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You’ve been told to work hard, save money, get out of debt, and live below your means. That advice is obsolete if you want to get ahead in life. Robert Kiyosaki argues these exact points in his new book, Rich Dad’s Increase Your Financial IQ.
These best-sellers have motivated many people (including my family) to take control of their financial lives. Both of these books have been summarized for you here.
Here’s My Rich Dad’s Increase
Your Financial IQ Book Summary!
“It is not real estate, stocks, mutual funds, businesses, or money that make a person rich.It is information, knowledge, wisdom, and know-how, a.k.a. financial intelligence, that makes one wealthy.” – Robert Kiyosaki.
Kiyosaki divides financial intelligence into five “Financial IQs”:
Making more money. This is measured by how much money you earn. If you make $120,000 a year, you have a higher Financial IQ than someone earning $40,000 a year.
Protecting your money. Once you earn your money, you need to hold onto it. So you need to protecting your money, especially from taxes.
Budgeting your money. “Being able to live well and still invest no matter how much you make requires a high level of financial intelligence,” Kiyosaki writes. This Financial IQ is measured by how much money you have left after expenses.
Leveraging your money. This Financial IQ is measured by return on investment. Answer this: How well do you make your budget surplus generate more money?
Improving your financial information. Financial information doesn’t just mean knowledge of basic financial concepts, but also means detailed knowledge of the investments you make.
Most of the book is devoted to exploring these five aspects of financial intelligence in detail.
Financial IQ #1: Making More Money
Many people fail to acquire wealth, Kiyosaki says, because they want the money without the work. He writes,“What many people do not realize is that it’s the process that makes them rich, not the money.”
It’s by learning to make money that you can continue to make money.
In order to make money, you must also learn to control your emotions. You must learn to defer gratification. Don’t sacrifice your financial future for a few bucks today.
According to Kiyosaki, the key to making money is learning to solve problems.“In order to grow wealthy you must come to terms with the fact that problems will never go away,” he writes.
Identify the problems preventing you from wealth, tackle them head-on, and the money will follow.
Financial IQ #2: Protecting Your Money
Once you’ve begun to make money, you need to protect it from the 7 financial predators.
Bureaucrats — We need to pay taxes, but it’s our job to (legally) pay as little as possible.
Bankers — Banks are constantly trying to siphon bits of your money in the form of fees. It’s important to watch out for and protect against this.
Brokers — Like fees from brokers they can chip away at your wealth. He cites brokers who “churn” accounts, buying and selling stocks frequently in order to generate more commissions.
Businesses —“All businesses have something to sell,” Kiyosaki writes. As their job is to part you from your money; yours is to keep it. He suggests asking yourself whether any particular purchase will make you richer or poorer.
Brides and beaus — Money plays an key role in any relationship. You must trust your partner, must reach an understanding about finances.
Brothers-in-law — Here, his point is that in order to protect your estate from family members you don’t intend to share it with, you need to plan for your death.
Barristers — Finally, it’s important to protect yourself from legal difficulties.
Even though Kiyosaki lists seven possible pitfalls, he offers little practical advice for coping with them.
Financial IQ #3: Budgeting Your Money
There are two ways to solve a budget crunch: decrease your spending or increase your income. Either will erase a budget deficit, but Kiyosaki believes (as I do) that in the long run, increasing income is a better solution.
Kiyosaki explains that it’s important to think of a budget surplus as a fixed expense. If you decide to save 10% of your income, then make this ten percent a fixed item in your budget.
Treat it just as you would any other bill. Pay yourself first. It’s also important to refuse to live below your means – instead increase your means.
Financial IQ #4: Leveraging Your Money
I found this chapter to be the longest and most frustrating chapter of the entire book. It represents the core of Kiyosaki’s financial philosophy. However it’s not presented in a way that makes it relevant to the average person.
Leverage — borrowing money to increase the power of your own cash is good. If you have the financial intelligence to control the investment. But if you’re not in control of the investment, then leverage is risky.
“Most of the people being hurt by the real estate meltdown are people who were counting on the real estate market to keep going up and increasing their home’s value,” he writes.
They borrowed against their home’s inflated value, however had no control over whether the housing market rose or fell. This is a lack of financial intelligence.
Kiyosaki argues that one should use leverage to make low-risk investments, investments in which you, as the investor, have control. This sounds great, but he doesn’t provide any relevant examples.
He only discusses his recent purchase of a 300-unit, $17 million apartment complex in Tulsa, Oklahoma. I don’t know about you but I do not $17 million to invest into one investment. The average person might only have $17,000? or even $1,700 to invest with right now?
So we are left wondering at the end of this character on how does the average person make leverage work for them?
Financial IQ #5: Improving Your Financial Information
In order to improve your financial information, it’s important to:
Separate fact from opinion. Many gurus are happy to offer their opinions — “gold is going up!” — but it’s foolish to make financial decisions based on these. Base your decisions on facts.
Verify information. Don’t trust just one source of information, but seek confirmation from other parties.
Know the rules. If you don’t understand how an investment works, don’t make it. “Rules provide a valuable source of information about how the game of money is played,” Kiyosaki writes.
Understand trends. Trends are historical facts. Smart investors can use trends to make informed decisions. However, it’s important to note that trends do not project to future facts. Only to opinions about possible futures. Still, trends are valuable sources of financial information.
“Ultimately,” Kiyosaki writes, “it is not the asset that makes you rich. Information makes you rich.”
