All of us always used to dream of having a comfortable life. But such is not as easy as 123. Nothing in this world exists in the easiest way we wanted to happen. Neither doing things as perfect as what we wanted to expect.
We should be satisfied always by what we have. However, we should learn how to nurture and develop them in order for us to grow into a more productive individual.
All the richness we are longing to have can only be attained only if we know how to stretch our limbs and learn how to stand and not only be satisfied with the way we crawl.
Ours is a possession of a great magnitude to conquer all odds. Whatever challenge that we might encounter, we should learn how to face them bravely and with full of optimism.
Showing posts with label Business. Show all posts
Showing posts with label Business. Show all posts
Friday, June 11, 2010
Tuesday, June 1, 2010
What is Financial Intelligence?
Do you ever wonder what’s the cause of the break up of marriages? It’s usually the subject of money. What if the breadwinner gets downsized? What if he lost his job?
Schools usually teach Scholastic Aptitude Test (SAT). You want to know how good you are in reading, writing and arithmetic. These are very important skills. And depending on how well did you perform in SAT, the next thing schools focus on is the Professional Aptitude Tests (PAT) to know whether you’ll become a doctor, a lawyer, a fireman, or whatever you want to be.
But what schools fail to train people on is the thing called Financial Intelligence. Rarely did the subject of money was discussed in schools. So what is Financial Intelligence?
If I gave a sum of money, say $10,000 to a group of people, then 80% of them might have nothing left at the end of the year. 60% of them would have earned $10,100 at the end of the year since they could have deposited it in banks to earn interest income. And 4% would have anywhere from $20,000 to $1,000,000 or more at the end of the year because they are financially intelligent.
There are two forms that one should learn in his desire to increase his financial intelligence. The income statement which involves two things - the income and expenses and the balance sheet which involves assets and liabilities. These are the very basic information that one should know to increase his financial intelligence.
What’s the difference between an asset and a liability? Robert Kiyosaki always tell that assets are something that puts money in a person’s pocket while liabilities are something thing that puts money out of a person’s pocket. There is always the issue of the house being an asset or a liability being debated a lot of times.
Kiyosaki further said that “If I stopped working, the ASSETS will FEED ME while LIABILITIES will EAT ME.”
Another important lesson in increasing one’s financial intelligence is the subject called CASHFLOW. There is a huge difference between the cashflow of a poor person, middle class person and rich person.
For the poor people, Kiyosaki said that all they have is a job. Then income comes in from the job. It goes down to expenses to pay their rent, clothing, food and other expenses and goes out of their pockets.
For the classic middle class person, Kiyosaki said that it’s a little bit more different. Income also comes from their jobs. Then it will now go to liabilities as they may probably have house mortgage payments, car mortgage payments, etc. and then it will go to expenses and then finally out of their pockets.
For the rich person, Kiyosaki said that income comes from the their assets. While the poor and middle class persons are focusing on income, the rich person is focusing on the assets. And the assets are the great secret of the rich.
THE CHOICE IS YOURS
Everytime you have income from your job, then the choice is yours. It will now depend to you what do you want to be. Is it the poor, the middle class or the rich person mentioned above? If every income goes outright to expenses, then you chose to be poor person. If every income goes out to liabilities to buy a bigger house, a new car, or you always take a vacation on your credit card, then what you chose is a middle class person. And if every income, you chose it to go to the assets, then you make that decision to be a rich person.
MIND YOUR BUSINESS!
Kiyosaki said that if we want to be financially intelligent, we should mind our own businesses! How is that? The poor people being a professional employee are not minding their own business because they mind the business of the shareholders of the company, and not only that because they also mind the business of the government when it comes to tax payments. The middle class person being a professional employee, aside from minding the business like the poor people did, also minds the business of banks as they have house and car mortgage payments. For the rich people, they mind their own business. They trade their own stocks, buy their own properties and primarily make their decisions to invest.
Kiyosaki said that most people are in the poor and middle class because they mind other person’s business. They believe in hardwork without being financially literate. They don’t know that if their income was raised because of hard work, so their taxes too. And they buy more liabilities that are camouflaged as assets because they mind what other people tells them. So their income increased because of hard work, their expenses increased too from their tax expenses and their liabilities increased too. Suddenly, they lost their jobs! Boom! What happens next? They lose their income. But will the expenses and liabilities lose too? Definitely NOT! And this causes financial insecurity or financial struggle on their end.
