Category: Financial Literacy

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Financial Literacy

Transform Your Financial Mindset: A Rich Dad Poor Dad Summary

Are you tired of living paycheck to paycheck? Are you tired of being stuck in a dead-end job? Do you want to achieve financial freedom and live the life of your dreams? If so, then you need to read “Rich Dad Poor Dad” by Robert Kiyosaki.

“Rich Dad Poor Dad” is a bestselling book that has helped millions of people around the world achieve financial success. The book is a memoir that tells the story of Robert Kiyosaki’s two dads: his biological father, who was a highly educated government employee but poor, and his best friend’s father, who was a rich businessman. Through their experiences and lessons, Robert learned the secrets to wealth and financial freedom.

In this comprehensive summary of “Rich Dad Poor Dad,” we will take a closer look at the key lessons and takeaways from the book.

Lesson 1: The Importance of Financial Education

One of the main themes of “Rich Dad Poor Dad” is the importance of financial education. Robert’s rich dad taught him that the key to wealth and financial freedom is understanding how money works. He taught Robert the difference between assets and liabilities, and how to invest in assets that will generate passive income.

Robert’s poor dad, on the other hand, had a traditional education and believed that the key to success was to get a good job and work hard. He did not understand the importance of financial education also known as financial literacy and ended up living paycheck to paycheck.

One of the key takeaways from “Rich Dad Poor Dad” is that traditional education, such as a college degree, does not necessarily provide the financial knowledge and skills necessary to achieve financial success. Instead, Kiyosaki advocates for financial education that teaches individuals how to manage their money, invest in assets, and create passive income streams.

In addition to the importance of financial education, Kiyosaki also stresses the importance of financial independence. He explains that having multiple sources of income, such as rental properties or a business, allows individuals to have more control over their financial future and reduces dependence on a single employer.

Asset and Liabilities

According to Kiyosaki, the key to asset management is understanding the difference between assets and liabilities. An asset is something that generates income or increases in value, while a liability is something that takes away from one’s income or decreases in value. The goal of asset management is to acquire assets and minimize liabilities.

Kiyosaki emphasizes that the traditional approach to asset management, which is to save money and invest in a diversified portfolio of stocks, bonds, and real estate, is not necessarily the most effective way to build wealth. Instead, he advocates for a more strategic approach that involves acquiring assets that generate cash flow, such as rental properties, and using the cash flow to acquire more assets. He also encourages readers to focus on acquiring assets that generate passive income, such as stocks, bonds, and royalties, which can provide a steady stream of income without the need for active management.

Kiyosaki also explains that asset management is extremely important and it is not just about acquiring assets, but also about managing them effectively. He encourages readers to be proactive in managing their assets, such as by keeping track of their cash flow and expenses, and making adjustments as needed. He also advises readers to be patient and disciplined in their approach to asset management, and to avoid impulsive decisions based on emotions or hype.

The Cash Flow Quadrant

Robert Kiyosaki introduces the concept of the Cash Flow Quadrant, which is a framework for understanding the different ways that people make money. The Cash Flow Quadrant is divided into four parts: the Employee, the Self-Employed, the Business Owner, and the Investor.

The Employee quadrant is where most people start their financial journey. They work for someone else and receive a steady paycheck in exchange for their time and labor. They have little control over their income and their financial future is largely dependent on the success of their employer.

The Self-Employed quadrant is where people start their own business, but they are still trading their time for money. They are responsible for everything in their business, from sales to accounting. They may make more money than employees, but they also have more risk and more work to do.

The Business Owner quadrant is where people have a business that runs without them. They have employees, systems and processes in place and they make money from the efforts of others. This is where the real wealth is created.

The Investor quadrant is where people make money from their money. They invest in assets that generate income, such as rental properties, stocks, and bonds. They use their money to make more money, and they have the potential to make significant returns on their investment.

Kiyosaki argues that the key to achieving financial freedom is to move from the Employee and Self-Employed quadrants to the Business Owner and Investor quadrants. He encourages readers to start thinking like a business owner and investor, rather than an employee or self-employed person. He explains that by doing so, they will be able to build long-term wealth and achieve financial freedom.

The Cash Flow Quadrant is a powerful framework that can help people understand the different ways that people make money. It can help people identify where they are currently on the quadrant and guide them to move towards the quadrants where real wealth is created. Rich dad poor dad encourages readers to move from the Employee and Self-Employed quadrants to the Business Owner and Investor quadrants in order to achieve financial freedom.

Good Debt vs Bad Debt

In “Rich Dad Poor Dad,” Robert Kiyosaki explains the difference between good debt and bad debt and how understanding this concept can help individuals achieve financial freedom.

