Tele-seminars

Business Basics

Before going into the discussion of real estate itself, I feel important to introduce you to a few business, financial and economic concepts so we speak the same language. Robert T. Kiyosaki has done a tremendous job in spreading this knowledge to laymen and women. Here I'll review only a few of those concepts, and I recommend you to buy Kiyosaki's books for further information and details. The 3 basic ones are Rich Dad Poor Dad, Rich Dad's Cashflow Quadrant and Rich Dad's Guide To Investing.

The Poor, the Middle Class & the Wealthy

The first concept I want to introduce here is the concept of wealth, and how the Poor, the Middle Class and the Wealthy relate to it.

You should be careful not to confuse wealth with riches. They are not the same. Riches mean having a lot of money, but that doesn't mean you're wealthy. You can also be wealthy, but broke. In that latter case, it's generally a very temporary situation, while for the Poor it's a permanent situation.

What differentiates the Poor, the Middle Class and the Wealthy is their mindset, which produces different actions thus different results that show in their financial statements.

But let's first define more precisely what wealth is. Buckminster Fuller, who patented the geodesic dome in 1961, defines it thus: "Wealth is a person's ability to survive so many number of days forward… or if I stopped working today, how long could I survive?" Another way, more operational maybe, to define wealth, is to say that it is "the measure of the cash flow from the asset column compared with the expense column." [Cf. Robert T. Kiyosaki, Rich Dad Poor Dad, ©1998, p. 80.]

Now, I realize the latter definition might be a little technical for some of you, so let's define what those columns are and what they relate to.

Financial Literacy

A financial statement is a diagram that shows the relation between income, expenses, assets and liabilities. It allows you to make more accurate financial decisions when you understand it properly.

The upper part composed of the income and expense columns is what is called an income statement, or a profit and loss statement. It measures money in and money out.

The lower part composed of the asset and liability columns is what is called a balance sheet. Assets are what put money in your pocket while liabilities are what put money out of your pocket.

The arrows representing the flow of money through the columns is what is called the cash flow pattern, which differentiates the Wealthy from the Poor and the Middle Class.

As you can see on the diagram below, the Poor mainly use the income they get from their job to pay expenses such as food, rent, clothes, transportation, leisure, etc. Often times, they also spend money on stuff they don't really need, but which is discounted. That gives them the false impression that they are saving money, but actually they are spending and adding to their expense column. Globally, money is spent as it comes in on payday.

On the other hand, the Middle Class, that people often think as the Rich, spend their hard earned money from their job or as a professional on liabilities that produce recurring expenses. Such liabilities may be cars, boats, planes, houses, credit card debts, consumer loans, etc. They have money but their habits prevent them from becoming wealthy.

The real Wealthy don't manage their money that way. On the opposite, the Wealthy buy assets that produce more money to buy additional assets and so on. It's like a cycle which maintains itself, and which makes the Wealthy becoming wealthier. Examples of assets, i.e. things that put money in your pocket, are stocks, bonds, notes, real estate, intellectual property, businesses (with a system in place), etc. Contrary to the Poor and the Middle Class who live from earned income (salary), the Wealthy live from portfolio and/or passive income: dividends, interests, rental income, royalties, etc.

As you can see by now, wealth is much more than riches. It's different from your net worth as well, which is defined as the difference between assets and liabilities. What is important is the cash flow your assets are producing compared to your expenses, because that's what will sustain your lifestyle would you not go to work beginning tomorrow.

Another way to look at this is to find who you really work for. The Poor and the Middle Class primarily work for their boss, the government and their bank. They often get their income from a job, thus putting time and efforts making the business' owner or shareholders richer. Then, the first expense of employees is taxes, which is the government's business. Their earned income is taxed before they even get a chance to look at it! Then their second most important expense is probably their mortgage, their car payment or their credit card debts, which are caused by their liabilities—and thus they are making the bank richer.

The Wealthy is in a different situation, with a different set of rules because they get assets producing passive or portfolio income, not earned income. Their income is not taxed first, but last. So it is the income produced by their assets that pays for expenses or the purchase of new assets, and taxes are paid at a lower rate on the remainder, if remainder there is.

Cashflow Quadrant

There is yet another way to look at all this. Let's consider for a moment the distribution of wealth, so you can get a clearer picture of how you can ultimately become a wealthy person if you so desire. This section refers to the Cashflow Quadrant introduced by Robert T. Kiyosaki in his second book: Rich Dad's Cashflow Quadrant. Read it for a more detailed discussion.