The answer as Kiyosaki said lies on focusing on your own business and instead have your own money work for you so that even if you lost your job, then there will be assets that will continue to feed you. We could not ascertain the lives of companies. They may be there for 5, 10 or even 20 years but few can survive 50 years or more especially nowadays that a lot of companies declare bankruptcies as the global recession continues.
THE RICH PERSON ON TAXES:
Kiyosaki said that there is a huge difference between how the income of both the poor and middle class persons were taxed as against the income of the rich person. The poor people earns income from their jobs and gets taxed right away before they can spend what remained. The rich people earns income from their jobs and assets, they spend some of it by buying more assets and then they get taxed as they cash in these assets.
Finally, Kiyosaki devised a game simulating the real world of business and investing called the cashflow game which I already played several times. One of the foundations of learning is repetition. The more you play the cashflow game, the higher the possiblity of increasing your financial intelligence and the richer you would become.
So are you financially intelligent?
Schools usually teach Scholastic Aptitude Test (SAT). You want to know how good you are in reading, writing and arithmetic. These are very important skills. And depending on how well did you perform in SAT, the next thing schools focus on is the Professional Aptitude Tests (PAT) to know whether you’ll become a doctor, a lawyer, a fireman, or whatever you want to be.
But what schools fail to train people on is the thing called Financial Intelligence. Rarely did the subject of money was discussed in schools. So what is Financial Intelligence?
If I gave a sum of money, say $10,000 to a group of people, then 80% of them might have nothing left at the end of the year. 60% of them would have earned $10,100 at the end of the year since they could have deposited it in banks to earn interest income. And 4% would have anywhere from $20,000 to $1,000,000 or more at the end of the year because they are financially intelligent.
There are two forms that one should learn in his desire to increase his financial intelligence. The income statement which involves two things - the income and expenses and the balance sheet which involves assets and liabilities. These are the very basic information that one should know to increase his financial intelligence.
What’s the difference between an asset and a liability? Robert Kiyosaki always tell that assets are something that puts money in a person’s pocket while liabilities are something thing that puts money out of a person’s pocket. There is always the issue of the house being an asset or a liability being debated a lot of times.
Kiyosaki further said that “If I stopped working, the ASSETS will FEED ME while LIABILITIES will EAT ME.”
Another important lesson in increasing one’s financial intelligence is the subject called CASHFLOW. There is a huge difference between the cashflow of a poor person, middle class person and rich person.
For the poor people, Kiyosaki said that all they have is a job. Then income comes in from the job. It goes down to expenses to pay their rent, clothing, food and other expenses and goes out of their pockets.
For the classic middle class person, Kiyosaki said that it’s a little bit more different. Income also comes from their jobs. Then it will now go to liabilities as they may probably have house mortgage payments, car mortgage payments, etc. and then it will go to expenses and then finally out of their pockets.
For the rich person, Kiyosaki said that income comes from the their assets. While the poor and middle class persons are focusing on income, the rich person is focusing on the assets. And the assets are the great secret of the rich.
THE CHOICE IS YOURS
Everytime you have income from your job, then the choice is yours. It will now depend to you what do you want to be. Is it the poor, the middle class or the rich person mentioned above? If every income goes outright to expenses, then you chose to be poor person. If every income goes out to liabilities to buy a bigger house, a new car, or you always take a vacation on your credit card, then what you chose is a middle class person. And if every income, you chose it to go to the assets, then you make that decision to be a rich person.
MIND YOUR BUSINESS!
Kiyosaki said that if we want to be financially intelligent, we should mind our own businesses! How is that? The poor people being a professional employee are not minding their own business because they mind the business of the shareholders of the company, and not only that because they also mind the business of the government when it comes to tax payments. The middle class person being a professional employee, aside from minding the business like the poor people did, also minds the business of banks as they have house and car mortgage payments. For the rich people, they mind their own business. They trade their own stocks, buy their own properties and primarily make their decisions to invest.
