MASTER the Rules of Investing by Kiyosaki and Buffet NOW
So you’ve heard about investing, but you’re not sure how to get started. It can be hard in the beginning if you don’t really have a roadmap to follow. And if you look at superstar investors like Warren Buffet or Robert Kiyosaki, then you may start to become overwhelmed with how you could get from where you are to where they have grown their fortunes.
But, just like anything, it’s all about understanding the basic rules that you need to master. And this is also true with investing. In fact, in this article, I’m going to share some of the rules of investing that Robert Kiyosaki and Warren Buffer talk about. Take these to heart, because they could help you really level up your investments for the future. Ready? Let’s go!
Understanding how to use other people’s money
The first rule is understanding how to use other people’s money. Or, put another way, how to use debt as leverage to generate income. According to Kiyosaki, it isn’t easy to do – and you have to build up a lot of financial intelligence and education – but it is a very fast way to become rich. I’ve always been a big believer in the idea that we can use debt to invest, but the trick is knowing how to do it right.
With debts, the more money you pay back, the less tax you have to pay. Think about it: if you have $100 and you pay back $100 with interest, then you don’t have to pay any taxes on that $100. You know what that means?
It means your net worth increases by $100! So when I say “borrowing,” I mean borrowing from a bank or credit union and paying them back with interest so that your net worth increases even more than it did before.
And if you’re using debt in the right way — by investing in real estate — then your net worth will increase exponentially over time as well! It’s not easy or fun at all times—you’ll have to learn new skills like budgeting and saving—but if you want to get rich, this is a powerful way to make that happen.
Understanding that cash isn’t a good investment
The second rule is understanding that cash isn’t a good investment. According to Warren Buffet, cash is never a good investment because it is almost guaranteed to go down in value over time. Instead, it is better to take your cash and use it to purchase assets.
Assets are investments that put money, on a regular basis, into your pocket. For example, if you buy some shares of a dividend producing index fund, then you are generating regular, passive income just by holding that asset in your investment account.
Or, if you directly own a business, or are part-owner of a business, even if you aren’t managing it on a day to day basis, your ownership in the business – as long as it is actually making money – is going to put more wealth into your accounts over time.
But if you are holding on to cash? Then all you’re going to do over the long term is lose money. Sure, you might want a small buffer in case of emergencies – i recommend 3 to 6 months worth of your expenses – but beyond that make sure you’re turning all of your cash into income producing assets.
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Understand the three types of income
The third rule is to understand the three types of income. Robert Kiyosaki shares that each of the types of income work in very different ways. But what are they? Well, the first is what most of us are familiar with: earned income.
This is when you work for money and get paid for it. It’s the same thing as being self-employed or working for yourself, so if you do this, you will first be taxes on that income before you have access to it. It is the most highly taxed type of income, so for that reason it is also the type you should try to get away from over time.
The second type of income is portfolio income. This is when you buy stocks and sell them again, or flip houses. If you get a stock and buy it for $100 and then you sell it a year later for $200, that $100 is your portfolio income.
This is also taxed pretty heavily, so it isn’t necessarily the best option, but the advantage it has over earned income is that you didn’t have to actively work for it to happen. You bought an investment, and then you sold it when it had grown it’s value.
The third type of income is passive income — and that is the one I mentioned just a moment ago. This is where you get paid from your assets. The benefit of these is that the tax rate on asset’s paying you is much different than on earned or portfolio income. Assets pay their own taxes and then give you your profit.
That is one of the reasons this is the ideal type of income to have. If you understand these three types of income, then you’ll be on your way to being able to make the right decisions for your financial future.
Understand with investing is understanding
The fourth rule to understand with investing is understanding that investing isn’t risky. Our perception of risk really comes from ourselves, more than it comes from the outside world. When we look in the mirror, Robert Kiyosaki says, what sort of person is looking back at us? What sort of investment can they tolerate?
If you think that real estate is risky, the truth is that it is only risky if you don’t know what you’re doing. But how else can you learn how to do it, if you don’t first try? But you know what else is risky?
Having no control over your financial future. And, believe it or not, working for someone else in a typical income-earning job, is something that is almost completely out of your hands. You don’t have control over your future – your employer does!
So, instead of focusing on acquiring income, focus on developing your financial education and intelligence, and creating assets that can generate money FOR you. That is FAR less risky.
Invest within your circle of competence
The final rule to understand, comes from Warren Buffet, and that is to invest within your circle of competence. What does that mean? Well, we all have things that we know well, and things we don’t know well.
The things we know are our circle of competence. And when you’re investing, it’s important to stay within that circle when making financial decisions. Just because your friends are excited about a specific opportunity – and it is in an area that you’re not familiar with – that doesn’t mean you should invest in it. In fact, it is better not to invest because it is beyond your area of expertise and knowledge.
Can you grow your competence? Of course, and part of becoming a better investor is developing your financial knowledge and intelligence to higher levels. But if you try to invest before you have become competent in that area then you’re setting yourself for some potential failures.
Here’s the thing, these five investment rules are really just the tip of the iceberg. There are a LOT more things to learn. But if you can really internalize these five to start with, then you’ll be on your way to growing and developing your financial I.Q. into the future. Of course, investing is just one part of the spectrum.
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