What Can I Do?
As mentioned, the conspiracy of the rich has created two sets of rules when it came to money, old rules of money and new rules of money. One set of rules is for the rich and another set is for ordinary people. The people who are most worried by our current financial crisis are those playing by the old set of rules. If you want to feel more secure about your future, you need to know the new set of rules—the eight new rules of money. This book will teach you those rules, and how to use them to your advantage.
The following are two examples of old rules of money versus new rules of money:
Old: Save Money
After 1971, the U.S. dollar was no longer money, but rather a currency (something I talk about in my book Rich Dad’s Increase Your Financial IQ). As a consequence, savers became losers. The U.S. government was allowed to print money faster than it could be saved. When a banker raves about the power of compounding interest, what he or she fails to also tell you about is the power of compounding inflation—or in today’s crisis, the power of compounding deflation. Inflation and deflation are caused by governments and banks attempting to control the economy by printing and lending money out of thin air—that is, without anything of value backing the money other than the “full faith and credit” of the United States.
For years, people all across the globe have believed that U.S. bonds are the safest investment in the world. For years, savers dutifully bought U.S. bonds, believing that was the smart thing to do. At the start of 2009, 30-year U.S. Treasury bonds were paying less than 3 percent interest. To me, this means there is too much funny money in the world, savers will be losers, and since 2009, U.S. bonds could be the riskiest of all investments.
If you don’t understand why that is, don’t worry. Most people don’t, which is why financial education (or the lack there of) in our schools is so important. This subject of money, bonds, and debt will be covered more fully later in the book—unlike in your high school economics class. It is worth knowing, however, that what used to be the safest investments, U.S. bonds, are now the riskiest.
New Rule: Spend, Don’t Save
Today, most people spend a lot of time learning how to earn money. They go to school to get a high-paying job, and then they spend years working at that job to earn money. They then do their best to save it. In the new rules, it is more important that you know how to spend your money, not just earn or save it. In other words, people who spend their money wisely will always be more prosperous than those who save their money wisely.
Of course, by spend I mean invest or convert your money into long-lasting value. The rich understand that in today’s economy you cannot become wealthy by sticking your money under a mattress—or even worse, in a bank. They know that the key to wealth is investing in cash-flowing assets. Today, you need to know how to spend your money on assets that retain their value, provide income, adjust for inflation, and go up in value—not down. This will be covered in more detail throughout this book.
Old Rule: Diversify
The old rule of diversification tells you to buy a number of stocks, bonds, and mutual funds. Diversification, however, did not protect investors from a 30 percent plunge in the stock market and losses in their mutual funds. I thought it odd that many of the so-called “investment gurus,” people who sang the praises of diversification, began shouting “Sell, sell, sell!” as the market fell. If diversification protected you, why sell all of a sudden at near market bottom?
As Warren Buffett says, “Wide diversification is only required when investors do not understand what they are doing.” In the end, diversification is a zero-sum game at best. If you are evenly diversified, when one asset class goes down, the other goes up. You lose money in one place and make it in another, but you don’t gain any ground. You are static. Meanwhile, inflation, a topic we will also discuss in detail later in the book, marches on.
Rather than diversify, wise investors focus and specialize. They get to know the investment category they invest in and how the business works better than anyone else. For example, when investing in real estate, some people specialize in raw land and others in apartment buildings. While both are investing in real estate, they are doing so in totally different business categories. When investing in stocks, I invest in businesses that pay a steady dividend (cash flow). For example, today I am investing in businesses that operate oil pipelines. After the stock market crash of 2008, the share prices of these companies dropped, making the cash flow dividends bargains. In other words, bad markets offer great opportunities if you know what you are investing in.
Smart investors understand that owning a business that adjusts to the ups and downs of the economy or investing in cash-flowing assets is much better than owning a diversified portfolio of stocks, bonds, and mutual funds—investments that crash when the market crashes.
New Rule: Control and Focus Your Money
Don’t diversify. Take control of your money and focus your investments. During this current financial crisis I took a few hits, but my wealth remained intact. That is because my wealth is not dependent upon market values going up or down (aka capital gains). I invest almost exclusively for cash flow.
For example, my cash flow decreased a little when the price of oil came down, yet my wealth is strong because I still receive a check in the mail every quarter. Even though the price of the oil stocks, capital gains, came down, I’m not worried because I receive cash flow from my investment. I don’t have to worry about selling my stocks to realize a profit.
The same is true with most of my real estate investments. I invest for cash flow in real estate, which means every month I receive checks—passive income. The people who are hurting today are real estate investors who invested for capital gains, also known as flipping properties. In other words, since most people invested for capital gains, counting on the price of their stock investments or their home to go up in price, they are in trouble today.
When I was a boy, my rich dad would play the game of Monopoly® over and over again with his son and me. By playing the game, I learned the difference between cash flow and capital gains. For example, if I owned a property with one green house on it, I got paid $10 a month in rent. If I had three houses on the same property, I received $50 a month in rent. And the ultimate goal was to have one red hotel on the same property. To win at the game of Monopoly, you had to invest for cash flow—not capital gains. Knowing the difference between cash flow and capital gains at the age of nine was one of the most important lessons my rich dad taught me. In other words, financial education can be as simple as a fun game and can provide financial security for generations—even during a financial crisis.
Today, I do not need job security because I have financial security. The difference between financial security and financial panic can be as simple as knowing the difference between capital gains and cash flow. The problem is that investing for cash flow requires a higher degree of financial intelligence than investing for capital gains. Being smarter about investing for cash flow will be covered in greater detail later in this book. But for now, just remember this: It is easier to invest for cash flow during a financial crisis. So don’t waste a good crisis by hiding your head in the sand! The longer this crisis lasts, the richer some people will become. I want you to be one of them.
Today, one of the new rules is to focus your mind and money, rather than to diversify. It pays to focus on cash flow rather than capital gains because the more you know how to control cash flow the more your capital gains increase, and so does your financial security. You might even become rich. It’s basic financial education taught in the game of Monopoly and my educational game, CASHFLOW, which has been called Monopoly on steroids.
These new rules, learn to spend rather than save and focus rather than diversify, are just two of the many concepts that will be covered in this book, and they will be covered in