Good debt is debt that is used to acquire assets that generate income, such as rental properties, stocks, and bonds. It is debt that is used to increase one’s income and wealth. According to Kiyosaki, good debt is an investment in one’s future and can be a powerful tool for building wealth.

On the other hand, bad debt is debt that is used to acquire liabilities, such as cars, boats, and vacations. These are items that do not generate income and actually cost money to maintain. According to Kiyosaki, bad debt is a financial burden that can prevent individuals from achieving financial freedom.

Kiyosaki also emphasizes that the key to success is not to avoid debt altogether, but to understand the difference between good debt and bad debt and to use debt strategically. He encourages readers to focus on acquiring assets that generate income, such as rental properties, stocks, and bonds, and to avoid taking on debt for liabilities that do not generate income. He also encourages readers to strive to have their assets generate enough income to cover their expenses and not to rely on a job or a salary for their livelihood.

“Rich Dad Poor Dad” explains the difference between good debt and bad debt and how understanding this concept can help individuals achieve financial freedom. Good debt is debt that is used to acquire assets that generate income, while bad debt is debt that is used to acquire liabilities that do not generate income. The key to success is not to avoid debt altogether, but to understand the difference between good debt and bad debt and to use debt strategically to acquire assets that generate income.

The lesson here is that to achieve financial success, you need to educate yourself about money and investing. You need to understand how money works and how to invest in assets that will generate passive income.

Lesson 2: The Power of Entrepreneurship

Another key lesson from “Rich Dad Poor Dad” is the power of entrepreneurship. Robert’s rich dad was an entrepreneur who owned multiple businesses and investments. He taught Robert the importance of creating multiple streams of income and the power of leverage. He also taught Kiyosaki the importance of entrepreneurship and how to turn ideas into profitable ventures.

Robert’s poor dad, on the other hand, worked for the government and had a steady paycheck. He did not understand the power of entrepreneurship and the potential for unlimited income.

Entrepreneurship

One of the key takeaways from “Rich Dad Poor Dad” is that entrepreneurship is a powerful tool for creating wealth. Kiyosaki explains that entrepreneurs have the ability to create their own income, rather than relying on a single employer, and they can also create jobs for others. Furthermore, entrepreneurs are able to take advantage of opportunities and create something from nothing.

Kiyosaki also emphasizes the importance of taking risks in order to be a successful entrepreneur. He explains that entrepreneurs often have to take risks in order to start a business, but these risks are necessary in order to achieve success. Furthermore, entrepreneurship requires a certain level of creativity and innovation, which can only be achieved by taking risks.

Another important aspect of entrepreneurship as explained in “Rich Dad Poor Dad” is the ability to think outside the box. Kiyosaki encourages readers to challenge the traditional way of thinking and to look for opportunities that others may not see. He also stresses the importance of learning from failure, as it can be a valuable learning experience that can lead to success.

Taxes and Corporations

The book explains that taxes have been used throughout history as a means of redistributing wealth and financing government operations. Kiyosaki argues that the current tax system is heavily biased in favor of the wealthy and large corporations, and that this bias has been perpetuated by a lack of financial education among the general population.

Kiyosaki explains that corporations, which are legal entities separate from their owners, have been used throughout history as a means of limiting liability and accumulating wealth. He argues that corporations have been used to accumulate wealth and avoid taxes, and that this is a major reason why the wealthy have been able to maintain their wealth and power.

Kiyosaki encourages individuals to take advantage of the legal structure of corporations to limit their liability and accumulate wealth. He explains that by understanding the history of taxes and the power of corporations, individuals can make informed decisions about their finances, such as by incorporating their businesses and taking advantage of tax-advantaged investments.

The lesson here is that to achieve financial freedom, you need to think like an entrepreneur. You need to create multiple streams of income and leverage your assets to generate even more income. Kiyosaki emphasizes the importance of taking risks, thinking outside the box, and learning from failure in order to be a successful entrepreneur. He also explains that entrepreneurship allows individuals to have more control over their financial future and create multiple sources of income. He encourages readers to consider entrepreneurship as a path to achieve their financial goals.

Lesson 3: The Importance of Mindset

In “Rich Dad Poor Dad,” Robert Kiyosaki emphasizes the importance of having the right mindset in order to achieve financial success. He explains that having the right mindset is essential for understanding and making the most of opportunities, as well as for overcoming obstacles and challenges.

One of the key takeaways from “Rich Dad Poor Dad” is that having a “poor mindset” can prevent individuals from achieving financial success. Kiyosaki defines a “poor mindset” as one that is focused on scarcity and lack, and that is characterized by fear, doubt, and the belief that there is not enough to go around. On the other hand, having a “rich mindset” is characterized by abundance and the belief that there is enough to go around, as well as by confidence, courage, and the willingness to take risks.