Kiyosaki said that most people are in the poor and middle class because they mind other person’s business. They believe in hardwork without being financially literate. They don’t know that if their income was raised because of hard work, so their taxes too. And they buy more liabilities that are camouflaged as assets because they mind what other people tells them. So their income increased because of hard work, their expenses increased too from their tax expenses and their liabilities increased too. Suddenly, they lost their jobs! Boom! What happens next? They lose their income. But will the expenses and liabilities lose too? Definitely NOT! And this causes financial insecurity or financial struggle on their end.
The answer as Kiyosaki said lies on focusing on your own business and instead have your own money work for you so that even if you lost your job, then there will be assets that will continue to feed you. We could not ascertain the lives of companies. They may be there for 5, 10 or even 20 years but few can survive 50 years or more especially nowadays that a lot of companies declare bankruptcies as the global recession continues.
THE RICH PERSON ON TAXES:
Kiyosaki said that there is a huge difference between how the income of both the poor and middle class persons were taxed as against the income of the rich person. The poor people earns income from their jobs and gets taxed right away before they can spend what remained. The rich people earns income from their jobs and assets, they spend some of it by buying more assets and then they get taxed as they cash in these assets.
Finally, Kiyosaki devised a game simulating the real world of business and investing called the cashflow game which I already played several times. One of the foundations of learning is repetition. The more you play the cashflow game, the higher the possiblity of increasing your financial intelligence and the richer you would become.
So are you financially intelligent?
Secrets of the Rich: Active Income vs. Passive Income
I’ve been spending my time lately really educating myself on financial literacy. I admit my job has been so boring and not challenging so instead of killing myself to boredom, I’ve been using my additional time efficiently and effectively by adding additional knowledge on my financial education.
In addition to my article, “what’s makes rich gets richer?” I’ve recently watched a video of Robert G. Allen, the author of the best selling books Nothing Down and Creating Wealth as he discussed the difference between linear income vs. residual income.
I came to these two terms before when I first knew about Cashflow Quadrant of Robert Kiyosaki. To him, there are two main divisions of the cash flow. One is Active Income where you work for money and one is Passive Income where money works for you. In Robert Allen’s video, Active Income is also called Linear Income and Passive Income is also called Residual Income.
Now, how do you distinguish between the two? Ask yourself the following questions:
How many times do you get paid for every hour you work? If your answer is only once, then it’s active income! In active income, one hour of effort equals one unit of money one time. However, in passive income, you will get paid many times for every hour of effort. A doctor can only see one patient at a time so he gets paid for every patient that he has.
Do you have to be present to earn income? If your answer is yes, then that’s active income. If your answer is no, then that’s passive income. A lawyer earns active income by presently attending to his clients.
Did you get the picture? Passive income is a stream of income that you can own. It can be a “hands-off” income. It’s an automatic pilot. The secret of the rich is to increase their streams of income. This is done not by increasing their active income by taking a second or even a third job but by increasing their passive income. Now, where can we get this passive income?
Here are some of the sources:
Interest Income. Yes, we can earn passive income from the interests of our savings deposits. We can also earn passive income through the interests of our bonds.
Dividends. We can also earn passive income through our stock investments. Companies share their income to their stockholders by either giving them cash or stock dividends for every share they own. Alternatively, we can also earn it through the dividends of our mutual funds or uitfs. Or probably from insurance policies which also gives dividends.
Real Estate. Real estate investments can also earn us passive income. My ideal real estate is a self-liquidating asset. That is you buy a property, pay the down payment only not the whole contract price, and rent it out to tenants. The monthly rental income from the tenant itself will be the one paying for the monthly amortization of the mortgage to the bank. The rental income will be our passive income in this case.
Royalties. Ever wonder why even though Elvis Presley was now dead, he still earns income? Yes, that’s the power of passive income! His albums that he did before when he was still living continuously earn royalty income for him. For every album sold, he gets a royalty fee that’s why even he’s dead, he is still earning.
The same goes for the author of books. Just imagine how rich J.K. Rowling, the author of Harry Potter, has become. She might be getting pennies for every sold copy of her book but it gets multiplied a million times as her Harry Potter is a best seller book with millions of copies sold. Not only that, she also gets royalty fees from the film Harry Potter series itself.
Another source of royalty income is thru franchise fees. The original owner of the business gets a royalty income for every franchisee that he has. Just imagine how rich are the original owners of McDonalds now that it has thousands of franchisees worldwide.
