“Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them.”
The last series on “The Power of Focus” was very well received and I got an overwhelming response from the esteemed readers. One of my friend, who is heading an organization of medium size, even asked for the links of all my articles, as he wants to have them printed out and given to his employees as a book. In fact, he has ignited this interesting thought in me – to rework my articles and create a book that becomes a companion for all who desire happiness, health and wealth, by simple changes in habits, attitudes and outlook. Let’s see how it goes.
The quote above, by Robert Kiyosaki, is one I wholeheartedly believe in and it has been the raison d’etre of my first book, “Musings of a Financially Illiterate Father.” We teach our children about everything that they require to do in life- manners, etiquettes, social graces, values et. al. The only thing we assiduously don’t teach them is, you guessed it right – financial wisdom. In fact, such conversations are considered a strict no-no for most families – the financial issues are not supposed to be discussed in front of the children. Why children, even some husbands hesitate to share their financial details with their spouses. The result is miscommunication and friction in relationships as any requirement or demand by the family is construed to be a splurge by the breadwinner. The hapless family never understands as to why their requests for the exotic holiday, the latest gadget, swanky bike, jewellery for the upcoming marriage in the family etc. are frowned upon by the breadwinner.
The irony runs even deeper. In our urge to protect our monies from our own family, we often leave it unclaimed should a mishap occur. Thus, one’s family, for whom one earned all his life, is left stranded without financial support in case of untimely or accidental death of the breadwinner. Let’s see this in some detail – normally we have accounts in banks including the salary account, mutual fund folios, other investments like stocks, bonds, ETFs etc. about which we know but our family may not know. The result? Huge unclaimed amounts lying with the banks and mutual fund companies. The figure for the mutual funds, as of Aug 2018, was a staggering Rs 44,000 crore. In the case of banks, as of 31 Mar 2019, this amount was Rs 25,000 crore. In a poor country like India, people have literally left around Rs 70,000 crore on the table, a seriously big amount that could have helped their families in financial distress.
I hope I have been able to make the point of financial literacy clear to the readers – both to you and your family. This incidentally has very little to do with skillsets for investing, which is just about 20% of the total game. Please concentrate on the remaining 80% of financial literacy, which is about developing the correct mindset and attitude towards money management. It is about developing a healthy respect for money, learning to balance your today and tomorrow’s needs and wants, generating a feeling of abundance in place of scarcity, and so on. I have dwelled on these issues at length in both my books as also in some of the articles whose links are being provided below. I have discussed three books on personal finance so far on this platform, please read them to get a sense of what I have trying to convey so far.
- “Everything you Need to Know about Financial Planning” by Scott Adams.
- “The Richest Man in Babylon” by George S. Clason.
- “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko.
The fourth book on personal finance that I wish to recommend and share with you is “Rich Dad Poor Dad” by Robert Kiyosaki which is as good as any on personal finance. However, after this book, Kiyosaki wrote some pretty ordinary stuff. This book though is profound, and I will share my understanding of the Seven Key Concepts from it. So, here we go:
1. Financial Literacy
Personal finance is not institutionally taught to children in schools or colleges in our country. Even at home, this subject is considered taboo and even if discussed, is more in form of heated arguments about mismanagement of expenses by either of the spouses. Naturally, the children, who unwittingly end up listening to such negative conversation, develop a warped worldview about money. In any case, who is supposed to teach children about money at home? Their parents – but are they themselves qualified for it? The answer is an emphatic no. At the same time though, all of us can improve our financial situation by improving our “financial IQ”.
Remember, “Broke is temporary. Poor is eternal.”
Kiyosaki suggests several ways to improve one’s financial education like going to seminars (he goes for at least two per year), listening to/watching CDs and audiobooks, going to the bookstores, and rummaging through books on different and unique subjects, reading newspapers, magazines, and internet for interesting and thought-provoking articles etc. I myself have been following this strategy for years. While on my morning jogs/walks, I listen to audiobooks on a variety of topics including finance. This otherwise “dead time” of 60 odd minutes is fruitfully utilized and I manage to finish one audiobook (duration normally between 6 to 9 hours) in a week or two- virtually free of cost. You can subscribe to “Audible” at a very nominal subscription of Rs 199 per month and/or partake in a wealth of free audiobooks on YouTube. Try them from today and make the best of your so-called “dead time” of commuting, working out etc.
2. Financial Intelligence
Develop a positive mindset about money. It should never be – “I can’t afford it” but rather “how could I afford it?” This mindset will trigger ways and means in your brain to make and multiply money. You will develop financial intelligence, so important to make and retain money. Bhagwan Dada, the iconic hero of Bollywood with hit songs like “Shola jo bhadke Dil Mera dhadke” to his credit, had a multitude of properties and seven cars at the peak of his success. Due to his lack of financial intelligence, however, all his assets had to be sold off and he died a poor and broken man. There are many such examples in history – we can make money sometimes by sheer providence, but to retain and multiply that money we must have financial intelligence. Please remember the 80:20 stuff about financial intelligence that we discussed earlier.