Kiyosaki explains that having a poor mindset can lead to self-sabotage, as individuals with this mindset may not take advantage of opportunities or may be too afraid to take risks. Furthermore, he explains that a poor mindset can also lead to a lack of financial literacy, as individuals may not be willing to learn about money and investing.

On the other hand, having a rich mindset is essential for achieving financial success. Kiyosaki explains that individuals with a rich mindset are willing to learn about money and investing, and they are also willing to take risks in order to achieve their goals. Furthermore, he explains that a rich mindset is essential for being able to think outside the box and to see opportunities that others may not see.

The lesson here is that to achieve financial freedom, you need to have a positive and proactive mindset. You need to think outside the box and be willing to take calculated risks.

“Rich Dad Poor Dad” emphasizes the importance of having the right mindset in order to achieve financial success. Kiyosaki explains that having a poor mindset can prevent individuals from achieving their goals, while having a rich mindset is essential for understanding and making the most of opportunities, as well as for overcoming obstacles and challenges. He encourages readers to develop a rich mindset in order to achieve their financial goals.

Conclusion

“Rich Dad Poor Dad” is a bestselling book that has helped millions of people around the world achieve financial success. The book is a memoir that tells the story of Robert Kiyosaki’s two dads: his biological father, who was a poor school teacher, and his best friend’s father, who was a rich businessman. Through their experiences and lessons, Robert learned the secrets to wealth and financial freedom.

The key lessons from the book include the importance of financial education, the power of entrepreneurship, and the importance of mindset. By understanding and implementing these lessons, you can achieve financial freedom and build the financial future you deserve.

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Financial Literacy

Gain Financial Freedom with The Richest Man in Babylon

The “Richest Man in Babylon” is a classic book written by George S. Clason in 1926. The book offers financial advice through a collection of parables set in ancient Babylon. The stories in the book provide valuable lessons about money management and personal finance that are still relevant today.

Gain Financial Freedom with The Richest Man in Babylon’s Personal Finance Advice

The Seven Cures for a Lean Purse

The book starts with the story of a young man named Arkad, who is considered to be the richest man in Babylon. He is asked by his friends to share his secrets of wealth, and he shares with them the Seven Cures for a Lean Purse. These cures are:

  1. Start thy purse to fattening
  2. Control thy expenditures
  3. Make thy gold multiply
  4. Guard thy treasures from loss
  5. Make of thy dwelling a profitable investment
  6. Ensure a future income
  7. Increase thy ability to earn

The First Cure: Start thy purse to fattening

The first cure for financial troubles, as outlined in the book “The Richest Man in Babylon” by George S. Clason, is to “Start thy purse to fattening.” This means that the first step to achieving financial success is to begin saving a portion of your income.

One of the key principles in the book is that “a part of all you earn is yours to keep.” The author emphasizes the importance of living below one’s means and saving at least 10% of one’s income. By consistently saving a portion of your income, you are creating a foundation for financial security and prosperity.

Saving money is the first step but it’s not enough, you must also find a way to make your money work for you. One of the best ways to do this is by investing your savings in profitable ventures. This means putting your money to work for you by investing in things like stocks, bonds, and real estate. The idea is that by earning a return on your investments, your savings will grow and compound over time.

It is also important to have a plan for your savings and investments. You should set financial goals for yourself and create a plan to achieve them. It could be buying a house, saving for retirement, or starting a business. Having a plan in place will help you stay focused and motivated to achieve your financial goals.

In addition, seeking out wise counsel when it comes to managing your money is crucial. This means seeking out advice from experts, such as financial advisors or successful investors, to learn more about how to invest your money and grow your wealth. They can provide valuable insights and strategies that can help you achieve your financial goals.

In conclusion, the first cure for financial troubles is to “Start thy purse to fattening.” This means living below your means, saving at least 10% of your income, being mindful of your spending habits, investing your savings in profitable ventures, creating a plan for your savings and investments and seeking out wise counsel. By following these principles, anyone can improve their financial situation and achieve their financial goals. The key is to start saving and investing early, so that your money can grow and compound over time.

The Second Cure: Control thy expenditures

The second cure for financial troubles, as outlined in the book “The Richest Man in Babylon” by George S. Clason, is to “Control thy expenditures.” This means being mindful of your spending habits and making sure that your expenses do not exceed your income. It is about learning to live below your means, and avoiding unnecessary expenses.

One of the key principles in the book is that “the part of your income that you do not spend is the part that will bring you wealth.” This means that by cutting unnecessary expenses, you can save more money and invest it in profitable ventures. The more you save, the more you will have to invest and grow your wealth.

Creating a budget and sticking to it is a great way to control your expenses. A budget is a plan for how you will spend your money each month. It helps you to see where your money is going and identify areas where you can cut back. By creating a budget and sticking to it, you can ensure that your expenses do not exceed your income.