Websites. With the coming of industrial age, successful internet entrepreneurs have also built passive income thru their blogs or websites. I have seen a few of them and one perfect example might be one of the largest adsense earners. His website, one of the largest dating websites called Plenty Of Fish, attracts millions of visitors per month enabling him to earn an easy US$1 Million per year.
Networking. This is also called MLM of Multi Level Marketing System. This is another form of passive income yet a lot disagrees to its pyramiding concept. It’s like building a team of sales people who will provide you with huge passive income as your group and sales increase.
So there you are the sources of passive income. The secrets of the rich is to increase the streams of income more on the passive income rather than on the active income so that if one stream of income dries up, there will be other streams to support them. This what makes rich gets richer.
Someday, if God permits, I would like to be an author of a book. I would personally want to have passive income from its royalty fees. Or possibly buy a real estate where I can have passive income through rental income of tenants. As of now, I rely on my active income from my paychecks with just a very little passive income from interests on savings and dividends from stocks.
Do you still have other sources of passive income in mind?
In addition to my article, “what’s makes rich gets richer?” I’ve recently watched a video of Robert G. Allen, the author of the best selling books Nothing Down and Creating Wealth as he discussed the difference between linear income vs. residual income.
I came to these two terms before when I first knew about Cashflow Quadrant of Robert Kiyosaki. To him, there are two main divisions of the cash flow. One is Active Income where you work for money and one is Passive Income where money works for you. In Robert Allen’s video, Active Income is also called Linear Income and Passive Income is also called Residual Income.
Now, how do you distinguish between the two? Ask yourself the following questions:
How many times do you get paid for every hour you work? If your answer is only once, then it’s active income! In active income, one hour of effort equals one unit of money one time. However, in passive income, you will get paid many times for every hour of effort. A doctor can only see one patient at a time so he gets paid for every patient that he has.
Do you have to be present to earn income? If your answer is yes, then that’s active income. If your answer is no, then that’s passive income. A lawyer earns active income by presently attending to his clients.
Did you get the picture? Passive income is a stream of income that you can own. It can be a “hands-off” income. It’s an automatic pilot. The secret of the rich is to increase their streams of income. This is done not by increasing their active income by taking a second or even a third job but by increasing their passive income. Now, where can we get this passive income?
Here are some of the sources:
Interest Income. Yes, we can earn passive income from the interests of our savings deposits. We can also earn passive income through the interests of our bonds.
Dividends. We can also earn passive income through our stock investments. Companies share their income to their stockholders by either giving them cash or stock dividends for every share they own. Alternatively, we can also earn it through the dividends of our mutual funds or uitfs. Or probably from insurance policies which also gives dividends.
Real Estate. Real estate investments can also earn us passive income. My ideal real estate is a self-liquidating asset. That is you buy a property, pay the down payment only not the whole contract price, and rent it out to tenants. The monthly rental income from the tenant itself will be the one paying for the monthly amortization of the mortgage to the bank. The rental income will be our passive income in this case.
Royalties. Ever wonder why even though Elvis Presley was now dead, he still earns income? Yes, that’s the power of passive income! His albums that he did before when he was still living continuously earn royalty income for him. For every album sold, he gets a royalty fee that’s why even he’s dead, he is still earning.
The same goes for the author of books. Just imagine how rich J.K. Rowling, the author of Harry Potter, has become. She might be getting pennies for every sold copy of her book but it gets multiplied a million times as her Harry Potter is a best seller book with millions of copies sold. Not only that, she also gets royalty fees from the film Harry Potter series itself.
Another source of royalty income is thru franchise fees. The original owner of the business gets a royalty income for every franchisee that he has. Just imagine how rich are the original owners of McDonalds now that it has thousands of franchisees worldwide.
Websites. With the coming of industrial age, successful internet entrepreneurs have also built passive income thru their blogs or websites. I have seen a few of them and one perfect example might be one of the largest adsense earners. His website, one of the largest dating websites called Plenty Of Fish, attracts millions of visitors per month enabling him to earn an easy US$1 Million per year.
Networking. This is also called MLM of Multi Level Marketing System. This is another form of passive income yet a lot disagrees to its pyramiding concept. It’s like building a team of sales people who will provide you with huge passive income as your group and sales increase.
