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Messages (294) I often hear people say, “When I make a lot of money,
my money problems will be over. ” In reality, their new
money problems are just beginning. One of the
reasons so many newly rich people suddenly go broke
is because they use their old money habits to handle
new money problems. In 1977, I started my first big business , which was
my nylon and Velcro surfer wallet business. As I said
in a previous chapter, the asset created was bigger
than the people who created it. A few years later I
created another asset that grew rapidly and again the
asset got bigger than the people who created it. Again I lost the asset. It took the third business for me to
learn what my rich dad had been guiding me to learn. My poor dad was shocked at my financial ups and
downs. He was a loving father but it pained him to see
me on top of the world one minute and in the gutter
the next. But my rich dad was actually happy for me.
He said after my two big creations and disasters,
“Most millionaires lose three companies before they win big. It took you only two companies. The average
person has never lost a business and that is why 10%
of the people control 90% of money.” After my stories about making millions and losing
millions, I am often asked an important question,
“Why do rich people go bankrupt?' I offer some of the
following possibilities, all from personal experience. Reason #1: People who have grown up without money
have no idea how to handle a lot of money. As stated
earlier , too much money is often as big a problem as
not enough money. If a person is not trained to handle
large sums of money or does not have proper
financial advisors, then the chances are very strong that they will either stash the money away in the bank
or just lose it. As my rich dad said, “Money does not
make you rich. In fact, money has the power to make
you both rich and poor. There are billions of people
each day who prove that fact. Most have some
money but they spend it only to get poorer or greater in debt. That is why today there are so many
bankruptcies being reported in the best economy in
history. The problem again stems from people
receiving money and then buying liabilities they think
are assets. In the next few years, I am certain that
many of today's young or instant millionaires will be in financial struggle because of their lack of money
management skills. Reason #2: When people come into money, the
emotional euphoria is like a drug that boosts your
spirits. My rich dad said, “When the ‘money high' hits,
people feel more intelligent, when in fact they are
becoming more stupid. They think they own the world
and immediately go out and start spending money like King Tut with tombs of gold.” My tax strategist and CPA, Diane Kennedy once said
to me, “I have been an advisor to many rich men.
Just before they go broke after making a ton of
money, they tend to do three things. One, they buy a
jet or big boat. Two, they go on safari. And three, they
divorce their wife and marry a much younger woman. When I see that happening I begin preparing for the
crash.” Again, much like reason number one, they buy
liabilities or divorce an asset, which then creates a
liability, and then they marry a new liability. They now
have two or more liabilities. Reason #3: When you have money certain friends and
relatives tend to become closer. The hardest thing for
many people is to say “no” to people they love when
they ask to borrow money. This has not happened to
me, but I have seen many families and friendships
break up when one person suddenly becomes rich. As rich dad said, “A very important skill in becoming rich
is to develop the ability to say ‘no' to yourself and the
people you love.” The people who come into money
and begin buying boats and big houses are not able to
say “no” to themselves, let alone their family members. They end
up further in debt, just because they suddenly had a
lot of money. Not only do people want to borrow money from you
when you have money, banks want to lend you more
money. Which is why people say, “Banks lend you
money when you don't need it.” If things go bad, not
only do you have trouble collecting the loans you
made to friends and relatives, the banks then have trouble collecting from you. Reason #4: The person with money suddenly
becomes an “investor” with money, but without
education and experience. Again, this goes back to
rich dad's statement that when people suddenly have
money they think their financial IQ went up also, when
in fact it has gone down. When a person has money, they suddenly begin receiving phone calls from
stockbrokers, real estate brokers, and investment
brokers. Rich dad also had a joke about brokers, “The
reason they are called ‘brokers' is because they are
broker than you.” My apologies to any “brokers” who
are offended, but I think my rich dad's stockbroker is the one who told the joke to him originally. I had a friend of my family who came into a $350,000
inheritance. In less than 6 months all that money was
lost in the stock market, not to the market but to the
broker that “churned” the suddenly rich person who
thought that money made him more intelligent. For
those who do not know what churning means, it is when the broker advises the person to buy and sell
regularly, so the broker makes the commission on
each buy and sell. This practice is frowned upon and
severe fines are levied if brokerage houses find their
brokers involved in this practice . . . yet it does
happen. As stated at the start of this book just because you
