education.
3. After 1971, bank bailouts increased in size.
By 2010, most people were aware of the subprime mess and the trillions in bank bailouts all over the world.
Today, many are angry that the governments bailed out the rich bank owners and passed the bill on to the taxpayers.
Unfortunately, few people are aware that these bailouts have been going on for years and have increased in size since 1971. In the 1980s, the bank bailouts were only in the millions. By the 1990s, the bank bailouts were in the billions. After 2007, the bailouts became international and are now measured in the trillions.
Unfortunately, due to a lack of financial education, most people think debt is bad. Like the monkey, they are hanging onto their dollars and doing their best to get out of debt.
Most people without a sound financial education think debt is bad—and it is if you do not know how to use debt to make you richer.
In this book you will find out how debt makes bankers, and the financially educated, very rich.
4. Inflation is rising.
On January 4, 2000, an ounce of gold cost $282.
Ten years later, on December 30, 2010, the same ounce of gold cost $1,405 an ounce.
In the last decade, when measured against gold, the U.S. dollar lost 398 percent of its value.
On January 4, 2000, oil was $25 a barrel.
By December 31, 2010, oil was $91 a barrel.
In 10 years, the price of oil has gone up by 264 percent. Yet the government still claims there is no inflation.
A smart person would ask:
“What will an ounce of gold cost at the end of the next decade, on December 31, 2020?”
“How much will a gallon of gasoline cost in 2020?”
“What will food cost in the next 10 years?”
These are questions most monkeys do not ask. Instead, monkeys go back to school, work harder, pay higher taxes, pay higher prices, do their best to live below their means, and save, save, save.
As you can tell, you should have invested in gold in 2000 when gold was only $273 an ounce. In this book you will learn what to invest in before the thundering herd gets into the market.
In this book you will learn how to predict the future and how to reduce your risk from the changes that are coming.
5. I see more poor people.
In the coming decade, the years between 2010 and 2020, the gap between the haves and have-nots will increase. Many in the middle class today will slip into poverty in the next 10 years.
In other words, there will be more poor people, although they live in rich, first-world countries like the United States, England, France, and Japan.
When the governments chose to bail out the owners of the banks, governments chose to spare the rich at the expense of the poor and middle class. In the coming decade, the rich will get richer and the poor and middle class will grow poorer due to taxes and inflation.
The following are events that will make the next decade tougher for those with limited financial education:
• Baby boomers will retire. In the United States alone, there are 78 million baby boomers. It is estimated that 52 percent of baby boomers do not have enough retirement savings or investments to live on. Social Security and Medicare are broke. Financing these programs will require more taxes from generations born after 1964.
More jobs will be lost. National, state, city, and local governments are short of money. Many are technically bankrupt.
From 2007 to 2010, most of the job losses were in the private sector, in large corporations and small businesses.
The next job losses will come from the public sector. Millions of government jobs will be lost in the coming decade.
This means higher taxes, fewer services, and more unemployment.
For example, in January 2011, Camden, New Jersey, the second most-dangerous city in the United States, cut its police force by 50 percent. Camden also reduced the number of firefighters and government workers.
Who wants to live in Camden if crime and fire losses increase? What does a loss of government services do to property values?
In spite of rising unemployment and the loss of traditionally safe jobs, like a monkey clinging to his fruits and nuts, people are returning back to school to train for a new job, higher pay, benefits, and a good pension plan.
This book presents you with some new ideas on what types of education will better prepare you for the future.
In 2010, the U.S. debt was $14 trillion. In reality, according to the National Center for Policy Analysis, the United States owes $107 trillion when Social Security and Medicare are added to the bill. This means the United States is bankrupt.
The United States has three basic options. They are:
Default on our debts, aka declare bankruptcy. This will change the world economy.
Cut spending, increase taxes, and pay bills. This will change the world economy.
Print more money, kill the dollar, and pay the bills with counterfeit money. This will change the world economy.
The average person, like the monkey with its fist stuck in a tree, has no idea what is going on with the U.S. dollar or the world economy. All the average person cares about is making enough money to put food on the table and keep a roof over their head.
Like a monkey clinging to what they have, the average person actually believes the money in their grasp is real money. The average voter actually believes their elected officials can solve this global financial crisis. Few people realize the global financial problem is bigger than any one leader or one country.
In this book you will discover how the rules of money are different in the Information Age and how to adapt to the new global rules of money.
In 1972, President Nixon opened the door to China. Today, China is a very poor country rushing to become the world’s next superpower.