It is also important to avoid impulse buying and to think twice before making a purchase. Ask yourself if the item is a necessity or a luxury, and if you can afford it. Impulse buying can lead to overspending and can make it difficult to save money and reach your financial goals.

Another important aspect of controlling your expenses is to be aware of the long-term cost of your purchases. For example, a car may be cheaper to buy but if it has higher maintenance costs, it may end up costing you more in the long run. Similarly, it may be more expensive to buy organic food, but in the long run it may save you money on medical bills.

It’s also important to protect yourself from financial risks, such as unexpected expenses, by having an emergency fund. An emergency fund is a savings account that is set aside for unexpected expenses, such as a job loss or a medical emergency. Having an emergency fund can help you to avoid going into debt and can give you peace of mind.

In short, controlling your expenditures is an essential step towards achieving financial success. It’s about living below your means, creating a budget, avoiding impulse buying, being aware of the long-term cost of your purchases, and protecting yourself from financial risks by having an emergency fund. By following these principles, you can learn to spend less than you earn and save more money to invest in profitable ventures and reach your financial

The Third Cure: Make thy gold multiply

The Third Cure for financial troubles, as outlined in the book “The Richest Man in Babylon” by George S. Clason, is to “Make thy gold multiply.” This means investing your money in profitable ventures so that it can grow and generate more wealth.

The key principle of this cure is that “gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate.” This means that by saving and investing at least 10% of your income, you can create a substantial amount of wealth over time.

One of the best ways to make your gold multiply is through compound interest. Compound interest is the interest that is earned on the initial deposit and on the interest that is accumulated over time. This means that the longer your money is invested, the more interest it earns, which leads to exponential growth.

Another way to make your gold multiply is through diversification. Diversification means spreading your investments across different types of assets, such as stocks, bonds, and real estate. This helps to spread the risk and reduce the impact of any potential losses.

It’s also important to educate yourself about different investment options and to choose those that align with your risk tolerance and financial goals. It’s important to remember that investing always carries some degree of risk, and it’s important to be comfortable with that risk before investing.

To be successful in making your gold multiply, you also need to be patient and disciplined. Investing requires a long-term perspective and it’s important to not let short-term market fluctuations discourage you. Having a plan and sticking to it will help you to stay focused on your goals and make better investment decisions.

Making your gold multiply is an essential step towards achieving financial success. It’s about saving and investing at least 10% of your income, taking advantage of compound interest, diversifying your investments, educating yourself about different investment options, being patient and disciplined, and having a plan and sticking to it. By following these principles, you can learn to make your money work for you and create a substantial amount of wealth over time.

The Fourth Cure: Guard thy treasures from loss

The Fourth Cure for financial troubles, as outlined in the book “The Richest Man in Babylon” by George S. Clason, is to “Guard thy treasures from loss.” This means protecting your investments and wealth from potential risks and losses.

The key principle of this cure is that “a part of all you earn is yours to keep.” This means that you should always be mindful of the risks associated with your investments and take steps to minimize those risks.

One of the most important ways to guard your treasures from loss is through diversification. Diversification means spreading your investments across different types of assets, such as stocks, bonds, and real estate. This helps to spread the risk and reduce the impact of any potential losses.

Another important way to guard your treasures from loss is through proper risk management. This includes researching and understanding the risks associated with different investments and taking steps to mitigate those risks. For example, investing in a variety of stocks can reduce the risk of a stock market crash, while purchasing insurance can protect your assets from natural disasters or other unforeseen events.

It’s also important to regularly review your investments and stay up-to-date on market conditions. This will help you to identify potential risks and take appropriate action to protect your investments.

Another important way to guard your treasures from loss is to be cautious and avoid impulsive decisions. Don’t be swayed by hype or the promise of quick profits. Instead, research, analyze and invest in a thoughtful manner.

Lastly, it’s important to have a plan for emergencies. Having a financial cushion or an emergency fund can help you to weather financial setbacks and protect your investments from unexpected events.

Guarding your treasures from loss is an essential step towards achieving financial success. It’s about being mindful of the risks associated with your investments, taking steps to minimize those risks, diversifying your investments, properly managing risk, regularly reviewing your investments, being cautious and avoiding impulsive decisions and having a plan for emergencies. By following these principles, you can learn to protect your wealth and investments from potential losses.

The Fifth Cure: Make of thy dwelling a profitable investment

The Fifth Cure for financial troubles, as outlined in the book “The Richest Man in Babylon” by George S. Clason, is to “Make of thy dwelling a profitable investment.” This means turning your home into a source of income and wealth, rather than just a place to live.

