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Everyone Needs to Become an Investor
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“Don't they realize how important investing is?” I asked rich dad. We were walking out of a hotel ballroom where rich dad had held a meeting for his key management team and his top employees, about 125 people.

“We shall see,” said rich dad. “I've done my best to convince them but I can only push so hard. This 401(k) plan we've implemented is a benefit but many of the workers aren't contributing to the plan. Some only contribute a little. Even some of the management team have stopped contributing. I don't know what they expect to live on once they retire.”

The year was 1988. I was passing through Hawaii on my way to the Far East and rich dad asked me if I wanted to attend this meeting. The 1987 stock market crash in October had frightened many of them and they had stopped contributing to their DC retirement plan.

“I called in the representative from the fund management company to explain to the workers once again how their 401(k) plan works. The potential fiduciary liability prevented this investment advisor from giving specific investment advice. She only presented the information but did not advise the person what to buy. So she explained the plan but did not go into much detail. That did not make the employees feel too secure since they have no idea what to invest in. Why does the law prevent the people who run the plan from giving the employees a little bit more spe cific advice?”

“I did not know that,” I said. “All these years I never understood why the advisors just presented the plan but not much advice. Today I learned it was the potential fiduciary liability.”

“At least she told them that you were a generous employer because you were willing to match the employee's contribution dollar for dollar. Many employers do not match any funds at all . . . and some only match 50 cents on the dollar. Even though I am willing to be generous, there are still only a few employees contributing on a regular basis,” said rich dad.

“Even if they don't get much investment advice, don't the employees re alize that every dollar you contribute is like receiving tax free money?” I asked. “All they have to do is put in a dollar that is also tax free.”

“They hear the words,” said rich dad. “I've been saying the same thing for years but nothing seems to change. I even told them that a person who is contributing to the plan is making more money than those that are not. Even that failed to change things. Then after the stock market crash, some of those that used to contribute stopped contributing. That is why I asked the representative from the fund company to stop by and speak to them. I hope it does some good.”

We continued our conversation all the way back to his office, which was just down the street from the hotel where the meeting was held. Again I asked the question, “Don't they realize how important investing is?”

“I believe they do,” rich dad replied.

“So why don't they invest?” I asked.

With that question rich dad sat down at his desk and began to write on his yellow legal tablet the following words:

RICH

MIDDLE CLASS POOR

Looking up at me, he said, “Every one of us invests in one way or an other. We simply invest in different things and in different ways.” He then wrote the following after each class:

RICH: Good financial education

Build business

Large real estate investments

Private equity funds

Hedge funds

Personal money manager

Private placements

Limited partnerships

MIDDLE CLASS: Good education

High paying job

Profession

Home

Savings

Retirement plan

Mutual funds

Small real estate investments

POOR: Large family

Government support programs

“These are the different investments the different classes invest in,” said rich dad. “The poor often have large families, trusting that their kids will take care of them in their old age. They also count on government programs such as Social Security, welfare, and Medicare.”

“The poor invest in kids?” I responded incredulously.

Rich dad nodded. “That is a broad generalization but you will find some truth in that statement. They may not say it but they expect their kids to sup port them when they stop working.”

“And the middle class invests in a good education so they can get a high paying job,” I said, reading from rich dad's tablet. “To them that is an investment?”

“Sure,” smiled rich dad. “Isn't it true in your family? Isn't it important to your mom and dad that you have a college degree, and possibly a profes-sion such as doctor, lawyer, or a job title such as vice president or general manager?”

I agreed. “Education is very important in our family. My mom really wanted me to become a doctor and my dad always thought I should go to law school.” Rich dad chuckled. “And don't they insist you buy a home and have a retirement plan? In fact, didn't you tell me that your dad wanted you to stay in the Marine Corps because it had a great retirement plan with benefits?” Again I nodded. “But don't the poor want the same things, at least in their work?”

“They may dream of a high paying job. But dreams are dreams and reality is reality. If you notice, most of my lower paid employees move from job to job simply because it's easy to move from job to job, as long as you do not expect high pay. So they may dream of finding a great high paying job but in reality without a good education or some technical skills, a high paying job is out of the question.”

“So they spend most of their money just surviving, keeping their kids clothed and fed. That is what they invest in.”

Rich dad nodded, tapping his pencil on the investment of the poor. “Now my college-educated managers are different,” he said, shifting his pencil to the investments of the middle class. “As employees, they tend to stay longer because they know that if they leave, they have to start all over again, often at the bottom of the ladder. That is why they like job titles and seniority. It also takes longer to find a job if you expect higher pay. So they invest more time in a good education, high pay, job security, promotions, and titles. That is what is important to the middle class. As I said, people invest, but they invest in different ways. People invest time and money only into what they think is important.”