In the coming decade, China will continue to grow economically but will also grow more unstable as they battle inflation, position for more world political clout, and push for an international reserve currency outside of the U.S. dollar. Additionally, the economic growth will cause trouble internally as the divide between the rich and the poor grows. Their instability will cause financial ripples, economic booms and busts that will be felt throughout the world.
Like most monkeys, the average person can see the trees but not the forest. Americans are probably in a worse condition, however, because they live in a fishbowl where the world looks in at us, but we cannot see the world outside the fishbowl.
In this book you will learn how to think, act, and do business globally. There is a world of opportunity today—but not for those who think only about the tree they are clinging to.
The Most Exciting Decade in History
The next 10 years, the decade from 2010 to 2020, will prove to be the most exciting decade in world history.
The next 10 years will mark the end of the American Empire. The U.S. dollar will prove to be a fraud, and a whole new world economy will emerge. This borderless world, powered by low-cost technology, will unleash the world’s genius and reveal the massive ignorance that ran the old world economy.
For those who are financially educated, prepared, flexible, and adaptable, the next 10 years will be the best of times.
For those who are waiting for the happy days of the past to return, the next 10 years will be the worst of times.
Trapped by Going to School
The key to the new world is education. The problem is that the current school system is trapped in the tar pit of the Industrial Age.
In the Information Age, a person’s education and lifelong learning is more important than ever before. Unfortunately, going to school alone will not prepare you financially for a rapidly evolving and expanding world. Simply said, schools change too slowly, and the world is changing too rapidly.
In the Industrial Age, all it took to be successful was the following two types of education:
Academic education: The ability to read, write, and solve basic mathematical problems.
Professional education: Education to earn money with by being a productive member of society.
For example, medical doctors go to medical school, lawyers go to law school, pilots go to flight school, chefs to go cooking school, and so on.
In the Information Age, we need the following three types of education:
Academic
Professional
Financial
The following question thus arises: Why is there not any financial education in schools?
The answer: Humans trap and train monkeys in school.
If a person has a solid financial education, they will not cling so tightly to job security, a steady paycheck, and a pension. If a person knows the tax laws, they will not pay unnecessary taxes. If they understand the banking system, they will not save money. Rather than call their home an asset, they will know that it is a liability. If they understand inflation, they will not try to live below their means. Rather than get out of debt, they will learn how to use debt to gain wealth. And they will not mindlessly turn their money over to Wall Street bankers, financial planners, and real estate agents in the hope of obtaining a secure retirement.
Most importantly, they will question why they are going to school, who their teachers are, and where their education is leading them.
Education Is a Process
In 1973, I returned home from the Vietnam War. I had one year left on my military contract, and I was looking forward to the next direction my life would take.
In 1973, I was 26 years old, a college graduate with two professional licenses: one as a third mate on oil tankers sailing for Standard Oil, and the second as a pilot, flying for the U.S. Marine Corps. Although both professions could be high-paying with job security, I did not want to either sail or fly.
When I asked my poor dad for advice, he recommended that I follow in his footsteps, which would be to go back to school, get my master’s degree, get my PhD, and then get a job with the government.
The problem was that in 1973 my dad was 54 years old, the former superintendent of education for the State of Hawaii, a former Republican candidate for lieutenant governor of Hawaii, and unemployed.
My dad was unemployed because he resigned from the superintendent of education position to run on the Republican ticket against his boss, the governor, a Democrat. When Judge Samuel King and my dad lost the gubernatorial election, the governor informed my dad that the price for his lack of loyalty was to never be allowed to work in state government again.
My dad, although highly educated, could not survive in the real world outside of the educational system. Knowing he could not find a paying government job, my dad took his retirement savings, bought an ice cream franchise and lost it all when his ice cream business failed.
In many ways, it was my poor dad who gave me a glimpse of the future, not for his generation, but for mine.
When he recommended that I follow in his footsteps, I knew whose advice I would follow. After leaving my poor dad’s home, I drove to Waikiki to my rich dad’s office and asked for his advice.
Education Is Very Important
Both dads had tremendous respect for education—but not for the same education. One of my unfair advantages is to know the differences between different types of education.
The following are three concepts that are helpful when considering different types of education:
1. Education is a process.
A person goes to school to go somewhere and become something. For example, I went to flight school to become a pilot. The problem with traditional education is that traditional education is a process to becoming an employee. That is why most people say, “Go to school to get a job.”
Monkeys don’t question why they stuck their hands in a hole in a tree. Most people do not question going to school to get a job and become an employee. An intelligent person would ask, “What if I don’t want to be an employee?”
2. There are four choices in education.
My rich dad explained the diagram of the CASHFLOW Quadrant for me. It was his way of giving me choices in my education and what I wanted to be when I grew up.