Though an overview of the five Financial IQs forms the bulk of this 200-page book, it’s actually the last fifty pages that hold the most value. Where Kiyosaki discusses “the integrity of money” and explains how to develop your financial genius.
It’s motivational. It’s a breath of fresh air and offers a perspective often missing in personal finance discussion. I also like that his writing always motivates me to action, pushing me to pursue my goals.
However, there is #1 Point I Really Do Not Agree With…
Diversification isn’t a hoax, or a scam. Other than Kiyosaki, it’s embraced by most financial authors I’ve ever read or heared about.
Diversification is a central belief of the modern portfolio theory. It’s backed by facts, not opinions.
In the book Kiyosaki says “The richest investor in the world, Warren Buffett, does not diversify.” His implication is that you should not diversify either, but that’s completely counter to what Buffett believes.
For 99% of all investors, Buffett recommends diversified index funds. So It’s duplicitous of Kiyosaki to pretend otherwise.
I will leave you with this message: ‘if you do what you love – money will follow.’
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“We don’t buy and sell stocks based upon what other people think the stock market is going to do
(I never have an opinion) but rather upon what we think the company is going to do.”
– Warren Buffett
I’m in awe of what Warren Buffett has accomplished. He continues to write, rewrite and break the rules of investing, business, and entrepreneurship. There’s an endless amount that can be learnt from Buffett’s decades in business.
One of the things that impresses me most, though, is that this is all Warren everything he’s accomplished has been on his terms. No one handed him the proverbial silver spoon.
He worked hard, thought outside the box and continued to innovate, elevate and accelerate. And it paid off big time.
That said, it didn’t happen overnight.
Warren has been building his fortune for more than 60 years. As chairman and the single largest shareholder of Berkshire Hathaway for nearly 50 years, Warren’s investment decisions have been carefully watched and highly scrutinized. They’ve also, though, been so on-point it seems almost unfair—like he has a crystal ball hidden away somewhere.
In my quest to understand Warren’s methods and processes, I stumbled on Jeremy Miller’s book, Warren Buffett’s Ground Rules. The author Jeremy C. Miller is an investment analyst for a mutual fund company and a 15-year veteran of the financial industry.
Miller’s book is a must-read whether you’re a huge Warren Buffett fan or simply want to gain that critical edge in business and in life.
Ground Rules covers Warren’s first 14 years as a true business mogul, including his tenure at the helm of Buffett Partnership Limited.
While there’s lots to dive into in Ground Rules, what I find most fascinating is the fact that the book itself is based on 33 letters Warren wrote to his partners from 1956 to 1970, outlining his business strategies and philosophy.
Miller puts it all into his book with a powerful context and strong narrative that weaves every piece together and creates a solid work any entrepreneur, business leader or investor can learn from. You’ll find lots of important tidbits here, many of which can be directly applied to your business—even if you haven’t reached Warren Buffett status just yet.
Overall, the content in Ground Rules is perfect for the business leader or long-term investor who wants to protect their assets and grow their success. In fact, Warren himself endorsed this book and gave the author express permission to work with his letters. If that doesn’t speak to the quality of Ground Rules, I don’t know what does.
Warren Buffett’s Ground Rules Book Layout:
Part I lays out the investment principles and ground rules employed by Warren between 1956-1970. It also describes the Partnership structure and the fees that all partners paid to Warren based on the investment returns realized each year.
Part II explains the different investment categories. In the beginning there were three; Generals-Private Owner, Workouts, and Controls. A fourth category was added later on: Generals-Relatively Undervalued.
Part III contains a few different topics, all related to investing; “Conservative Versus Conventional,” “Taxes,” “Size Versus Performance,” “Go-Go or No-Go,” “Parting Wisdom,” and “Toward a Higher Form.” Each one of the chapters touch upon important questions to consider for an investor, and at the same time shows what Warren’s thoughts looked like in these areas.
This book is much more than a compilation of excerpts from Buffett’s letters, smartly organized by investment theme. Miller begins every chapter with an articulate and insightful synthesis, which helps the reader understand Buffett’s key ground rules on each theme.
My Take Aways…
Buffett’s correspondence with his early partners was folksy and insightful. Buffett never wrote an investment guide. These letters make up the closest thing investors will ever have to a Buffett textbook on investing.
Among Buffett’s early beliefs are:
Performance is Relative – Buffett aimed to beat the Dow, which he referred to as his “yardstick.” If the Dow fell 10% in a given year and Buffett’s investments were off only 5%, he considered his performance a victory. He promised not to celebrate a 20% gain if the Dow posted 25% for the year. He told his partners he welcomed criticism for the “right reason” – underperforming the Dow.
Look at the Long-Term – Buffett didn’t care about short-term results. He considered three years “an absolute minimum” for benchmarking. In frothy markets characterized by rampant speculation, Buffett asked his investors to judge his performance over five years.
Pick Companies, Not Markets – Trying to predict the direction of the market or the economy is a fool’s errand. Buffett focused on finding undervalued companies with solid products and savvy managers. A bull market lifts all stocks. But Buffett argued his most important gift was not his ability to divine moves in the broad market; his underlying analysis of a specific company was the crucial factor in any investment decision. He relied on a fundamental analysis: were a firm’s assets worth more than its market value?
I Personally found Ground Rules to be a powerful tour through the mind of a man who has consistently astonishedthe modern investment world. In this book, we get a better understanding of his unorthodox philosophy of diversification, which reversed what was then considered common knowledge when published.
We also get a unique opportunity to follow the development and reasoning behind Warren’s conservative long-term strategies, which have proven effective for decades despite endless movement in the marketplace.
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