meet the qualifications of an Accredited Investor,
simply a person with money, does not mean you
know anything about investing. In today's heated stock market, many companies are
investing as foolishly as individuals are. With so
much money in the market, many companies are
running around buying other companies they hope are
assets. In the industry it is often called M&As, or
mergers and acquisitions. The problem is, many of these new acquisitions can become liabilities. Often
the big company that bought a small company ends
up in financial trouble. Reason #5: The fear of losing increases. Many times
a person with a poor person's outlook on money has
lived a life being terrified of being poor. So when the
sudden wealth hits, the fear of being poor does not
diminish, in fact it increases. As my friend who is a
psychologist for professional day traders says, “You get what you fear.” That is why so many professional
investors have psychologists as part of their team, at
least that is why I have one. I have fears like
everyone else. As stated earlier , there are many
ways to lose money other than through the
investment markets. Reason #6: The person does not know the difference
between good expenses and bad expenses. I often
receive a phone call from my accountant or tax
strategist saying, “You have to buy another piece of
real estate.” In other words , I have the problem of
making too much money and I need to invest more money in something like real estate because my
retirement plan cannot take any more money. One of
the reasons the rich get richer is because they buy
more investments by taking advantage of the tax
laws. In essence, money that would have been paid in
taxes is used to buy additional assets, which provide a deduction against income, reducing the taxes due,
legally. The tetrahedron illustrated earlier is to me one of the
most important diagrams for wealth creation as well
as keeping and increasing the wealth created. When I
show people the diagram, I am often asked why
expenses are part of the structure. The reason is
because it is through our expenses that we become richer or poorer, regardless of how much money we
make. Rich dad often said, “If you want to know if a
person is going to be richer or poorer in the future just
look at the expense column of their financial
statement.” Expenses were very important to rich
dad. He often said, “There are expenses that make you rich and expenses that make your poor. A smart
business owner and investor knows which kind of
expenses they want and controls those expenses.” “The main reason I create assets is because I can
increase my good expenses, ” rich dad said to me
one day. “The average person has mainly bad
expenses. ” This difference in good expenses and bad
expenses was one of rich dad's most important
reasons for creating assets. He did so because his created assets could buy other assets. As he said to
me when I was just a kid walking along the beach
looking at the very expensive piece of real estate he
had just purchased, “I can't afford this land either. But
my business can.” If you understand the tax laws available to the B
quadrant, you soon realize that one of the reasons the
rich get richer is because the tax laws allow the B
quadrant, more than other quadrants, to spend pre-tax
dollars, to build, create, or buy other assets. In fact,
the tax laws almost require you to buy more investments with pre-tax dollars, which is why I
receive those phone calls telling me to buy more real
estate or buy another company. The E quadrant on
the other hand, must often use after-tax dollars to
build, create, or buy other assets. What to Do with Too Much Money “If you want to be rich, you must have a plan on how
to make a lot of money and you must also have a
plan on what to do with that money before you make
it. If you do not have a plan on what to do with it
before you make it, you will often lose it faster than
you made it. ” One of the reasons he had me study real estate investing was so that I would understand
how to invest in real estate before I had a lot of
money. Today when my accountant calls and says,
“You have too much money. You need to buy more
investments,” I already know where to move my
money, the corporate structures to use, and what to buy with that money. I call my broker and buy more
real estate. If I buy paper assets, I often call my
financial planner and buy an insurance product, which
then buys my stocks, bonds, or mutual funds. In
other words, the insurance industry produces special
insurance products for rich people who are business owners. When a business buys insurance, it is an
expense to the company and it often becomes an
asset to the owner with many tax advantages. In
other words, when my accountant calls, much of the
money is already spent according to a predetermined
plan. It is spent as expenses that make the person richer and more secure. That is why a financial
advisor and an insurance agent for the rich are very
important members of the team. Over the years, I have seen many people start very
profitable businesses and still end up broke. Why,
because they did not control their expenses. Instead
of spending money to acquire other assets, assets
such as real estate or paper assets, they expensed it
through frivolous business expenses, or bought bigger homes, nice boats, fast cars, and new friends.
Instead of getting financially stronger , they became
financially weaker with every dollar they made and
then spent. The Other Side of the Coin Rich dad often said, “It is through the expense column
that the rich person sees the other side of the coin.