E stands for employee
S stands for small business or self-employed
B stands for big business (500 employees)
I stands for investor Introduction 12
Traditional education prepares students for the E and S quadrants. Examples of S-quadrant schools are law schools, medical schools, and dental schools.
It is interesting that it is the top students from our medical and law schools that pay the most in taxes, and they do so because they are in the S quadrant. To me, if I were a top student, I would want to know how to pay less in taxes. Paying higher taxes is one of the traps of the S quadrant.
When an employee quits their job to start their own business, most wind up in the S quadrant, operating a highly-specialized small business or service business, such as computer consulting or selling real estate
Like a monkey trapped at one tree, most people only know about the E and S quadrants.
A financially intelligent person would want to know what they have to learn to operate from the B and I quadrants. The B and I quadrants create the richest people in the world, people who earn the most and pay the least in taxes.
In this book you will gain an unfair advantage by understanding what the B and I quadrant people know that E and S quadrant people do not.
3. You can choose between traditional or non-traditional education.
My poor dad respected only traditional education. That is why he thought grades and the school you graduated from were important. He believed that good grades and a good school got you a good job.
My rich dad respected non-traditional education. He did not care about grades or what school you went to. All he cared about was what skills you learned, who your teachers were, and how prepared you were for the real world of business.
My rich dad did not value a high-paying job. Being an entrepreneur, he valued how many high-paying jobs he could create.
That is why in 1973, while still in the Marine Corps, I signed up for non-traditional classes in which I would learn how to:
Use debt to invest.
Develop sales skills (because “sales equals income”).
Reduce taxes paid.
Taking the path of non-traditional education in 1973 has given me the biggest unfair advantage in my life.
I continue to take non-traditional educational classes today. Non-traditional education gives me an unfair advantage, even over the smart kids who went to good schools, got good grades, and became well-paid doctors, lawyers, and corporate executives.
Most monkeys do not know the difference between food and food in a trap. That is why they are easily trapped.
A strong financial education teaches students that there are three types of income. They are:
Ordinary earned income
Portfolio income
Passive income
Most E’s and S’s are trained to work for ordinary earned income. That is why they are so easily trapped, work the hardest, and pay the most in taxes.
In this book you will find out why the financially intelligent work for portfolio, passive, and non-taxable income.
The Difference Between Monkeys and Humans
It may sound cruel to compare human beings to a monkey stuck with its fist in a tree.
I do not do it to be cruel but to make a point. You see, it is cruel to allow Americans to remain financially uneducated, naïvely working hard, paying taxes, and saving money—all the while knowing that something is deeply wrong but not knowing exactly what to do in this period of financial change and uncertainty.
There are similarities between humans and monkeys. For example, a monkey will clench its fist and hang onto fruits and nuts. A human being will hang on tightly to old ideas.
Most of us know this law of physics: Two objects cannot occupy the same space at the same time. For example, you cannot have two cars in a one-car garage. The same is true with thoughts and ideas.
Just as the monkey must let go before it can be free, humans must let go of old ideas before they can be free.
In this book you will learn many unconventional ideas about money and why the rich are getting richer. The main purpose of this book is to present these ideas and challenge any old ideas you might have in place. Then it is up to you to decide if you want to let go of your old ideas and begin to adopt new ideas about money.
Examples of old ideas about money are:
1. “I’ll never be rich.”
If that idea is not replaced, then the idea becomes your reality. This book was written to change that thought—if you want to change it.
2. “The rich are greedy.”
In this book you will find out that being rich requires being generous. You will find that E’s and S’s are often more greedy than B’s and I’s.
3. “I’d rather be happy than rich.”
Why not be both? Thinking you can only have one is caused by limited thinking.
4. “Taxes are unfair.”
In this book you will find that taxes are very fair and how taxes make the financially educated richer.
5. “I’ve got to work hard.”
In this book you will find out why those that work hard pay the most in taxes.
6. “Investing is risky.”
In this book you will find out why investing is not risky. Most importantly, you will find out why the financially uneducated are sold the riskiest investments of all.
7. “Get a good education.”
In this book you will find out why you need to question where education will take you and who your instructors are.
For example, I enrolled in an MBA program in 1973. My instructors were all employees in the E quadrant. I resigned after six months because I realized that the two-year course of study was programming me to become a well-paid employee in the E quadrant.
If you want to grow into the B and I quadrants, you need instructors and mentors from those quadrants.
In flight school, my first instructors taught me the basics of flying. The next level of instructors taught me advanced flying, which allowed me to graduate from flight school. My next instructors were combat pilots. They were a completely different level of instructor. I already knew how to fly, but the combat-pilot instructors were preparing me for the real world of war.