So there you are the sources of passive income. The secrets of the rich is to increase the streams of income more on the passive income rather than on the active income so that if one stream of income dries up, there will be other streams to support them. This what makes rich gets richer.
Someday, if God permits, I would like to be an author of a book. I would personally want to have passive income from its royalty fees. Or possibly buy a real estate where I can have passive income through rental income of tenants. As of now, I rely on my active income from my paychecks with just a very little passive income from interests on savings and dividends from stocks.
Do you still have other sources of passive income in mind?
My First Financial Planning Seminar
Last July 31, I was given the chance to be a resource speaker for the very first financial planning seminar that I conducted. I was at first nervous as this was my very first speaking stint but that nervousness was slowly swallowed as I discussed my topics.
It was a success! It was attended by around 50 attendees from our company. I was first introduced as a BS Mathematics graduate from Ateneo de Manila University, mentioned my two former employment background and my feature in Good House Keeping magazine as financial expert.
A lot of thanks for that introduction. I’ve never been given such recognition in my entire life. After that, I started discussing my financial planning powerpoint presentation.
For the readers of this blog, I would present here the details of my handout given to those who attended so that at least even though you were not able to attend, it’s as if you attended my first financial planning seminar. Basically, it’s just a summary of some of the contents of this blog.
Goals:
Goals empower us. It gives us direction. Life is full of paths. We can either go in the right direction or in the wrong direction. Goals provide us the right direction. It sets our priorities. It gives us the motivation.
When you list down your goals, you are giving direction to your life. In listing your goals, list them “smartly”. S-Specific, M-Manageable, A-Achievable, R-Realistic, T-Time Bound
S-Specific. Our goals should be specified to give us direction. To set a specific goal, it must answer any one of the following “W” questions:
o Who: Who is involved?
o What: What do I want to accomplish?
o Where: Identify a location
o When: Establish a time frame
o Which: Identify requirement and constraints
o Why: Specific reasons, purpose or benefits of accomplishing the goal.
Sample: I want to become a millionaire! But a specific goal would say, “Get a job for 10 years, establish your own food business and use your network of friends and acquaintances”
M – Measurable. To determine if your goal is measurable, ask questions such as “How much?” “How many?” “How will I know when it is accomplished?” Sample: I want to become a millionaire by age of 26!
A – Achievable. When you identify goals that are most important to you, you begin to figure out ways on how to achieve them. In the process, you develop the attitudes, abilities, skills, talents and capacity to achieve them. When you list your goals, you see yourself as worthy of these goals.
R – Realistic. To be realistic, a goal must have an objective that you are both “willing” and “able” to work. If you truly “believe” that you can achieve your goal, then it is realistic.
T – Time Bound. Goal should be grounded by time frame because if there’s no time frame, then there’s no sense of urgency. If you just say, “someday” then it won’t work. By setting a time frame, you are setting your mind to begin working in achieving that goal.
ABC to achieve goals:
ASPIRE: You start with what you want to achieve. Be specific; follow the “S-M-A-R-T” goal system. You say to yourself: “I WILL ACHIEVE THIS!”
BELIEVE: After you’ve listed down the goals that you aspire, believe in yourself that you can achieve it! I already saw a lot of people achieved it, if they can do it, then why won’t I? You say to yourself: “I CAN DO IT!”
COMMIT: The next step is to commit. This is the hardest part because your patience, attitude and determination will be tested to its fullest. It’s a test for survival. You say to yourself: “I WILL NEVER GIVE UP!”
Law of Attraction: Positive Thinking + Action = Goals
- Napoleon Hill (author of Think and Grow Rich): We become what we think about
- Newton’s Universal Gravitation: Every object in the universe was attracted by every other object -> e=mc2
- WILL POWER: What your mind conceives, your body can achieve.
Examples of Will Power:
Marathon Race: At the start of the game, the runner conditions his mind. His will power says: “I CAN DO IT!” This will power pushes his body to try harder and run faster to overcome opponents. It was the soul driving the body. The power was not in the muscles but in his will! You will notice that at the end of the race, the will let up and the body will collapse.
Rags to Riches Story: They never consider their economic status to be a hindrance to become successful in life.
Roselle Ambubuyog: A BS Mathematics student in Ateneo who graduated Summa Cum Laude and got the title valedictorian of the Year! - BUT both eyes are blind.