Most people only see expenses as bad, events that
make you poor . When you can see that expenses
can make you richer, the other side of the coin begins
to appear to you.” He also said, “Seeing through the expense column is like going through the looking
glass as Alice did in Alice in Wonderland. Once Alice
went through the looking glass, she saw this bizarre
world that in many ways reflected the other side of the
looking glass.” Both sides of the coin really did not
make much sense to me but rich dad said, “If you wanted to be rich, you had to know the hopes, the
fears, and the illusions on both sides of the coin.” During one of my meetings with rich dad, he said
something that changed my thinking from a poor
person to a rich person. Rich dad said to me, “By
having a plan to be rich, understanding the tax laws
and corporate laws, I can use my expense column to
get rich. The average person uses their expense column to become poor . That is one of the biggest
and most important reasons why some people get rich
and others become poor. If you want to become rich
and stay rich, you must have control of your
expenses.” If you understand this statement you will
understand why rich dad wanted low income and high expenses. That was his way of getting rich. He said,
“most people eventually lose their money and go
broke because they continue to think like a poor
person and poor people want high income and low
expenses. If you don't make this switch in your head,
you will always live in fear of losing money, trying to be cheap, trying to be frugal, rather than being
financially intelligent and becoming richer and richer .
Once you can understand why a rich person would
want high expenses and low income, you will begin to
see the other side of the coin.” A Very Important Point This last paragraph is one of the most important
paragraphs in this book. In fact, this book has been
written around this one paragraph. If you do not
understand it, I suggest sitting down with a friend who
has also read this book and begin a discussion to
deepen your understanding of what it says. I do not expect you to necessarily agree with it. It would be
good just to begin to understand it. You may begin to
understand that there is a world of too much money
and you may understand how you can become a part
of that world. Rich dad said, “People who do not
change their point of view about money in their head, will see only one side of the coin. They will see the
side of the coin that only knows a world of not enough
money. They may never see the other side of the
coin, the side where the world is a world of too much
money, even if they do make a lot of money.” By understanding that a world of too much money can
exist, understanding a little of the tax laws and
corporate laws, and why control of your expenses is
so important, you can begin to see an entirely
different world, a world very few people ever see. And
seeing that world begins in your head. If your mental view can change, then you will begin to understand
why rich dad always said, “I use my expenses to get
richer and richer and the average person uses their
expenses to become poorer and poorer.” If you
understand that statement you may understand why I
think the teaching of financial literacy is important for our school system. It is also why my educational
games CASHFLOW can help you see a world of
money that few people ever see. The financial state is
much like the looking glass in Alice in Wonderland. In
the game CASHFLOW, it is via the mastery of the
financial statement that the player moves from the Rat Race of life onto the Fast Track of the investment
world, the world that begins with the Accredited
Investor. How Can Low Income and High Expenses Be Good? So as rich dad said, “Money is just an idea.” And
these last few paragraphs contain some very
important ideas. If you understand fully why low
income and high expenses is good then move on. If
not, please invest some time in discussing this point
with someone who has also read this book. This idea is the pivotal point of this book. It also explains why
many rich people go broke. So please do your best to
understand this point because it makes not much
sense to be creative, build an asset, and make a lot
of money—only to lose it all. When I studied the
90/10 rule the one thing I discovered is that the 90% who earn the 10% are people who want high income
and low expenses. That is why they stay where they
are. A Guide Line So the question is, “How can low income and high
expenses make you rich?” And the answer is found in
how the sophisticated investor utilizes the tax laws
and corporate laws to bring those expenses back to
the income column. For example: This is a diagram of what a sophisticated investor is
working to do. This is the Diagram of the 10% Who
Make 90% Again the question is, “How can low income and high
expenses make you rich?” If you can begin to understand how and why this is
done, then you will begin to see a world of greater and
greater financial abundance. Compare the previous diagram with the following
diagram: This is the Diagram of the 90% Who Make 10% This is the financial diagram of most of the world's
population. In other words, the money comes in and
goes out the expense column and never comes back
in. That is why so many people try to save money, be
frugal, and cut back on expenses. This diagram here
is also the diagram of the person who will emphatically say, “My house is an asset. ” Even
though the money goes out the expense column and
does not return, at least not immediately. Or the
person who says, “I'm losing money each month but
the government gives me a tax break to lose money.”