Financial education is much like flight school. Learning to fly is not a do-it-yourself project. It is best to have the most talented pilots available to educate and train students and give them the opportunity for hands-on experience before they go on to the next level.
One of the problems with traditional education is the absence of real-world experience. Most kids leave school with technical answers to problems but lack the skills needed to put their technical knowledge to good use. This means their most important instructors are the teachers or mentors they meet once they graduate.
One tragedy of this financial crisis is that many college graduates are leaving school but not finding jobs. It is this real-world experience that is crucial to a person’s lifelong learning and development and defines who they ultimately become in life.
One reason why so many students leave school and are unable to find a job is that they have been trained to be an employee. They lack the real-life skills to become an entrepreneur.
To make matters worse, many students leave school deeply in debt. Without a job, they cannot pay off their school loans.
School loans are different from home loans. School loans can never be forgiven. This means a person can walk away from a mortgage but not a school loan. If the student cannot find a job, the interest on their school loan accrues unpaid interest. In a few years, the debt explodes due to compounding interest, and the student is trapped like a monkey for life.
8. “I need job security.”
In this book you will learn the differences between security and freedom. Security and freedom are exactly opposite. The more security you desire, the less freedom you have. That is why inmates in maximum-security prisons have the least freedom.
Monkeys are trapped because they cling to security.
This book is for those who want freedom and security.
9. “I need to invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.”
This could be the worst financial advice of all. Just look at the past decade, often referred to as the “lost decade” for those who invested in stocks, bonds, and mutual funds.
At the start of 2000, the DJIA (Dow Jones Industrial Average) was at 11,357. At the close of 2010, the Dow was 11,577.
Up only a couple hundred points in 10 years. Talk about long-term losers. A 0.2 percent gain in 10 years is a joke, a tragic joke for those who followed this poor advice.
As you already know, gold went from $282 to $1,405 in the same 10 years, a 398 percent gain in 10 years.
If the DJIA had performed as well as gold, in 2010 the DJIA would have been over 45,000.
In spite of these horrible statistics, millions still follow this advice.
Does this mean you should invest in gold?
Absolutely not. This means it is best to gain real-world financial education. If you are like most people and not interested in your financial education, then do as the experts tell you to do, which is to turn your money over to them.
Remember, gold is not a good investment if you are a bad investor. Nothing is a good investment if you are a bad investor.
In this book you will find that the more financial education you have, the more money you make, the less you will pay in taxes, and your returns will go up as your risk goes down.
One day I asked my rich dad, “Do you think real estate is a good investment?”
His reply was, “I don’t know. Are you a good investor?”
I then asked, “What advice do you have for the average investor?”
His reply, “Don’t be average. Average investors make smart investors rich.”
What you invest in—whether it’s business, real estate, paper assets, or commodities—is not as important as your investment in yourself. If you are a fool, you will probably lose no matter what you invest in.
This book is about investing in your financial education.
10. “I didn’t do well in school. How can I be rich?”
While you do have to go to school to become a doctor or lawyer, you do not have to go to school to be rich or an entrepreneur.
Some of the richest people in the world did not graduate from school. Examples are Henry Ford, founder of Ford; Thomas Edison, founder of General Electric; Bill Gates, founder of Microsoft; Mark Zuckerberg, founder of Facebook; Richard Branson, founder of Virgin; Walt Disney, founder of Disney World; and my hero, Steve Jobs, founder of Apple.
Many people are trapped like a monkey today because they went to school and were trained to be workers in the E and S quadrants.
This book is for people who want to know what life is like in the B and I quadrants and what kind of education it takes to get there.
Final Word
On January 24, 2011, on the Today show, the following advice from Consumer Reports and Jean Chatsky, their resident financial expert, was offered. It is the same advice they been dishing out for years:
Live modestly.
Have a budget and open a 401(k) retirement plan.
Catch up. (In other words, save, save, save.)
Pay off debt.
Work longer; retire later.
I would never follow this advice. Not only is it bad advice, but it is also depressing advice. Who looks forward to living modestly and saving? On top of being depressing, this advice terrifies me. While this may sound like great advice, especially for the financially uneducated, I believe this is terrible advice.
In this book you will find out why a retirement plan, such as a 401(k), is the worst way to invest. TIME magazine in an article entitled “Why It’s Time to Retire the 401(k)” in 2009 showed why the 401(k) is a disgrace due to the way it destroys people’s wealth.
