Understanding…and mastering the game of investing.
When I was a young boy, my best friend Mike, the son of my rich dad,
took up both the game of golf and investing. Both were games, in a
sense, both were difficult to master, and both required understanding
the rules of the game.
Fifteen years later, when we were both twenty-five years old, Mike was
an expert at both golf and investing. I was just beginning to learn
the rules.
I make this point because, regardless of how young or old you are,
learning the basics of anything, is important. Most people take some
kind of golf lessons to learn the basics before playing golf, but
unfortunately, most people never learn the simple basics of investing
before investing their hard-earned money.
The following are the 6 basics of investing taught to me by my rich dad:
Basic rule #1: Know what kind of income you're working for. Most
people think only of making money. They
don't realize that there are different kinds of money to work for. For
years, rich dad drilled into Mike and me that there are three kinds of
income:
A. Ordinary earned income: Generally earned from a job via a paycheck.
It's the highest-taxed income, and thus, the hardest to build wealth
with.
B. Portfolio income: Generally derived from paper assets such as
stocks, bonds, and mutual funds.
C. Passive income: Generally derived from real estate, royalties, and
distributions. It is the lowest-taxed income, with many tax benefits,
and is the easiest income to build wealth with.
Rich dad said, "If you want to be rich, work for passive income."
Basic rule #2: Convert ordinary income into passive income
Most people start their life out by making ordinary earned income as
an employee. The path to building wealth then starts with
understanding that there are other types of income and then converting
your earned income into the other types of income as
efficiently as possible. To illustrate this, rich dad drew a simple diagram:
"That, in a nutshell," said rich dad, "is all an investor is supposed
to do. It's as basic as it can get."
Basic rule #3: The investor is the asset or liability. As we've
discussed recently, many people think investing is risky . The
reality, however, is that it's the investor who is risky. The investor
is the asset or liability. "I have seen investors lose money when
everyone else is making it," said rich dad. "In
fact, a good investor loves to follow behind a risky investor because
that is where the real investment bargains can be found!"
Basic rule #4: Be prepared. Most people try to predict what and when
things will happen. But a true investor is
prepared for anything to happen. "If you are not prepared with
education, experience, or extra cash, a good opportunity will pass you
by," said rich dad. Rich dad went on to say that it was most important
not to predict what will happen but to instead focus on what you want,
to keep your eyes open to what is happening, and to respond to
opportunity. This is done through continual education and application.
Basic rule #5: Good deals attract money
One of my big concerns as a beginning investor was how I would raise
money if I found a good deal. Rich dad reminded me that my job was to
stay focused on the opportunities in front of
me, to be prepared. "If you are prepared, which means you have
education and experience," said rich dad, "and you find a good deal,
the money will find you or you will find the money." Rich dad's point
was that getting the money was the easy part. The hard part was
finding a great
deal that attracted the money—which is why so many people are ready to
give money to a good investor.
Basic rule #6: Learn to evaluate risk and reward. As you become a
successful investor, you must learn to evaluate risk and reward. Rich
dad
used the example of a nephew building a burger stand. "If you had a
nephew with an idea for a burger stand, and he needed $25,000, would
that be a good investment?" "No," I answered. "There is too much risk
for too little reward."
"Very good," said rich dad, "but what if I told you that this nephew
has been working for a major burger chain for the past 15 years, has
been a vice president of every important aspect
in the business, and is ready to go out on his own and build a
worldwide burger chain? And what if you could buy 5 percent of the
company with a mere $25,000? Would that be of interest to you?" "Yes,"
I said. "Definitely because there is more
reward for the same amount of risk."
Learning and mastering the rules of investing takes a life-long
investment in financial education. But these basics will get you
started. Where you go from here is up to you.
No comments:
Post a Comment