“So the rich build businesses and invest in larger pieces of real estate,” I said. “Or they invest in private equity funds or hedge funds, while the mid dle class has mutual funds.”

Rich dad went on: “Or the rich invest in syndications, partnerships, or they have personal fund managers who do it for them. They invest in invest ments reserved only for the rich.”

“But isn't a college education important to everyone?” I asked.

“Yes it is,” said rich dad. “In fact, if you look at all three classes and their investments, all three classes of investments are important, even to the rich.” “You mean the rich need large families?” I asked.

“Not necessarily large, but family is important to all of us, regardless of

which class. And so is government support important for the rich. If the government did not support the poor with welfare programs, there would be beggars in the streets and burglars in the homes of the rich. So the rich in-vest in government support through their taxes or charitable donations.”

Rich dad went on to explain that if I wanted to be rich, I needed to invest in all three classes. In other words, if I wanted to be rich, I had to invest far more than the other two classes of people. He said, “If you want to be rich, I strongly recommend you invest in what the poor invest in, the middle class invest in, and what the rich invest in. Do not . . . I repeat—do not try to skip over any of the first two investments. If you want to be rich, you must invest more . . . not less than the first two groups.”

He continued by pointing out to me the importance of family, home, and a retirement plan. He said, “Many people try to get rich without those pillars of support and that is very risky. That is why even I have a 401(k) retirement plan, even though I do not need one. It's there for support. Besides, it's a small tax advantage for me.” Pointing to family he said, “Family is very important to me, that is why I invest a lot of time and money in my family. I need them for emotional support just as you need Kim for emotional support. I have met many people who ignore their families. They sacrifice time with family for time at work. Or even worse, people cheat on their families. You and I have met people who cheat on their husband or wife thinking that a little affair doesn't matter, but it does. A strong family is important to me and I trust it is to you.”

The discussion of family made sense to me. Before rich dad left the dis cussion of family, I added, “Because you are rich, you have more time with your family. My dad was often gone for days on business trips. He said he needed to travel if he wanted to get his pay raise and promotion so he can put food on the table and buy a bigger house.”

“I know,” said rich dad. “Many people ignore their families for a pay raise, promotion, and trying to look rich by buying a big house. As I said, people invest in what they think is important. But in my mind, that is not investing . . . that is financial and family suicide. How many parents today have no time for their kids? Where would you be today if I had not spent so much time with you teaching about business and investing? Your father did not have the time. He was too busy working hard to make big house payments.”

As rich dad was talking it was beginning to sink in why he always talked about a plan. In previous books, I wrote about him saying that there were investment plans to be safe, comfortable, and rich. He was a stickler for developing a plan and following it. He had a plan to become rich because he wanted the free time to spend with his kids. My poor dad's plan was to continually go back to school so he could be promoted and receive higher pay. Although he did his best to be at home with the kids, the reality was he was often on the road, while rich dad was at home, letting his employees run his businesses and investments. I now realized how important all three levels of investment were. Suddenly, it struck me that I had many friends who only wanted to get rich, and did not invest in the first two classes of investments. So I asked, “But what about people who invest in the investments of the rich but do not have the first two levels. What happens to them?”

“Some make it,” said rich dad. “But very few do. I meet so many people investing in the investments of the rich before investing in the first two steps. I meet people who invest in wild business schemes with lofty tales of making billions of dollars, but most of those people lose their money, falling victim to the con men, crooks, and dreamers of the business world. Most who try to win big without a strong foundation wind up losers.”

Nodding, I could only laugh at myself, saying, “I've met many of those people along the way. In fact, I was one of those people when I was just starting out.”

Rich dad grinned and said, “I know. You sure had some wild stories about how you were going to strike it rich . . . and the problem is you did strike it rich with your first business. The trouble was you got lucky but you did not have the skills to maintain your luck. That is when you and the three clowns who were your partners went broke. You had the business, the rich level of investment, but you boys forgot about the importance of the first two levels . . . the middle-class and poor levels. That is why when your business struck it rich, instead of you and your partners becoming rich, you became clowns and lost it all.”

“So now I have all three levels,” I said. “Hopefully, I have the skills and the maturity to develop all three levels.”

“I hope so too,” said rich dad quietly. “But don't worry. Investing on all three levels is a full-time job and you will have your challenges in the future . . . just as my employees will have their challenges in the future.”

“So the lesson of the day is that as individuals we tend to only invest in what we think is important,” I added. “Many of your employees know in vesting is important to them, but investing is not yet important enough. They have other things they invest in that are more important and that is where their time and money goes.”