In the coming decade, the years between 2010 and 2020, the people following this advice from the Today show will be hurt the most. They will be whipsawed by ups and downs in the global economy and crushed by higher taxes. They will find life very expensive as inflation goes through the roof. A majority will wind up poorer as their investments in the stock market are lost to market crashes.
The greatest tragedy of all is that people who follow this old advice will miss out on the greatest opportunities in history. Tremendous wealth will be generated in the next 10 years, but not for those following that obsolete advice. Those following the old advice will watch in frustration as the rich become even richer, while life becomes tougher for them.
In chapter one of this book, I go into detail about how the crash that began in 2007 was the best financial opportunity in my lifetime. I expect the next 10 years to be even better.
Time to Let Go
A monkey cannot find freedom until the monkey lets go. The same is true for humans. Humans cannot find freedom until they let go of old, obsolete ideas.
As the old saying goes: The definition of insanity is doing the same thing over and over and expecting a different result. Yet that is what people are doing. They listen to obsolete experts dishing out obsolete financial advice, advice that has not worked. Yet, they continue to cling to those obsolete ideas.
I know it is hard to change old ideas. As they say: You can’t teach an old dog new tricks. With humans, it is difficult to change a person who clings tightly to old ideas.
This book is about the unfair advantage a sound financial education can afford anyone, rich or poor, smart or not so smart, living in a rich country or a poor country. With the World Wide Web, anyone living anywhere can gain enormous wealth in the world economy. All they have to do is adopt new ideas, be serious about their financial education, and take action.
Taking action is important because we learn by our mistakes. The idea that mistakes are bad is a bad idea. If people do not make mistakes, they fail to learn, which is why my poor dad remained poor. Rather than look at the loss of his job, the election, and his ice cream business as blessings, he looked at his failures just as a schoolteacher would and punished himself for making mistakes. He died a poor man, not realizing that his failures were his biggest opportunities to learn and to grow.
You see, in school, students who make the most mistakes are labeled stupid. In the real world, people who make the most mistakes and learn from them, become smarter people.
I am happy to report that today I make much more money than my classmates who were the “A” students and became doctors and lawyers. I make more money simply because I made more mistakes and learned from them.
I am not saying this book has the best advice for you. As Warren Buffett says, “Fortunately, there are many ways to financial heaven.” I found my way to financial heaven. It is up to you to find your way. This book is merely a guide, not an answer book, because in the real world there are no right answers. There are only answers that work for you.
The primary reason for this book is to offer you new ideas, new ways of looking at the subject of money.
There are many things that I write about that might cause you to say, “This is too good to be true.” And they are too good to be true if a person is limited in financial education and real-life experience. Yet for me they are true and can be true for those willing to dedicate more time to their real-life financial education.
Everything in this book is about real life. This book is filled with thoughts, actions, and experiences used every day in my life. This book is about the unfair advantages available to all of us if we are willing to invest in our financial education and learn. I offer these ideas with the intent of challenging old ideas and opening your mind to new ideas.
Remember, you cannot fit two cars in a one-car garage.
Just as a monkey cannot find freedom unless it lets go, human beings cannot change until they let go of old ideas. With the financial challenges up ahead, adopting new ideas is better than clinging to old ideas.
As the Industrial Age and Information Age collide, a massive transfer of wealth is under way. Those who were rich yesterday may not be rich tomorrow. Many who are middle class today, will be poor tomorrow. Just because you were an “A” student yesterday does not mean you know much today.
This book is about letting go of the past and moving into a brave new world of wealth, opportunity, and abundance.
Lessons from Sunday School
I am not very religious, yet I learned very important lessons in Sunday school. Two lessons applicable today are:
“Blessed are the meek for they shall inherit the earth.” The meek does not mean the weak. The meek are those who are humble enough to know they need to reduce their arrogance and be willing to learn anew.
“My people perish from a lack of knowledge.”
The real financial crisis is a crisis of an educational system that is old, obsolete, and out of touch with the real world. The financial crisis will not go away until our schools inform students about the truths behind jobs, work, taxes, and investing. It is time our schools stop training students to become monkeys with their fist stuck in a tree.
If we don’t teach people about money, we will have many more people like my poor dad, a very good, well-educated, hard-working, and honest man, but a man who died angry at the rich and expecting the government to take care of him.
It is time we set people free. Financial education can do that.
Good luck reading this book, and may you gain more knowledge, because knowledge is real money.
Chapter One - UNFAIR ADVANTAGE #1: KNOWLEDGE
What Should I Do with My Money?
FAQ (Frequently Asked Question)
I have $10,000. What should I do with it? What should I invest in?
Short Answer
If you do not know what to do with your money, the best thing to do is not tell anyone.
