increase your return on investment, but only if you know what you are doing. Only a few know the difference between capital gains and cash flow and which is less risky. Most people blindly accept the idea of going to school to get a good job and never know why employees pay higher tax rates than the entrepreneur who owns the business. Many people are in trouble today because they believed their home was an asset, when it was really a liability. These are basic and simple financial concepts. Yet for some reason, our schools conveniently omit a subject required for a successful life—the subject of money.
In 1903, John D. Rockefeller created the General Education Board. It seems this was done to ensure a steady supply of employees who were always financially in need of money, a job, and job security. There is evidence that Rockefeller was influenced by the Prussian system of education, a system designed to produce good employees and good soldiers, people who dutifully follow orders, such as “Do this or be fired,” or “Turn your money over to me for safe keeping, and I’ll invest it for you.” Regardless of whether this was Rockefeller’s intent in creating the General Education Board, the result today is that even those with a good education and a secure job are feeling financially insecure.
Without a basic financial education, long-term financial security is almost impossible. In 2008, millions of American baby boomers began retiring at a rate of 10,000 a day, expecting the government to take care of them financially and medically. Today, many people are finally learning that job security does not ensure long-term financial security.
In 1913, the Federal Reserve was created, even though the Founding Fathers, creators of the U.S. Constitution, were very much against a national bank that controlled the money supply. Without proper financial education, few people know that the Federal Reserve is not federal, it has no reserves, and it is not a bank. Once the Fed was in place, there were two sets of rules when it came to money: One set of rules for people who work for money, and another set of rules for the rich who print money.
In 1971, when President Nixon took the United States off the gold standard, the conspiracy of the rich was complete. In 1974, the U.S. Congress passed the Employee Retirement Income Security Act (ERISA), which led to retirement vehicles like the 401(k). This act effectively forced millions of workers who enjoyed employer-provided defined benefit (DB) pension plans to instead rely on defined contribution (DC) pension plans and put all their retirement money in the stock market and mutual funds. Wall Street now had control of the U.S. citizens’ retirement money. The rules of money were completely changed and heavily tilted in favor of the rich and powerful. The biggest financial boom in the history of the world began, and today, in 2009, that boom has busted.
Reader Comment
I remember when they stopped backing our money with gold. Inflation went crazy. I was only a teenager and had gotten my first job. Things I needed back then I had to buy myself—prices of goods went up, but not my parents’ paychecks.
The discussions of the adults revolved around how this could have happened. They felt that this could be the downfall of our whole economic system. It took a while but here it is.
—Cagosnell
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