The key principle of this cure is that “a man’s house is not only his castle, but it can also be his source of income.” By making smart decisions when purchasing a home and taking steps to increase its value, you can create a valuable asset that will generate income for you in the long-term.

One way to make your dwelling a profitable investment is to purchase a home in an area with strong potential for appreciation. This means buying a home in an area that is likely to see an increase in property values over time. Factors such as location, school district, and overall economic growth can all influence property values.

Another way to make your dwelling a profitable investment is to make improvements to your home that will increase its value. This can include things like remodeling the kitchen or bathroom, adding a deck or patio, or finishing the basement. These improvements can make your home more attractive to potential buyers and increase its value when it comes time to sell.

It’s also important to keep your home well-maintained. This means making repairs as needed and keeping up with regular maintenance tasks such as painting, landscaping, and cleaning. A well-maintained home will be more valuable and appealing to potential buyers.

Another way to make your dwelling a profitable investment is to consider renting out a portion of your home, such as a basement or an in-law suite. This can help to generate additional income, while also providing a stable source of cash flow. This is what Brandon Turner famously coined as house hacking.

Additionally, if you have a mortgage, it’s important to make sure that the rent you charge is enough to cover the mortgage payments. This way, your home will be generating income for you rather than being a financial burden.

Making of thy dwelling a profitable investment is an essential step towards achieving financial success. It’s about making smart decisions when purchasing a home, taking steps to increase its value, keeping your home well-maintained, renting out a portion of your home and making sure that the rent you charge is enough to cover the mortgage payments. By following these principles, you can learn to turn your home into a valuable asset that will generate income for you in the long-term.

The Sixth Cure: Ensure a future income

The Sixth Cure for financial troubles, as outlined in the book “The Richest Man in Babylon” by George S. Clason, is to “Ensure a future income.” This means taking steps to ensure that you will have a steady stream of income in the future, even when you are no longer working.

One of the key principles of this cure is that “a man’s income should be in excess of his needs.” By living below your means and saving and investing a portion of your income, you can create a nest egg that will provide for you in the future.

One way to ensure a future income is to save a portion of your income every month. This can be done by setting up automatic savings plans or by creating a budget and allocating a specific amount of money towards savings each month. It’s important to start saving early and consistently in order to build a substantial nest egg over time.

Another way to ensure a future income is to invest a portion of your savings in a variety of investment vehicles. This can include stocks, bonds, mutual funds, and real estate. Diversifying your investments can help to reduce risk and increase the potential for returns.

Additionally, it’s important to plan for retirement and to take advantage of any employer-sponsored retirement plans, such as 401(k)s or pensions. These plans can provide a steady stream of income in retirement.

Another way to ensure future income is to create multiple streams of income. This can include starting a side business, renting out a property, or investing in dividend-paying stocks. By having multiple sources of income, you can increase your overall earning potential and reduce your reliance on a single income stream.

It’s also important to consider insurance as a way to ensure future income. Disability insurance can provide income if you are unable to work due to injury or illness, while life insurance can provide income for your loved ones in the event of your death.

Ensuring a future income is an essential step towards achieving financial success. It’s about living below your means, saving and investing a portion of your income, planning for retirement, creating multiple streams of income, and considering insurance. By following these principles, you can learn to create a steady stream of income that will provide for you in the future.

The Seventh Cure: Increase thy ability to earn

The Seventh Cure for financial troubles, as outlined in the book “The Richest Man in Babylon” by George S. Clason, is to “Increase thy ability to earn.” This means taking steps to increase your earning potential and improve your ability to make money.

One of the key principles of this cure is that “a man’s wealth is directly proportional to his ability to make money.” In order to increase your wealth, you must increase your ability to make money.

One way to increase your ability to earn is to acquire new skills and knowledge. This can include taking classes, attending workshops, or pursuing further education. By gaining new skills and knowledge, you can improve your qualifications and make yourself more valuable in the job market, which can lead to higher paying jobs or promotions.

Another way to increase your ability to earn is to start your own business. This can include starting a side business, becoming a freelancer, or starting an online business. By being your own boss, you have the potential to make more money than you would working for someone else.

Networking is another important aspect of increasing your ability to earn. By building relationships with other professionals in your industry, you can learn about new job opportunities, gain valuable advice, and gain access to new resources.

Another way to increase your ability to earn is to look for ways to increase your productivity. This can include time management techniques, goal setting and prioritizing your tasks. By being more productive, you can complete more work in less time, which can lead to higher earnings.

Finally, it’s important to always be open to new opportunities. This can include taking on additional responsibilities at work, accepting new job offers, or looking for new business opportunities. By being open to new opportunities, you can increase your ability to earn and improve your financial prospects.