Explanation
If you do not know what to do with your money, there are many people who will tell you what to do, which is, “Turn your money over to me. I’ll take care of it for you.”
The biggest losers during the latest financial crisis were people who turned their money over to people they trusted.
Longer Answer
Your level of financial education determines what you do with your money and how you invest.
Explanation
Without financial education, your risks go up, your taxes go up, your returns go down. People without financial education traditionally invest in a home, stocks, bonds, mutual funds, and savings in a bank. These are the riskiest of all investments.
With financial education, your risks go down, returns go up, and taxes go down. In other words, you can make more money with less risk and pay less in taxes. The problem is that you cannot follow traditional financial advice or invest in traditional investments.
What This Book Is About: With very high-quality financial education, money flows in rather than out. You can pay zero in taxes and earn millions with very low risk by using other people’s money in good or bad economies. This is an extreme unfair advantage.
Who Do You Call for Financial Advice?
In 2007, the world awoke to a new word: subprime. As the financial world began to shake, once-respected financial giants began to wobble. Some collapsed into a pile of rubble.
On September 15, 2008, the Lehman Brothers investment bank declared bankruptcy, the largest bankruptcy filing in U.S. history.
Also in 2008, Merrill Lynch, the largest stock brokerage firm in the United States, went bankrupt and sold itself to Bank of America. The irony is that Merrill Lynch was the firm millions trusted with their wealth, the firm millions looked to for financial advice.
In 2011, all is well at Merrill again. On their website, they promote contacting “a financial advisor to help you rebuild your assets today.” Notice the word “rebuild.” An intelligent question might be, “Why would anyone have to rebuild?” If you lost money, why would you give them more money?
AIG, Fannie Mae, and Freddie Mac are still in serious trouble. Even Warren Buffett, reportedly the world’s richest and smartest investor, and his firm Berkshire Hathaway took substantial losses in the crisis. In fact, it was the Moody’s ratings agency, an agency he controls, that issued AAA ratings to subprime mortgages and sold these toxic mortgages, aka derivatives, to governments, pension funds, and investors throughout the world. Selling subprime debt packaged as AAA prime debt is also known as fraud. Buffett’s firm was instrumental in triggering this global crisis, yet the world still looks to Warren for fatherly investment advice. On top of that, the companies he controls (Wells Fargo, American Express, General Electric, and Goldman Sachs) received billions in taxpayer bailout money after the crash. Is this Warren Buffett’s real secret to being the world’s smartest investor?
Also during this crisis, millions of people lost their homes to foreclosures. Millions more are upside down, which means their homes are now worth less than their mortgages.
In 2010, Boston College released a report stating that Americans are $6.6 trillion short in their retirement funds. Their study claims that losses in retirement accounts and home values will leave Americans short of money for retirement. If they cannot afford to retire, what will they do when they can no longer work? Push a shopping cart and live under a bridge? What happens if their health fails? Who takes care of them?
Milliman, Inc., a Seattle-based consulting firm, reported that defined-benefit pension plans of the 100 largest corporations lost $108 billion in August 2010. That is a huge loss in just one month. This means Americans who felt safe because they worked for a company that had a DB plan, a defined-benefit pension plan are in trouble. They might not receive that guaranteed paycheck for life.
Most workers in the United States have a DC plan, a defined-contribution benefit plan, such as the 401(k). A DC plan means that their retirement depends upon how much is contributed to the pension plan. If there is nothing in their plan, they receive nothing. If the plan runs out or is wiped out, again they receive nothing. If the stock market is down, workers with DC plans are in very big trouble. Rather than retirement being a dream, retirement might turn into a nightmare.
CalPERS, the California Public Employee’s Retirement System, is an agency of California’s government and manages pension and health benefits for more than 1.6 million public employees, retirees, and their families. In other words, there are a lot of people counting on CalPERS for their financial security.
Unfortunately, it has a reputation as the one public pension that lost more money than all the others combined. Some people say it is the most corrupt and inefficient public pension fund in the United States.
In 2010, Stanford University published a warning stating that CalPERs and CalSTRS, the University of California Retirement System, are collectively unfunded by $500 billion dollars and have engaged in overly risky investments.
Half a trillion dollars is quite a shortfall. There goes the myth of obtaining job and retirement security by working for the government.
The Smartest People in the World
You get my point. Unless you have been living under a rock since 2007, I believe you know the story: the story of how the smartest financial brains in the world, the people we look to for financial wisdom, the men and women who went to the best schools in the world, supposedly receiving the best financial education in the world, caused the biggest financial crisis in world history, a crisis some have called the New Depression.