“Exactly,” said rich dad. “Look at the differences between your dad and me. Your dad says his house is his biggest investment. To him his home is far more important than his stock portfolio or industrial real estate, which I invest in. That is why his college degrees and job title are more important than going to school to learn to invest. I invest time and money in what I think is important and he invests time and money into what he thinks is important. The problem is, now that he has lost his job and most of his savings, he is finding out how unimportant what he thought was important really is in the real world. He is finding out that his big house is not really an asset, and he found out that his college degrees and work experience did not help him in the real business world or in the investment markets. The real world is very different than the world of education or the government. What he invested in will not pay off in the real world.”

It Takes Little Financial Intelligence to Save Money

In my previous books I wrote about the three different types of education. They are:

1. Academic education

2. Professional education

3. Financial education

My poor dad was well educated in the first two. My rich dad was very well educated in the third level, the level of financial education. When ERISA was passed, rich dad quickly realized that the law failed to make universal finan-cial education essential. In 1988, he also found out that some financial advisors were by law limited in what kind of advice they could offer. The result is that most people will do what they always do. They will not make the transition from the E or S quadrant to the I quadrant when they retire.

Again taking his legal pad, rich dad pointed to his comparison between what the middle class thought was important and the rich. Pointing to the word save he said, “How much financial intelligence does it take to save money?”

“I don't know,” I replied. “I never really thought about it.”

“Well, in my opinion, it takes no financial intelligence at all. I could train a monkey to save money.” He chuckled. “And so many people think they're so smart for saving money. All one has to do is walk up to the bank teller, and if you're really incompetent, the teller will fill out the deposit slip for you. What is so hard about that? Saving money may be smart but it doesn't re quire much financial intelligence.”

“You could train a monkey to save money?”

“I'm sure I could,” smiled rich dad. “Look, I'm just making a point about how little financial intelligence most people have. If most people have trouble saving money, how much chance do they have when doing more sophisticated investments? Look at your dad. He is a highly educated man but he couldn't make a simple ice cream stand profitable. He was a saver but he was not an investor, much less a businessman. He had no business investing in that venture.”

“He felt he got cheated, but the facts were that he could not read a fi nancial statement or the prospectus on the franchise,” I said. “I asked him to have you look at the business and the numbers but his pride wouldn't allow that to happen. He said that you did not have a college degree so he would never ask you for any advice.”

Rich dad shook his head. Pointing to the investments that the rich invest in he said, “It takes financial education to invest in these investments . . . fi nancial education your dad does not have even though he has a college ed ucation,” he said, pointing to the investments of the rich.

RICH: Build business

Large real estate investments Private equity funds

Hedge funds

Personal money manager Private placements

Limited partnerships

Then pointing to the column of the middle class he said, “It takes very little financial education to invest in any of the investments this group invests in. As I said, I could train a monkey to save money, and after that I would train it to buy mutual funds. In fact every year someone has a contest where a monkey throws darts at a list of stocks to see if the monkey can beat the pros who pick stocks . . . and the monkey often wins.”

MIDDLE CLASS: Good education

High paying job Profession

Home

Savings

Retirement plan Mutual funds

Small real estate investments

“So the reason the middle class does not get rich is because of the lack of financial education?” I asked.

“Well, some do get rich,” said rich dad. “But without a sound financial education, it takes a lot of hard work to make a lot of money and it also takes a lot more money to stay rich. Also, the lower your financial IQ, the more at risk you put your money. That is why the middle class focuses on saving money while the rich focus on investing money. That is why the middle class often puts so much money into their home instead of investment real estate. The difference is financial education. If they had a better financial education they would understand why owning a home and saving money was really risky and why investing in investment real estate was more intelligent.”

“So after I rebuild my business, then I can begin investing in the invest-ments of the rich,” I said, pointing to the top line of what the rich invest in. “You can do what you want. Today I am only pointing out to you that people only invest in what they think is important. Many of my employees do not think their pension plan is important. They have other things to do with their money . . . things they think are more important,” said rich dad. “If you want to invest in the investments of the rich, I'm recommending you continue to invest in your financial education. If you have a high financial IQ, what seems risky to most people will be safe to you. And what seems safe to the poor and the middle class will seem risky to you. It's all a matter of what you think is important and that is what you will ultimately invest in. I leave that decision to you.”

Large stock market crash only frightens people with a limited financial edu cation. A large market crash is the best time to get rich for those with a strong financial education. As rich dad often said, “If you have a strong fi nancial education you are not worried about markets going up or down. You're just happy they are going up and down.”

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