Increasing your ability to earn is an essential step towards achieving financial success. It’s about acquiring new skills and knowledge, starting your own business, networking, increasing productivity and being open to new opportunities. By following these principles, you can learn to increase your earning potential and improve your ability to make money.

Conclusion

The “Richest Man in Babylon” is a classic personal finance book that uses parables set in ancient Babylon to teach timeless principles of financial success and offers valuable lessons on money management and personal finance. The Seven Cures for a Lean Purse provide a clear and simple guide to achieving financial success. By saving, controlling expenses, investing, protecting investments, making a profit on one’s home, planning for retirement and increasing one’s earning potential, anyone can accumulate wealth and achieve financial freedom. This book is a must-read for anyone looking to improve their financial situation and achieve financial independence.

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Financial Literacy Investing

The Importance Of Investing And Investing Early

If you’re considering financial independence and early retirement, investing is not an option: you must invest if you ever want to have a chance to reach financial independence, by definition. In its simplest form financial independence means your money is working hard enough to cover your lifestyle so you no longer need to exchange your time for money, meaning you no longer have to work.

Also living of savings can only last for so long and there’s only so much you can save.

If you expect to retire at 40 years old, expect to spend $50,000 per year until you leave this earth, let’s say at 80 years old, to keep the math simple, that’s 40 x $50,000 = $2,000,000 you need to save by age 40. Assuming you start working at age 20, you’d need to save $100,000 per year for 20 years.

Assuming you live a lifestyle similar to what you expect in retirement, you’d need to earn a gross income of around $200,000 per year. Here goes the math:

  • At $200,000, you can expect to pay around 25-30% in taxes. That leaves you with $140,000-$150,000.
  • $40,000-$50,000 of living expenses
  • That lives you with $100,000 saved up.

While a few jobs can allow you to earn this much, it’s unlikely for most to earn such a high income at such a young age.

And that’s where investing comes to the rescue. Sure, you need to work to start earning and saving money, but this money should not sit idle and it should also work for you, so you can reach your goal. Investing will help you boost your income, until it eventually gets you financially independent.

Let’s consider a few scenarios to see how they compare. The first year we start with $5,000 and each year after that we assume the following:

  • Saving $5,000 per year
  • Saving $5,000 per year and investing half of the money at a 7% yearly return
  • Start saving $5,000 per year, and each year increase the saving by $1,000 (So the first year we save $5,000, the second year $6,000, the third year $7,000 and so on and so forth…)
  • Saving $5,000 per year and investing all the money at a 7% yearly return
  • Start saving $5,000 per year, and each year increase the saving by $1,000, investing all the money at a 7% yearly return

Here is the evolution over time:

By saving $5,000 per year, after 40 years you’ll end up with $200,000. Not too bad, but not enough to retire comfortably.

If you just invest half of the money each year, you’d double the money getting slightly over $420,000. It already shows how important investing is.

Now, without investing, but by increasing your savings by $1,000 each year (either by getting a raise, changing job or starting a side hustle), you end up with around $940,000. And this shows how important it is to increase your savings as your income grows.

Then, going back to the $5,000 / yr savings and investing everything, it beats increasing the saving rate and you’ll end up shy of the $1 million mark with around $998,000. Again it shows how important investing is as far as growing your wealth.

Finally, combining both the increase of savings over time and investing show the power of compounding and we’d end up with over $3,000,000 which is more than 3 times the next best results.

Now that growth happened over 40 years and this shows the importance of starting early. The earlier you start, the easiest it will be to grow your portfolio leveraging the compounding effect.

Now 40 years is still a long time, if we want to reduce the time it takes to reach our goal, whatever it is, we realize how important it will be to save aggressively to bootstrap the investment growth.

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Financial Literacy

Buying vs Renting a Home

There is often a hard held belief that no matter what, you should always buy the place you live in, because after all when you rent you just throw money out of the window or rather to your landlord that you’ll never see again. While when buying a home, you always pay part of the mortgage towards the principal so you increase your equity, so you increase your assets.

Buying vs Renting a Home

Housing Is Your Biggest Expense

For most households, the money spent on the place we live in is the number one budget, taking roughly 30% of the annual expenses. It’s therefore extremely important to spend wisely on housing and it’s often where a lot of money can be saved.

As seen here, regardless of whether you are buying or renting, the place you live in is never an asset and always is a liability, short of house hacking (more on that in another post). A home takes money out of your pocket, so it’s a liability from a cash flow perspective.

That said, while the place you live in is always a liability, the game is to reduce such liability, to save as much money as you can.

And in reality the answer to the buying vs renting argument, is always: it depends.

It depends how much the home cost versus how much you would pay to rent a similar home.

Let’s look at the usual associated costs in each case:

Renting Costs

The renting costs are usually straightforward: the rent you pay to your landlord.