The question that arises is this: If they’re so smart, if the leaders of our financial institutions received the best financial education money could buy, why is the world in such a financial crisis? Why are the rich getting richer, the poor getting poorer, and the middle class shrinking? Why are taxes going up and governments going broke? What happened to the jobs? Why are wages going down as inflation goes up? Why are so many baby boomers, people who followed the advice of the best-educated brains in the investment world, now afraid of running out of money during retirement? Why are so many young people, graduating from school under massive debt, unable to find jobs, jobs that can pay off their student loans? The coming crisis will not be the real estate bankruptcies. The next debt crisis will be defaults on student loans.
Could the problem be the poor quality of our leaders’ financial education and the lack of financial education of the masses?
What Is Financial Education?
Today, millions of people are finally saying, “We need financial education in our schools.” Yet if the brightest minds in the world got the best financial education money can buy, why are we in a massive financial crisis?
A better question is: What is financial education? If schoolteachers do not know what financial education is, how can they teach it? How did the graduates of our best schools—Harvard, Yale, Princeton, Oxford, and Cambridge—guide us into the world’s biggest financial crisis? Why is the University of California teacher’s retirement plan in trouble? Did those who manage that retirement plan really receive a financial education? Are kids in schools receiving a financial education? Are schools preparing students for the real world of money?
Before describing what I believe financial education is, I need to point out the differences between education and training.
In 1969, I entered U.S. Navy flight school at Pensacola, Florida. After three years of flight school, I was flying in Vietnam. Looking back upon the experience, I now realize that I was a well-trained pilot. I was not a well-educated pilot.
I say that I was well trained because I was trained to fly the helicopter gunship. I had no education as to why we were at war in Vietnam. I did not have any geo-political-economic education. I did not know that Vietnam had been at war for over a thousand years. France and the United States were the last in a long line of imperialist countries trying to conquer Vietnam. I did not know that the war I was fighting was their thousand-year war of Independence, as the Revolutionary War was America’s fight for independence from England.
All we were told was that we were the good guys and the communists were the bad guys. I did not know what a communist was. All I knew was that we wore white hats and they wore black pajamas. We believed in God and communists did not. I did not know we were fighting for oil and control over the resources of Vietnam and the rest of Southeast Asia. Sadly, I see the same thing going on in Iraq and Afghanistan today.
Also, I had no idea how to design, build, or repair a helicopter. I was not educated in metallurgy, design, electronics, fuel, or weapons systems. I had no idea how to fix my helicopter. All I was trained to do was fly, shoot, and follow orders. Press the right button, and people died. Press the wrong button, and I died. By the end of the war, I was very well-trained pilot but not a well-educated one.
Potty Training
In the real world, people toilet train their children. They do not toilet educate their children. People train their dogs. They do not educate their dogs. The term “Pavlov’s dog” has come to signify the difference between education and training. In simple terms, ring a bell and Pavlov’s dogs salivated and got hungry, even if there was not any food around.
For those not familiar with the term “Pavlov’s dog,” the term is derived from the famed Russian physiologist and Nobel Laureate Ivan Pavlov (1849–1936), who was recognized for his research on the digestive system of dogs. He is credited with the term “conditioned reflex.” Pavlov’s dog is used to describe someone who merely reacts to a situation automatically instead of using critical thinking.
Modern advertising uses conditioned reflex extensively. Those of you from my generation may recall that Winston cigarettes had a tag line that went, “Winston tastes good ___ _ ______ ____.” At home, we filled in the blanks, “Like a cigarette should.” Or “How do you spell relief?” Our answer, “R-O-L-A-I-D-S.” Advertisers trained us like Pavlov trained his dogs. Today, Aflac uses a duck to keep them on our minds; Geico insurance uses a green gecko to keep them on our minds. The financial-services industry does the same thing. People work hard for their money and, without thinking, turn their money over to banks and pension funds.
In many schools, school administrators are proud to say they have financial education in their schools. In reality, it is financial training, not financial education. Just as Pavlov trained his dogs to salivate even if there was nothing to salivate about, millions of highly educated people are trained rather than educated when it comes to the subject of money. For example, I will give you a test to see if you can fill in the blanks:
Go to school, get good grades, and get a _ _ _.
Work _ _ _ _ .
Save _ _ _ _ _.
Buy a house because your house is an _ _ _ _ _.
Cut up your credit cards. Get out of _ _ _ _.
Live _ _ _ _ _ your means.
Invest for the _ _ _ _ term in a well-_ _ _ _ _ _ _ _ _ _ _ _
portfolio of _ _ _ _ _, bonds, and _ _ _ _ _ _ funds.
