Rich Dad’s Guide To Investing: What The Rich Invest In, That The Poor And Middle Class Do Not
Author: Robert Kiyosaki
I was first introduced to the world of business in late 2012. I’m not saying I didn’t know what businesses were, but I had no idea how they were built, how they were run, the legalities behind starting one, etc. Not only was I clueless when it came to business, but to me, the term “investing” simply meant “stock market.” After being introduced to the world of business, it’s safe to say that I fell in love with it and have spent the bulk of the last 5 years studying and learning more. This book, among MANY others, has taught me a lot about getting started in business and how to set yourself up for early retirement and financial freedom. It is part of the “Rich Dad” series by Robert Kiyosaki, which includes a handful of books on business building and investments. I have read most of them and will probably be doing reviews on them eventually, but this one is definitely my favorite so I chose to review this book first.
It wasn’t until about 3 years after I started studying business that I learned what an accredited investor is and what they have access to. I actually learned about the term on accident while talking to a small real estate company that allows accredited investors to make small investments into people’s mortgages if those people do not have access to bank loans. When I called and asked a few questions, they first asked me if I was accredited and I had no idea how to answer…talk about embarrassing. What I quickly found out is that an accredited investor is someone who has either $1 million net worth, has earned $200,000 or more in both of the last 2 years, or a married couple whose combined income for the last 2 years was $300,000 or more. These requirements were set by the SEC (Securities and Exchange Commission) for a few reasons, but they are basically meant to protect the general public from overly risky or unethical investments. Accredited investors have access to a wide range of investments that many of you have probably never heard of (and neither had I before reading this book). Here’s a list of what they can get their hands on:
- Private placements
- Real estate syndication and limited partnerships
- Pre-initial public offerings (IPO’s)
- IPO’s (available to all investors, not easily accessible to non-accredited investors)
- Sub-prime financing
- Mergers and acquisitions
- Loans for startups
- Hedge funds
As I said before, these investments are deemed too risky for the average investor, not because the investments themselves are risky, but because the average investor typically lacks the education, experience, and/or excess capital to realize what he or she is getting into.
Who to Have on Your Financial Team
I’m going to keep this part short. Most importantly, you need a financial advisor; I believe that whole-heartedly. In order to start your plan towards financial freedom, you need to have someone who knows how to draw one up. Aside from the advisor, you should also try to have the following people on your team while on your way to freedom:
- Insurance agent
- Successful mentor
The reasons for each are touched on in the book.
Keep Earned Income Secure
There are 3 basic types of income: earned income, passive income, and portfolio income. Earned income is generally derived from a job or some sort of labor and comes in the form of a paycheck. Passive income usually comes from real estate. It can also come from royalties on patents or license agreements. There are a few other ways to achieve passive income, but those are the most common places it comes from. Portfolio income usually comes from paper assets such as stocks, bonds, mutual funds, etc. A basic rule explained in the book is to convert earned income into passive or portfolio income as efficiently as possible.
This is the exact diagram used in to book to illustrate the idea of turning your earned income into either passive or portfolio income. Simply put, this means you should be taking your earned income and then purchasing securities with it in hopes your money will, in fact, stay secure and turn into one of the latter incomes.
Businesses Buy Assets
Kiyosaki urges that you should have your business purchase your assets for you instead of purchasing them as an individual. This is mainly for tax purposes, but it also keeps your individual income safe from everything else so you can use it for your monthly expenses and liabilities outside of your business(es.)
Business Entities and Their Benefits
- Sole Proprietorship – You have complete control, you are completely liable, and you report all income and expenses on your personal tax return.
- General Partnership – Each partner can enter into contracts and business agreements, you are liable for all business debts including your partners’, and you report your share of income on your personal tax return.
- Limited Partnership – General partners control the business, whereas limited partners are only liable for the amount of their investment. They report all income and losses on your personal tax return but some loss may be subject to limitation.
- Limited Liability Company – Owners and members have the authority, owners or members are not liable for business debts, and tax rules vary by state.
- Corporation – Shareholders appoint a Board of Directors which appoints Officers who have the most authority, shareholders only risk the amount of their investment in the stock, Corporation pays its own taxes, and shareholders pay tax on dividends received.
- Subchapter S – Shareholders appoint a Board of Directors which appoints Officers who have the most authority, shareholders risk only the amount of their investment in stock, and shareholders report their share of corporate profit or loss on their personal tax returns.
There are a few more very minor differences among each entity, those are explained in the book.
There are quite a few more topics discussed in the book that involve best practices for businesses, how to control your cash flow throughout your businesses, what legal council you will want and/or need based on what type of business you are running, and so on. Ultimately, this book is one of a few that has really gotten me moving with various businesses of my own and investing for my (hopefully early) retirement. This book taught me just about everything I needed to know to properly start any business I desire and I know it will do the same for anyone who reads it that may have a vision of starting one but has no idea where to start.
Have you read this book? What interests you most about investing and starting businesses that lead to financial freedom? Let’s start a conversation!