Money without financial intelligence is money soon gone.
3. Assets and Liabilities
“An asset puts money in my pocket. A liability takes money out of my pocket.”
This book is priceless for just this one concept – clarifying the difference between assets and liabilities and how poor, middle class and rich go about viewing and acquiring these.
“Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.”
Assets are what will provide a cash flow to you after their acquisition and hence Stocks, Mutual funds, Real estate, Bonds, Intellectual property etc. are assets. Liabilities will take money out of your pocket not only to be acquired but thereafter to be maintained as well. They will also depreciate in value over time. Car, consumer goods like Smartphone, Credit cards, and personal loan (and other consumers/student loans) are thus liabilities.
Kiyosaki does not rule out acquiring liabilities but he insists that money for the same must come out of the cash flow generated by the assets. Take a moment to look at the cash flow diagrams given below: –
The above diagrams clearly show the cash flow patterns of the rich, middle class and poor persons. It may be seen that the rich buy assets to generate an income stream and hence over a period of time stop depending upon their “regular income” like pay etc. A middle-class person (that is where most of us are) ends up using his pay (read income) to acquire liabilities which further increase his expenses – a vicious cycle indeed. A poor person remains poor because his expenses equal his income and are sometimes more. Hence, he does not buy any assets. These diagrams are pretty self-explanatory and must be taught to our kids.
If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities.
4. Spending Investing (SI) Balance
Please read my post on SI balance again. Kiyosaki emphasizes the same point giving an example of a young couple, who, as their income rises, keep increasing their expenditures- ostensibly to tell the world that they “have arrived”. A bigger house, few more credit cards, bigger cars, new furniture, and new appliances- the list is endless, but the money finite. Kiyosaki says, “I run into this young couple all the time. Their names change, but their financial dilemma is the same.”
Every pay raise, every bonus, every financial windfall is to be wisely invested to leverage the power of compounding. By all means, enjoy half of the windfall or income raise, but let the other half be invested for your tomorrow. There is no need to “appear rich” for the sake of your friends, relatives, neighbours etc. They have their own life race to be run as you have your own – the tracks may appear to be the same but are not.
5. Defining Wealth
Kiyosaki has a remarkably interesting take on what constitutes wealth. He defines it as, “Wealth is a person’s ability to survive so many numbers of days forward— or if I stopped working today, how long could I survive?”
This point emphasizes the value of “liquidity” in your total net worth meaning if required, how much money could you muster at short notice for your essential needs. Let’s say, 80% of your net worth consists of your house and car and you suddenly need money for a financial emergency. How soon and at what price will you be able to sell your house or car? It may be weeks or even months (especially for the house) before you can find a buyer who is not going to take advantage of your desperate situation.
The endeavour for us should always be to keep increasing our assets as they are our “cash flow generators” and will keep on fueling us in financially lean times – an ability that our liabilities like smartphone or car sadly lack. Assets also must be acquired in two separate categories – illiquid and liquid. A house is an illiquid asset for the reasons discussed above while your stocks, mutual funds, bonds etc. are liquid assets.
The rich focus on their asset columns while everyone else focuses on their income statements.
6. Give and You Shall Receive
Most of us wish to contribute to some social cause or the underprivileged but wait for an opportune moment when we will have enough to contribute. In a way, we tell ourselves that we first have to look after our needs before thinking about others. Kiyosaki states and I endorse it, that you must first give in order to receive.
The manner of giving is entirely upon us but giving leftover food to the maid or discarded clothes to an NGO is not really giving. You are just disposing of what you do not need any longer. Instead, you must share something for which you have a need – a percentage of your income may be. This could go towards the education of a child through a bonafide NGO or such like cause. If, however, you are not in a position to give the gift of money, do gift your time towards a worthy cause. My wife, Deepika, teaches the children of maids, gardeners etc. in the evenings. The children learn language, social graces, etiquettes etc. while she gets enriched in the vivacious company of lovely children.
Whenever you feel short or in need of something, give what you want first and it will come back in buckets. That is true for money, a smile, love, or friendship.
7. Miscellaneous Issues
- Understand and don’t incur “bad debts”. We have discussed this issue in my earlier posts and need to scrupulously follow it. Generally, all consumer debts are bad and hence avoidable.
- Never “dip into your savings”. This is the single most pernicious habit a middle-class person has. The savings/investments are always goal-based and should not be touched till the goal has been reached.
- Never buy luxuries on credit. This point is a corollary of the assets and liabilities point but needs reiteration. If you need a luxury, save for it. Ruthlessly curb the “present bias”.
Read more from Anand here: