Rule 2: Financial literacy is necessary. check out rule -6
In 1994, I retired at the age of 47. My money was working for me. By this time, Mike had taken over his dad's business and grown it exponentially. Both of us were able to reach where we were, thanks to Mike's dad (my Rich Dad) lessons in financial literacy.
The fundamentals of financial literacy, as Mike's dad taught us, is captured in just one rule: Understand the difference between an asset and a liability. You may want to believe that you know the difference between assets and liabilities. However, the truth is that a lot of us assume liabilities to be assets. Buying assets are about buying stuff that puts money in our pockets. Liabilities, on the other hand, take away money from our pockets. A lot of us might be hugely successful in our professional domains, but we may still be financially illiterate.
Is your house an asset or a liability? Being financially literate is not just about making money, but more importantly, about how to spend money. A lot of us see our homes as 'assets'. However, if we dig a little deeper, we will realize that a house is a liability. Buying a house offers tax breaks, but it also entails additional cash expenses. Most of us buy our homes on 20- 30 years mortgage. In a true accounting sense, the house, then, is a liability and not an asset, until you repay the entire mortgage.
Rule 3: Mind your own business
If you are asked what the business of McDonald's is, your answer, instinctively, would be 'fast food' or 'burger'. However, the founder of McDonald's, Ray Kroc, believed that McDonald's is in the business of real estate.
The primary success factor for a McDonald's restaurant is its location, the land it is built on. This Ray Kroc story, recounted by Mike's dad, became our third lesson:Mind your own business
It is important here to understand the difference between profession and business. A lot of us use these words interchangeably. For Ray Kroc, his profession was to sell franchises for making burgers; but his business was to build assets regarding the income-generating real estate. As a professional, we are 'minding' someone else's business. Instead, we should be 'minding' our own business. As a professional, you are working for a salary that becomes your 'income'. As a business person, you are looking at spending your income to buy revenue-generating assets. The 'usual assets' like a mortgage-bought home or a loan-bought car, become liabilities when we lose our jobs due to downsizing or restructuring. Minding your business is about buying revenue generating assets instead of liabilities or vanity goods. Revenue generating assets include stocks, bonds, mutual funds, real estate that generates net positive income after factoring mortgage and anything that produces income.
Rule 4: Use the cover of a corporation
The genesis of levying taxes emerged from Britain, and the US, unlike most things British, adopted permanent taxation with the 16th Amendment. Taxes today have split us into two camps - the haves and the have-nots. The have-nots believe in the Robinhood philosophy of 'take from the rich'. Ironically, it is the have-nots who lose the battle on taxation. Being in a job and working hard only enables the government to tax you more. The haves, on the other hand, play the tax game very differently. The haves mind their own business, which generates tax benefits for them, unlike the have-nots who have a job and therefore get taxed even before their salary reaches their banks.
What is financial IQ?
In order to manage taxes, it is important to build financial IQ. Financial IQ consists of the following four actions.
1. Understand what accounting all is about: If you are minding your own business or intend to do so, it is essential to understand the basics of accounting so that you can read and understand financial statements.
2. Understand the science of making money or investing.
3. Understand the demand and supply aspects of the financial markets.
4. Understand the law, especially regarding how the law interprets the income of an individual versus the income of a corporation.
When you work for someone, you earn, pay taxes and spend whatever remains after that. But when you mind your own business, you earn, then you spend and only then do you pay taxes.
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