Unfair Advantage -The Power of Financial Education (4 page)

I am certain these educators are well-intentioned people, but their conditioned reflexes blind them to the fact that the bankers and financial planners they invite into their schools work for the very organizations that caused and profited from this financial crisis: corporations such as Bank of America, Merrill Lynch, Goldman Sachs, and Lehman Brothers (oops, they’re gone). These companies continue to hire the brightest financially educated students from the best schools in the world and train them to run their companies and sell their financial services. This is not financial education. This is sales training.

Show Me the Money

In 1996,
Jerry McGuire
, a movie starring Renee Zellweger, Tom Cruise, and Cuba Gooding Jr. was released. From that movie came the line, “Show me the money,” and today, it is a cult classic. Just a few days ago, I was passing a group of boys between the ages of 10 and 12 who were arguing about money. It seems that one boy owed money to another boy. Frustrated and tired of excuses, the boy who was owed the money stuck out his hand and shouted, “Just show me the money.”

What most people think is financial education is really, “Send me your money,” not “Show me the money.” When a person says, “I have $10,000. What should I do with it?” financial planners, who have very little financial education but lots of sales training, are trained to say, “Invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds.” In other words, “Send me your money for the long term.” People who followed similar mantras are today’s biggest losers. This is how Bernie Madoff got so many educated wealthy people to send him billions of dollars, creating the second biggest Ponzi scheme in U.S. history. (The biggest Ponzi scheme in U.S. history is Social Security.)

The term “Ponzi scheme” is named after Charles Ponzi (1882– 1949) who was considered one of the greatest swindlers of all time. A Ponzi scheme is an investment fraud where early investors are paid with money coming in from new investors who are generally lured in with the promise of high returns. If you think about it, most markets, real estate, stocks, bonds, and mutual funds are Ponzi schemes. If new investors stop sending in their money in the hopes of higher returns, the scheme collapses. In 2007, as the news of the subprime crisis spread, old investors and new investors panicked and wanted their money back. Savers also wanted their money back, and the world economy, a massive Ponzi scheme, nearly collapsed. When people stopped sending in their money and began demanding, “Show me my money,” the global markets crashed. Millions of ordinary people lost trillions.

To save the world economy, central banks and governments of the world were forced to step in and promise savers and investors that their money was safe. The problem is that millions are still wiped out and millions more do not trust the government and financial systems. They shouldn’t. The entire global financial system is a government-sponsored Ponzi scheme. It works as long as you and I keep sending our money to people we hope are trustworthy. Imagine what would happen if young American workers said, “We will not donate any more to Social Security.” Not only would the U.S. economy go into chaos but the world economy would probably collapse.

The global Ponzi scheme works for those with financial education and is tragic for those without financial education. This is why I write and teach financial education. The legal, government-sanctioned Ponzi scheme works for me, which is why I do not have a job, save money, call my house an asset, get out of debt, live below my means, or invest for the long term in a diversified portfolio of stocks, bonds, and mutual funds. Unfortunately, the global financial system is corrupt, and millions who follow this advice are being destroyed financially.

The Five Components of Financial Education

To keep financial education as simple as possible, I break it down into five basic components. They are:

• History
  

• Definitions
  

• Taxes
  

• Debt
  

• Two sides to every coin
  

Throughout this book, I will often refer to these five basic components of financial education, doing my best to keep things as simple as possible.

Keeping It Simple

Growing up in Hawaii, far from the financial capitals of the world, my financial education began when I was nine years old. My rich dad, my best friend’s father, began teaching his son and me about money using the game of
Monopoly.
He kept his lessons very simple.

During one of his lessons, he said, “One of the world’s greatest financial strategies is found in the game of
Monopoly
.”

Curious, his son and I asked, “What is the formula?”

Chuckling, he said, “Can’t you see it? You’ve played this game for years. The formula is sitting right in front of you.”

The problem is that we could not see it. No matter how many times we went around “GO” and collected our $200, we were blind to what rich dad saw.

Finally rich dad said. “One of the great formulas of the rich is: Four green houses turn into one red hotel.”

Later that day, he drove his son and me out to see his real
green houses
. He had about five acres of them. “One day,” he said, “I will have my big red hotel.” Taking a moment to gather his thoughts, he said, “There are many different formulas. This is the formula I will follow for the rest of my life. I do not have an education. I did not go to school like you boys. Although not formally educated, I will dedicate my life to learning to have this formula work for me.”

He kept his word. Rather than go to traditional schools, rich dad often flew from our little town of Hilo, Hawaii, to Honolulu, the capital, on another island, to attend business, sales, and investment courses. His goal was not to get a college degree so he could get a job. He did not want a job. His goal was to get an education that would fuel his plan to great wealth.

Ten years later when I was 19 years old, I returned home from school in New York for Christmas break. For our New Year’s celebration, rich dad’s son and I had a roaring party in the penthouse of rich dad’s real red hotel on the beach at Waikiki. After midnight, when the party was over, I stood on the balcony of his penthouse staring at Waikiki Beach in front of me, realizing rich dad had played
Monopoly
in real life. He had followed his plan. In ten years, I witnessed him going from poor to very rich. By the end of his life, he had five red hotels on different islands and many other properties, businesses, and assets.