Buying Costs

When buying a home, there are several expenses associated with owning a home also known as unrecoverable costs:

  • The closing costs when buying a home
  • The mortgage payment
  • The home insurance
  • The property taxes
  • Miscellaneous maintenance expenses

So to figure out whether you should buy or rent you need to figure out if the buying costs or higher or lower than what it would cost to rent a similar home in the same area, for the time period you expect to live there.

There are plenty of calculators out there to help you estimate whether you should buy or rent, but the rule of thumb is: if in your area real estate is very expensive (e.g. the San Francisco Bay Area circa 2020 where a 1200 sq. ft home is worth +$1,000,000), it will usually be more advantageous to rent. Conversely if real estate is much cheaper (e.g. in Memphis, TN circa 2020 where a 1200 sq. ft home is usually worth around $90,000), it will usually be more advantageous to buy.

Now there are always exceptions: you may be able to find a cheap house in an expensive area or find an extremely cheap rental in an area where real estate is cheap. That’s why you should always run the numbers, but hopefully that gives you the feel and the basics on how you should allocate your housing costs, which is for most households the biggest budget expense.

The 5% Rule

If you want a quick and easy rule of thumb to figure out whether you should buy or rent, Benjamin Felix at PWL Capital came up with the 5% rule, which estimates that homeowners usually spend 5% of the house price annually, between taxes, maintenance, opportunity cost.

Therefore if the annual rent is less than 5% of what the house would cost, it’s usually preferable to rent.

If the annual rent is more than 5% of what the house would cost, it’s usually preferable to buy.

For example, let’s take a house that would cost $100,000 and the monthly rent is $700. The 5% rule says, the rent should not be more than 5% x $100,000 = $5,000 annually. The rent annually is: 12 x $700 = $8,400. Hence in this case it would be interesting to buy the house rather than renting, according to the 5% rule.

Now let’s take a house that would cost $1,000,000 and the monthly rent is $3,000. The 5% rule says, the rent should not be more than 5% x $1,000,000 = $50,000 annually. The rent annually is: 12 x $3,000 = $36,000. Hence in this case it would be interesting to rent the house rather than buying, according to the 5% rule.

Of course the 5% rule is an oversimplification and it’s just a quick guideline to get a back of the envelope estimate. As mentioned above it’s important to get the actual numbers (as taxes may be different based on where you live, the financing cost may be different…) to have a more accurate estimate on whether it’s financially more advantageous to buy or rent.

Categories
Financial Literacy Investing

What Are The Main Investment Types?

We’ll try to list the main investment types out there, how they function, i.e. how do you make money from them and we’ll try to classify how passive they are and the usual expected volatility.

What Are The Main Investment Types?

1. Real Estate

There are several ways to invest in real estate, from land acquisition, land development, single family rentals, multi family rentals, office rentals, industrial rentals. While there are a lot more hybrid investment types from house hacking to vacation rentals, we’ll only go through the main investment types in this introductory post.

1.1 Single Family Rentals

This is probably the most straightforward investment type in the real estate space: acquiring single family homes and rent them out. The business is simple: rent the home and maintain it in habitable condition for the customer.

The owner of the rental also may also profit down the road by selling the property for a profit if it appreciates.

1.2 Multi Family Rentals

Similar to single family rentals, but the asset is in general an apartment building. Duplexes and triplexes, smaller buildings, also qualify as multi family.

1.3 Land Acquisition

This is usually an appreciation play, where one would simply acquire land hoping to sell later in time, for a profit, if the land appreciates in value over time.

There’s one main exception regarding agricultural lending, where one can lend its land to a farmer to exploit the land. The owner of the land receives a rent and in exchange the farmer can exploit the land growing crops or farming livestock.

1.4 Land Development

Land development consist in acquiring raw land and developing it, usually bringing electricity, water and sewer to sell it to a real estate builder to then build and sell buildings, often multi family or single family homes.

1.5 Office Rentals

This is similar to multi family rentals, in the sense that this involves usually bigger buildings, however they’re usually leased to companies or specialized professionals.

1.6 Industrial Rentals

This is similar to office rentals, but concerns industrial buildings usually leased to companies. In this categories we usually have warehouses or industrial buildings able to house machinery.

2. Stocks

Stocks are usually fractions of a company traded on an exchange.  By buying the stock, you buy a fraction of said company.

2.1 Regular Stocks

By buying the stock, you expect the company to do well and have its share price increase to later sell it for a profit.

2.2 ETFs

ETFs or Exchange Traded Fund are usually funds that invest in several companies/stocks or track some indexes. It allows you to own a pool of investments without the hassle of having to buy every single one of them individually.

Similar to stocks, you’d buy the ETF expecting it to go up in value to sell for a profit.