They say that rather than say “I 'm making money on my investment and the government gives me a tax
break to make money.” My rich dad said, “One of the most important controls
you can have is found in this question. And the
question is, ‘What percentage of the money going out
your expense column winds up back in your income
column in the same month?' ” Rich dad spent hours
and days on this subject with me. By understanding his point of view I saw a completely different world
that most people do not see. I could see a world of
ever increasing wealth, unlike people who work hard,
earn a lot of money and keep their expenses down.
So ask yourself the same question. “What percentage
of the money going out your expense column comes back in your income column in the same month?” If
you can understand how this is done you should be
able to see and create a world of ever increasing
wealth. If you are having difficulty understanding this
idea, find someone else and discuss how it might be
done. If you can begin to understand it, you will begin to understand what a sophisticated investor is doing. I
would say it's worth the discussion and why you may
want to read and discuss this book often. It really was
written to change a person's point of view from the
view of not enough money to the view of creating a
world of too much money. What Is the Value of a Network Marketing Business? When I speak to network marketing companies, I
often say to them, “You don't know the value of your
network marketing business .” I say that because
many network marketing businesses only focus on
how much money such a business can generate. I
often warn them that it's not how much money they make, but much money they can invest with pre-tax
dollars that is important. This is what the E quadrant
cannot do. To me, that advantage is one of the
biggest advantages of a network marketing business.
If used properly a network marketing business can
make you far richer than merely the residual income the business generates. I have several friends who
have made tens of millions of dollars in network
marketing and are still broke today. When I speak to
the industry, I often remind the leaders of network
marketing that a vital part of their job is to not only
educate people on how to make a lot of money, it is as important to educate them on how to keep the
money they make and it is through their expenses
that they will ultimately become rich or poor. Why Are More Businesses Better than One? It is not only network marketing people who fail to
realize the true value of their business . I have seen
entrepreneurs who are good at building a business yet
do not realize the true value of that business. The
reason this happens is because there is a popular
idea going around today that you only build a business to sell it. That is the idea of a business
owner who does not know what a sophisticated
investor knows about the tax laws and corporate laws.
So instead of building a business to buy assets, they
often just build the business, sell it, pay the taxes,
put the cash in the bank, and start all over again, I have had several friends who have built businesses
just to sell them. Two friends of mine have sold their
companies for cash and then lost all that cash in their
next business venture. They lost because the 90/10
rule for business survival is still in effect. These two
were individuals from the S quadrant who built B quadrant business . They then sold those businesses
to people from the B quadrant. The buyers recognized
the often-unseen value of a B quadrant business. So
the friends who sold their businesses ultimately went
broke, even though they had collected several million
dollars. The businesses they sold went on to make the new owners even richer. A sophisticated business owner and investor would do
their best to keep the business as long as possible,
have it acquire as many stable assets as possible
and then trade the business with as small a tax
consequence as possible, while keeping as many of
the assets as possible. As my rich dad said, “The main reason I build a business is for the assets the
business buys me.” For many entrepreneurs, the
business they build is their only asset because they
utilize a single corporation strategy and fail to harness
the power of a multi-corporation investment strategy.
(Again, to utilize such a strategy requires a team of professional advisors.) This points out that the big
advantage the B quadrant has is that the tax laws for
that quadrant allow you to spend pre-tax dollars to
make you financially richer and in fact, the laws
reward you for investing as much money as possible.
After all, it is the rich who write the rules. The Power of Expenses So this is why expenses can be an asset or liability,
regardless of how much money you make. One of the
reasons 90% of the people only have 10% of the
money is because they do not know how to spend the
money they make. As rich dad said, “A rich person
can take trash and turn it to cash. The rest of the people take cash and turn it to trash. ” So what is the
answer to the question, “Why do rich people go
bankrupt?” “The same reason poor people remain poor
and the middle class struggles financially.” The
reason the rich, the poor, and middle class go broke
is because they lose control of their expenses. Instead of using their expenses to make them rich,
they use their expenses to make them poor. Robert Kiyosaki - Rich Dad's Guide To Investing What
The Rich Invest In ,

Tags: Bankrupt?, Do, Go, People, Rich, Why

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