Today, when back in Hawaii, I often drive by buildings his family still owns and continues to collect income from, even though rich dad is no longer with us. Even after death, he remained a rich man.

As some of you know, hanging onto your wealth can be as hard as achieving wealth. That is why, before he became wealthy, rich dad also took courses in Honolulu on taxes, probate, and asset protection. When I asked him why, he said, “It does not make sense to work hard and have someone or the government take your money from you. If you are not smart, the government will take most of your hard-earned money after you die. Your stockbroker won’t return your money after it’s lost in a market crash. If you are not smart, an accident or illness can wipe you out. If you are not smart, a lawsuit can take most of your hard-earned money. Before you make your money, you need to learn how to protect it.”

Rich dad never finished high school, yet he never stopped his education.

After Kim and I were married, while we were building our business and our investments, we allocated three to four times a year for business or investment education. The good thing about building a business and working on our investments was that we could apply what we learned immediately. Together, we took classes on advertising, gold, options trading, writing sales letters, foreign-exchange trading, creative financing, foreclosures, and asset protection. Like rich dad, this is how Kim and I gained and continue to increase our financial knowledge. In other words, rich dad did not teach me any specific subject. Instead, he taught me how to learn and what to learn. Today, like rich dad, we study hard so we can play
Monopoly
in real life.

The Value of Financial Education

Kim and I were married in 1986. Like many newly married couples, we did not have much money or credit. Adding to our financial challenges, I was still carrying nearly a million dollars in debt, money owed investors from the crash of my first entrepreneurial venture, the nylon-and-Velcro surfer wallet business.

On October 19, 1987, the Dow Jones Industrial Average fell 508 points, a 22 percent drop.

In 1988, George Herbert Walker Bush was elected president of the United States. That year, the savings-and-loan industry crashed, followed by a real estate market crash. Much like the subprime crisis, the destruction spread across the United States and the world. Millions of people lost their jobs and their homes, and the economy headed into a severe recession.

In 1989, as pessimism spread, I said to Kim, “Now is the time to start investing.”

Being newly married, deeply in debt, without traditional jobs, and in the process of building a business, it seemed impossible to find someone who would lend us money to invest. To make matters worse, interest rates for investors were running between 9 percent and 14 percent. We were turned down many, many times. Bankers did not understand why we wanted to be investors in one of the worst economies in decades. Most bankers did not like our explanation that we were playing
Monopoly
in real life.

In spite of the rejection, Kim kept studying, taking classes, reading books, and looking at hundreds of properties. Her goal was to buy two houses per year for ten years, for a total of 20 houses. At first the process was slow, but once she caught on, she achieved her goal of 20 houses in just 18 months. Although she achieved her goal eight years ahead of time, she did not stop investing. She was excited. She was learning more and more with each deal, especially the ones that did not go her way. The more she learned, the more she realized how little she knew. Her desire to learn more drove her on.

By 1994, Kim and I were financially free. We sold our business, and reinvested our gains. We owned over sixty investment properties, each of which sent us a check every month. She was 37, and I was 47.

We were still not rich. All we had was $10,000 a month coming in and $3,000 in expenses going out. Although not rich, we were financially free. As best we could tell, we had cash flow for life.

Pressure Test the Plan

In 1994, we retired early because we wanted to pressure test our retirement plan. We wanted to make sure it could survive in good times and bad times. If our plan did not work, we were still young enough to correct and rebuild our investment base.

Early Retirement Ends

Two years later, bored and tired of retirement, Kim and I got back to work and produced
CASHFLOW
, our financial education game. The game is designed to be a seminar in a box and to teach the financial lessons my rich dad taught me. Like my rich dad, the game does not give you answers. The game challenges you to think. Every time you play the game, the game is different, because the players and challenges are different. The game also comes in three levels: the fundamental version
,
CASHFLOW 101;
the advanced version,
CASHFLOW 202;
and
CASHFLOW for Kids
, a version for children 12 and under.

In 2004, the
New York Times
did nearly a full-page article on the game, stating that there were CASHFLOW clubs all over the world with people teaching people the lessons my rich dad taught me. Today, the game is in published in 15 languages. It is also played worldwide via the online versions of the game.

In 1997,
Rich Dad Poor Dad
was published. In the book, I repeated rich dad’s lesson, “Your house is not an asset.” Howls of protest went up, especially from real estate agents. In 2007, as real estate crashed, millions of people are discovering the value of rich dad’s lesson.

In 2000, Oprah called. I appeared on her show and became “an overnight success;” that is, in one night I became famous, but it took me forty years of struggle to truly become successful.

After Oprah, money poured in from books and game sales from all over the world, but our money formula stayed the same. It was the same “pressure tested” formula that worked in good times and bad, when we had very little money and when we had a lot of money.

In 2002,
Rich Dad’s Prophecy
was published.
Prophecy
predicted the biggest stock-market crash in history was coming. The prediction was heresy because the world was in a boom, the biggest bubble in history, a bubble that, as the book predicts, would wipe out the retirement plans of millions of people. Today, that prophecy is coming true.

Rich Dad’s Prophecy
attracted the attention of Wall Street, and I came under serious attack. I was discredited in the press through
Money
magazine,
Smart Money
, the
Wall Street Journal
, radio, television, and the World Wide Web. I understand. I am a businessman. Wall Street had to protect their cash cow.