2.3 Dividend Stocks

Dividend stocks are stocks that pay a dividend, sometimes monthly, but usually quarterly, as long as you’re holding the stocks. These stocks are usually from more established companies, with proven business models, where the growth of the stock usually lower but compensate for it with its dividend.

Dividend are taxed differently than capital gains from selling stocks for a profit and can be interesting in that regards.

Also several dividend companies tend to increase their dividend over time. Dividend aristocrats are dividend companies that have increased their dividend for at least 25 years.

2.4 REITs

REITs or Real Estate Investment Trust are companies that invest primarily in you guessed it, real estate. To qualify as a REIT must have at least 75% of its income derived from real estate and it must distribute at least 90% of its taxable income as dividend to its shareholders.

REITs income is usually taxed as income, unlike dividends and based on your tax bracket, it may be advantageous to hold them in tax preferred accounts such as a 401k or an IRA.

3. Bonds

Bonds are loan to a government (government bonds) or to a company (corporate bonds) for a certain period of time (maturity)and you receive interest (the coupon) , until the loans matures at which point you receive the principal payment.

4. Leveraged Financial Instruments

4.1 Options

Options, commonly on stocks, but can also apply against other financial instruments, are just that: option (not obligation) to buy (call option) or sell (put option) at a given price (strike price) until a certain time, the expiration date.

These investments are usually more volatile and riskier, because of the leverage builtin into the contract.

4.2 Forex

This is the currency market, where ones can profit from the gain of a currency against another. While usually reserved for more advanced investors, the concept is often eye opening that whatever you own that changes in value is a paired trade. When the USD/JPY forex pair trade goes up it means the US dollar goes up against the Japanese yen. When your home goes up in value, it means your home value goes up against the dollar. At which point you want to ask, is the house gaining in value or is the dollar losing in value?

Forex symbols are usually traded with leverage which can increase the risk if not managed carefully.

4.3 Futures

Futures are contract, usually on commodities but also on stock indexes and currencies. The contract establishes the price of an amount of a commodity at a certain date, e.g. The June 2020 Gold contract, at $1583, establishes the price of an ounce of gold by June 2020.

The market allows producers of such commodities to lock in a price for their production, while speculators, often blamed for commodities volatility allow the market to exist in the first place.

While not perfect, it should be noted that the existence of the market allow producers to hedge their production and many producers would not be in business without the existence of the futures market.

Futures , like the Forex, are usually traded with leverage which can increase the risk if not managed carefully.

5. Alternative Investments

This involves structured financial products in various area, such as art, real estate, marine, legal… It often involve lending money to a third party using various assets from the third party as collateral.

It’s usually reserved to accredited investors, i.e. investors earning more than $200,000 annually if single ($300,000 if married) or have more than $1,000,000  in assets excluding the primary residence. Or institutional investors like investment banks, pension funds and so on.

6. Private Equity

Private equity is generally speaking part of the alternative investments class, but probably deserves a note of its own. Like for alternative investments, these investments come mainly from accredited investors or institutional investors. There are 2 main segments in private equity: one for early stage companies or startups, one for later stage companies and distressed companies.

6.1 Early stage companies or startups

That’s usually where venture capital and angel investors come in. They will pool money or invest their own money to help develop early stage companies, usually in the hope the resell it at a higher price to a bigger company or take it to the public market, where they can exit their position.

The game in startups investing is that most of your investments will go to zero, but the few who survive will make a disproportionate amount of money.

If you want to put some rough numbers, successful startups investors, often see 90% of their investments go to zero. 9% percent of their investments get a 10-50x returns. And 1% turn into a 100-2000x returns and sometimes more.

The downside is that there’s usually no liquidity, so it’s very hard to liquidate your holdings and it’s usually a long game. It will take usually more than 5 and often around 10 years for those early companies to mature to the point where you can expect those enormous gains.

6.2 Distressed companies

Another side of private equity is to invest in failing or distressed companies. Investors usually buy the debt of a company at a steep discount and will try to turn the management around and eventually turn it into a profitable company again, so they can eventually collect the debt repayment.

If that ideal scenario fails and the company is forced into bankruptcy, investors will try to recoup some money during the bankruptcy process.

7. Institutional Investments

This are types of investments reserved for institutions (e.g. CDS), usually due to the amount required to participate in such investments which can range from several hundreds millions of dollar or billions of dollars and sometimes require special licenses to be allowed to participate into such investments. We won’t discuss much about these but it’s good to know that they exist because they can have some influence into other types of investments accessible to the general public.

Conclusion

We’ve presented most of the common investment classes. As far as building a passive income portfolio, we’ll talk more about rental real estate and stocks. We’ll also touch upon alternative investments and also discuss some opportunities with leveraged financial instruments when they arise.