Many educated people think this is financial education. On television, it is common to see so-called financial experts saying, “Go to school. Get a job. Save money. Cut up your credit cards, and get out of debt. Your house is an asset. Live below your means. Invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.” This is not financial education. This is financial training, the same training that Pavlov used on his dogs and that advertisers use to sell cigarettes, antacids, and insurance.
When the 2007 financial crisis hit, many of those who followed this financial training believed that they were financially educated and lost everything: jobs, homes, retirement, and savings. Many marriages broke apart.
To make matters worse, schools getting on the financial-education bandwagon continue to bring in bankers to promote the wisdom of “saving money.” In the name of financial education, schools also bring in financial planners who train young minds to believe that “investing for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds” is the smart thing to do. Mindlessly sending your money to complete strangers is not the end result of good financial education. It is the end result of dog training.
I am certain these educators are well-intentioned people, but their conditioned reflexes blind them to the fact that the bankers and financial planners they invite into their schools work for the very organizations that caused and profited from this financial crisis: corporations such as Bank of America, Merrill Lynch, Goldman Sachs, and Lehman Brothers (oops, they’re gone). These companies continue to hire the brightest financially educated students from the best schools in the world and train them to run their companies and sell their financial services. This is not financial education. This is sales training.
Show Me the Money
In 1996, Jerry McGuire, a movie starring Renee Zellweger, Tom Cruise, and Cuba Gooding Jr. was released. From that movie came the line, “Show me the money,” and today, it is a cult classic. Just a few days ago, I was passing a group of boys between the ages of 10 and 12 who were arguing about money. It seems that one boy owed money to another boy. Frustrated and tired of excuses, the boy who was owed the money stuck out his hand and shouted, “Just show me the money.”
What most people think is financial education is really, “Send me your money,” not “Show me the money.” When a person says, “I have $10,000. What should I do with it?” financial planners, who have very little financial education but lots of sales training, are trained to say, “Invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.” In other words, “Send me your money for the long term.” People who followed similar mantras are today’s biggest losers. This is how Bernie Madoff got so many educated wealthy people to send him billions of dollars, creating the second biggest Ponzi scheme in U.S. history. (The biggest Ponzi scheme in U.S. history is Social Security.)
The term “Ponzi scheme” is named after Charles Ponzi (1882– 1949) who was considered one of the greatest swindlers of all time. A Ponzi scheme is an investment fraud where early investors are paid with money coming in from new investors who are generally lured in with the promise of high returns. If you think about it, most markets, real estate, stocks, bonds, and mutual funds are Ponzi schemes. If new investors stop sending in their money in the hopes of higher returns, the scheme collapses. In 2007, as the news of the subprime crisis spread, old investors and new investors panicked and wanted their money back. Savers also wanted their money back, and the world economy, a massive Ponzi scheme, nearly collapsed. When people stopped sending in their money and began demanding, “Show me my money,” the global markets crashed. Millions of ordinary people lost trillions.
To save the world economy, central banks and governments of the world were forced to step in and promise savers and investors that their money was safe. The problem is that millions are still wiped out and millions more do not trust the government and financial systems. They shouldn’t. The entire global financial system is a government-sponsored Ponzi scheme. It works as long as you and I keep sending our money to people we hope are trustworthy. Imagine what would happen if young American workers said, “We will not donate any more to Social Security.” Not only would the U.S. economy go into chaos but the world economy would probably collapse.
The global Ponzi scheme works for those with financial education and is tragic for those without financial education. This is why I write and teach financial education. The legal, government-sanctioned Ponzi scheme works for me, which is why I do not have a job, save money, call my house an asset, get out of debt, live below my means, or invest for the long term in a diversified portfolio of stocks, bonds, and mutual funds. Unfortunately, the global financial system is corrupt, and millions who follow this advice are being destroyed financially.
The Five Components of Financial Education
To keep financial education as simple as possible, I break it down into five basic components. They are:
History
Definitions
Taxes
Debt
Two sides to every coin
Throughout this book, I will often refer to these five basic components of financial education, doing my best to keep things as simple as possible.
Keeping It Simple
Growing up in Hawaii, far from the financial capitals of the world, my financial education began when I was nine years old. My rich dad, my best friend’s father, began teaching his son and me about money using the game of Monopoly. He kept his lessons very simple.
During one of his lessons, he said, “One of the world’s greatest financial strategies is found in the game of Monopoly.”
Curious, his son and I asked, “What is the formula?”
Chuckling, he said, “Can’t you see it? You’ve played this game for years. The formula is sitting right in front of you.”
The problem is that we could not see it. No matter how many times we went around “GO” and collected our $200, we were blind to what rich dad saw.