We can separate society into four categories depending on how people get their income. There are Employees (E), Self-Employed people or Small Business Owners (S), Business Owners… with a system (B) and Investors (I). The two former are on the left side, and the two latter are on the right side.

What is interesting to know is that while about 90% of the population is on the left side of the quadrant, they share only 10% of global wealth. So if you want to get your share of the 90% available on the right side, you'd better learn what differentiates people who are on that side (the Wealthy), and how you can emulate what they do to get the same kind of results. So let's look further into differences between each quadrant.

Basically, Employees have a job and receive wages. Such people might be nurses, waiters, teachers, state employees, presidents of companies, etc. They receive a fixed amount of money for each hour they work. Most of the time, those people look for a secure job with strong benefits in response to their fear coming from the economic uncertainty. That's the way they get a feeling of security, although apparent even if they still believe in it. But the reality is that job security doesn't exist anymore as we moved from the Industrial Age to the Information Age.

Self-Employed people or Small Business Owners are people such as lawyers, doctors, dentists, direct sellers, consultants, real estate agents, restorers, retailers, travel agents, garage owners, business trainers, family enterprises, etc. Those people work for themselves, but without a system they really own a job. If they don't or can't go to work tomorrow, say because they get an accident, are sick, make a burnout or just don't wish so, their income stops as well. There is no real security there. But that's not what they are really looking for anyway. In response to their fear coming from the economic uncertainty, they rather want to take control of the situation and do things themselves. Having more success to them means working harder. Unfortunately, bankruptcies are common in this quadrant: 90% within 5 years.

What's the difference between a "S" and a "B" business?

In a "B" business, you have a system which works even when you are not working, while in a "S" business, you don't have a system–or said otherwise YOU are the system.

Let's say you go on vacation for a year. If you're business continues to grow and to bring you income while you're not there, it's a "B" business. If income stops, or you don't have your business anymore when you come back, it's a "S" business.

Business Owners (with a system) build assets and love to delegate. They say to themselves: Why would I do it myself when someone else can do it better for me? Prosperity is gained through leverage of time. That's what the system is used for. And that system gives them more time, more freedom, and more revenues, while being less taxed. Types of businesses qualifying for this quadrant are big businesses such as Ford Motor Co., Dell Computers, Hewlett Packard, General Electric, CNN, etc.; franchises such as McDonald's, Taco Bell, Subway, etc.; and network marketing companies.

Finally, Investors buy assets to leverage their money instead of their time. That means that it is their money that works for them, instead of them working for money. As a side note, it is interesting to remark that investors often invest in businesses with a system, while those businesses with a system often provide their owners with the money and education needed to go into the "I" quadrant. It's some kind of two-ways between those two quadrants.

Now, when we consider all the previous information, what we observe is that people on the left side of the quadrant trade hours for dollars, and thus have a limited income potential. Their income is dependent on their individual performance.

On the right side, however, the power of networks is used to leverage either time or money. That's what enable the Wealthy to access unlimited income potential.

So if you want to become wealthy, your goal is to reach the right side by becoming a business owner or an investor.

As an investor, to get access to the best deals with high potential returns on investment, which are forbidden by law to poor people, you have to be an accredited investor, which means, according to the SEC (Securities Exchange Commission), that you have $200,000+ annual income as an individual, $300,000+ as a couple, or 1 million dollars net worth. Only 2.4% of the U.S. population meet those requirements, and you still need education and experience to be successful. That's not accessible to a lot of people, and often times it's better to reach the "I" quadrant through the "B" quadrant as a way to get the education you will need to understand and evaluate investment opportunities, and make sound decisions about them. Alternatively, real estate is an interesting proposition to get started with the “B” and “I” quadrants at the same time, and in the coming tele-seminars we will focus our attention on that.

In summary, you now know a few basic actions you need to take to become wealthy:

The obvious one: spend less than the income you bring in.
Buy assets, not liabilities.
Mind your own business, not your boss', the government's or your bank's business.
Quit the left side of the Cashflow Quadrant, and come to the right side, probably by becoming a Business Owner before considering becoming an Investor.

As said earlier, every now and then, I host teles-seminars in which I or special guests teach real estate techniques, income producing strategies and success principles. Stay informed by subscribing to my notification list below. You'll learn about:

How to increase the return from your IRA.
How to set objectives.
What kind of due diligence you need to make before investing in any market.
How to set up a power team.
Where to find deals.
How to find the financing you need.
How to make an offer.
Etc.

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