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 more detail in future chapters. The point of this book is to open your eyes to the power you have to control your financial future if you have the proper financial education.
Our educational system has failed millions of people—even the educated. There is evidence that our financial system has conspired against you and others. But that is ancient history. Today, you control your future, and now is the time to educate yourself—to teach yourself the new rules of money. By doing so, you take control of your destiny and hold the key to playing the game of money according to its new rules.
Reader Comment
I think most people who are reading your books are looking for some sort of magic pill solution because that is the mindset of society in America today, with their instant gratification desires. And I think you do a good job of letting people know that this is not a magic pill book. When you discuss the new rules of money, what you say is excellent in reshaping people’s minds and how they should think.
—apcordov
My Promise to You
After President Nixon changed the rules of money in 1971, the subject of money became very confusing. The subject of money does not make sense to most honest people. In fact, the more honest and hardworking you are, the less sense the new rules will make. For example, the new rules allow the rich to print their own money. If you did that, you would be sent to jail for counterfeiting. But in this book, I will describe how I print my own money—legally. Printing your own money is one of the greatest secrets of the truly rich.
My promise to you is that I will do my very best to keep my explanations as simple as possible. I will do my best to use everyday language to explain complex financial jargon. For example, one of the reasons why there is a financial crisis today is because of a financial tool known as a derivative. Warren Buffett once called derivatives “weapons of mass destruction,” and his description proved true. Derivatives are bringing down the biggest banks in the world.
The problem is that very few people know what derivatives are. To keep things very simple, I explain derivatives by using the example of an orange and orange juice. Orange juice is a derivative of an orange—just like gasoline is a derivative of oil, or an egg is a derivative of a chicken. It’s that simple: If you buy a house, a mortgage is a derivative of you and the house you buy.
One of the reasons we are in this financial crisis is because the bankers of the world began creating derivatives out of derivatives out of derivatives. Some of these new derivatives had exotic names such as collateralized debt obligations, or high-yield corporate bonds (aka junk bonds), and credit default swaps. In this book, I will do my best to define these words by using everyday language. Remember, one of the objectives of the financial industry is to keep people confused.
Multilayered derivatives border on legal fraud of the highest order. They are no different than someone using a credit card to pay off a credit card, and then refinancing their home with a new mortgage, paying off their credit cards, and using the credit cards all over again. That’s why Warren Buffett called derivatives weapons of mass destruction: Multilayered derivatives are destroying the world’s banking system just as credit cards and home equity loans are destroying many families. Credit cards, money, collateralized debt obligations, junk bonds, and mortgages—they’re all derivatives, just going by different names.
In 2007, when the house of derivatives began coming down, the richest people in the world began screaming “Bailout!” A bailout is used when the rich want the taxpayers to pay for their mistakes or their fraud. My research has found that a bailout is an integral part of the conspiracy of the rich.
One of the reasons I believe my book Rich Dad Poor Dad is the bestselling personal finance book of all time is because I kept financial jargon simple. I will do my best to do the same in this book.
A wise man once said, “Simplicity is genius.” To keep things simple, I will not go into excessive detail or complex explanations. I will use real-life stories, rather than technical explanations, to make my point. If you want more detail, I will list
