Melissa is a radio show producer. She’s a bright businessperson, and, like many people, she has an investment retirement account or IRA that she has dutifully contributed to throughout the years.
Melissa also has a financial planner, Jane, who has been managing her IRA. Like many people, Melissa hasn’t paid much attention to her IRA.
She assumes that her financial planner is doing a good job for her. But, since Melissa is someone who knows and understands the Rich Dad/Rich Woman philosophy of taking control of your money, she decides to take action by actually opening her investment account statement. What do you think she discovered?
In the biggest stock market boom in history, Melissa’s retirement account had declined dramatically. Why? She had no idea. So she took her next bold step. She met with Jane for the first time since opening her retirement account and asked why her account was plummeting while the stock market was at a record high. Jane had no answers or strategies to offer. When Melissa pressed for an answer about how she could improve her situation, Jane looked her straight in the eye, and, in all seriousness, said, “You can always marry a rich man.” Melissa fired Jane on the spot.
What happened was that when the stock market was at all-time highs, Melissa’s financial planner didn’t have her invested in stocks. Instead, she put Melissa into bonds. Why? Because with little-to-no financial knowledge, some financial planners automatically move their clients out of stocks and into bonds as they get older because bonds are supposedly a “safer,” lower-risk investment. However, in this instance, bond prices were falling because there was little demand for them. When the stock market is up and investors feel confident in it, they typically will choose stocks over bonds.
As an educator, I ask, “Why are people so willing to turn their hardearned money over to someone else — often a complete stranger — to manage? The answers I frequently hear are “I’m too busy,” it’s too confusing” and “financial planners/stock brokers/asset managers are professionals.” And these are only some of the reasons.
Here is another theory.
The Income Trap
Those of you who are familiar with the book Rich Dad Poor Dad, written by my husband Robert, or my book, Rich Woman, know that we use simple diagrams of an income statement and a balance sheet to educate our readers. I was raised, like I’m sure many of you were, to set my focus on the income column. I was taught to get a good job that pays well, go for that pay raise and to work my way up to president or CEO because that’s where the big money is. When I worked for an hourly wage, the advice was, “Put in a lot of hours to make more money.” Or: “Work to raise your hourly rate to boost your income.” Sometimes I would work for free just to learn and people would tell me, “Your time is valuable. Demand to be paid for what you do!” The fixation was always on making more money.
For most of us, we are conditioned by our parents, the school system and society to focus on acquiring more and more income. We are taught and driven to focus on the income column. Now, I’m not saying that’s wrong or right, good or bad. There are a lot of people who do very well in the income column and make a great deal of money. But in order to continue to make that money, they have to continue to work hard. (Not to mention the huge amount of taxes they’ll probably pay on that ever-increasing income.)
The bottom line is that most of us are taught from a very early age, as I was, to focus on our salary, wages, paychecks, professional fees and bonuses — the income column.
A Change of Focus
In 1989, Robert and I lived in Portland, Oregon. It was at that time that he began to explain his rich dad’s philosophy on money and investing. The greatest distinction for me was rich dad’s definition of an asset and a liability.
This is how rich dad defined assets and liabilities:
- An asset is something that puts money in your pocket whether you work or not.
- A liability is something that takes money out of your pocket.
Assets produce cash flow — cash flowing into your pocket. Liabilities produce cash flowing out of your pocket. Rental properties, businesses, stock dividends and commodities such as oil and gas are all examples of assets . . . IF they are producing positive cash flow.
In 1989, I began my focus on assets and my journey into the asset column. My first investment was a two-bedroom, one-bath rental property in Portland. Some months, it was an asset. Other months, it was a liability. We continued buying properties that we could rent . . . single-family homes as well as small apartment buildings. It was interesting and challenging . . . but at that point, I saw real estate investing only as a hobby. By 1994, our cash flow from these properties ($10,000 each month) exceeded our living expenses ($3,000 per month).
Even though we had cash flow from our investments, my attention was still on the income column. I’d ask myself, How do we make more money so that we can acquire more assets? I still considered our investments a hobby, something we did on the side.
In 1995, Robert and I committed to create the board game, CASHFLOW®. This would be the start of The Rich Dad Company. Although there were certainly no guarantees of success (or even a sure bet to break even, for that matter), I felt a sense of relief knowing that we were creating a new business that would, ideally, generate more money into our income column.
In 1996, the CASHFLOW game launched. The next year, we published Rich Dad Poor Dad. The business — through a great deal of effort, mistakes, successes and learning — was up and running. Income was flowing in!
Then one day it hit me. I was hiking in the mountains of Phoenix (which is where I go when I want time to think) and, as usual, I’m thinking about how to bring more income into the company. I’m admiring the cacti and the desert flowers along the trail — with my mind chattering on about more income, more income and more income — when this fleeting thought crosses my mind. “It’s not about the income. It’s about the assets that we are building.”
The picture I saw in my mind changed. Instead of income moving from my income column to my asset column…it was the other way around! This is what I now saw in my mind’s eye: My assets were generating my income! I had it all backwards! News Flash: ITAC — It’s The Asset Column!
At that moment, I shifted my focus away from the income column. It’s not the income that brings wealth. It’s the asset that creates the income that brings wealth. My focus shifted to the asset column.
“What assets are we building or acquiring?” became the question I relentlessly asked myself. The CASHFLOW game is an asset. The book, Rich Dad Poor Dad, is an asset. Today, our company builds apps for financial education. If we do a good job, then every app could become an asset. Along with our rental properties, business investments and oil and gas projects, these assets are working hard — instead of Robert and me working hard. And life got simpler. Shifting my mindset off of the income column and onto the asset column has made a world of difference for me financially.
Most of us have been conditioned since we made our first dollar to focus on income, with little-to-no attention on the asset column. We are taught plenty about how to acquire income. We’re taught very little about how to acquire assets.
So, instead of turning your money over to a financial advisor, why not turn it over to your asset column? The questions you may want to start asking yourself are: “What asset am I building?” And “What asset am I acquiring?” And, of course, “How will these assets be working for me?”
The income column is important, but the asset column is where real wealth is created. ITAC!