Motivational Quotes:
- “I will do today what other people won’t so that I can have tomorrow what other people can’t”
- “When you want something, all the universe will conspire in helping you to achieve it”
- “Show me a person backed with passion, conviction and resolve and I’ll show you a winner”
- “When a team of dedicated individuals makes a commitment to act as one, the sky is the limit”
Frugality: Ways to Manage Funds in Work Life
- Pay yourself first:
Income – Savings = Expense
Pareto’s Principle of 80/20:
- In business, put most of your efforts on the 20% of things that bring 80% of income to your business.
- In saving, put at least 20% to savings.
Frugality: Ways to Manage Funds in Home Life
Save Money on Electric Bills
- Drop the temp. Lower the temperature on your water heater’s thermostat
- Change bulbs. Compact Fluorescent Lamps (CFLs) use a quarter of the electricity of regular incandescent light bulbs.
- Check filters. Remember to replace aircon filters and heat-pump filters to keep these systems running efficiently.
- Pull the plug. Remember to pull the plug for any electrical appliances that are not in use.
Save Money on Water Bills
o Get a gadget. Get yourself a low-flow faucet aerator. It uses less water while increasing water pressure.
o Fix leaks. Check for leaks in pipes, hoses, especially in the toilet.
o Recycle water. Collect rain water to water the plants. Just be sure not to stock it very long to avoid developing a breeding ground for dengue.
o Add a hose nose. Use a hose with a shut-off nozzle when you water the plants so that there will be no wasted water if the hose is not in use.
o Wash full loads. Cleaning less than a full load of clothes or dishes wastes both water and energy.
Frugality: Ways to Manage Funds in Family Life
Save Money in Dining and Entertainment
o Know before you go. Scan over your local newspaper, check radio stations and company websites for coupons, promos, and special discounts.
o Master menu magic. Drink water instead of ice teas, alcoholic beverages, and juices. Bypass that meaty main dish. Order a meatless meal or if it’s not enough, try two appetizers or several side orders.
o Get discount coupons. Take advantage of discount coupons and treats given by sales persons in different malls.
o Win your treat. Join contest that have prices for gift certificates, free movie passes, and free vacation packages. Some of these contests are held in radio stations.
o Ask to pay less. Use discount treats that come along with your credit card. Or if you are a senior citizen or a student, ask if they have special promos for you.
o Keep your fun cheap. Attend free cultural events and other low-priced entertainment. Or just watch a DVD movie at home with your friends.
Investments: Making Your Money Work For You
Emergency Bank
o Set up a minimum of 6 months up to one year of your monthly income for your emergency fund to cover up for emergency expenses such as job layoffs, hospitalization, and other emergency expenses
Evaluate Your Investments: Risk, Liquidity, Return
o Risk is the possibility of losing the amount you invested
Risk-Averse
Moderate Risk
Risky
o Liquidity is how an investment can easily turn back to cash
How urgent do you need your money now?
o Return is the interest income of the investment or ROI
The higher the return that we want, the riskier the investment
Investment Lessons You Need To Know
o Your Enemy: Inflation. Inflation is the rise of prices of commodity. It depreciates the purchasing power of our currency. Therefore, we must find a good investment that has returns higher than the annual inflation rate.
o Your Ally: Time. Time is of essence to investment because it takes time for you to reap the returns of your investment. In a simple savings account, time is beneficial as portrayed by compound interest.
o Know your investments. Be sure to know what the sources of the returns are and how those returns were made. Understand and learn in the process.
o Diversify. Diversify all your investments not only in one type of investment but also to others so that if it fails, you don’t lose everything.
o Minimize unnecessary expenses and taxes. Look for investments that have low taxes and other unnecessary expenses because it depletes the possible return for your money.
o Match your investment with your risk appetite: Evaluate each investment with risk, return and liquidity
o Start early. The early bird catches the worm. Time is essential in investment.
Investments: Where to Invest Extra Cash?
Risk-Averse:
o Savings Account
Lend money to bank and bank will invest it. In return, bank will give you low interest but you can withdraw our money anytime.
o Time Deposits
Lend money to bank and bank will invest it. In return, bank will give you higher interest but your investment is subject to a withholding period and you cannot withraw your money anytime you want.
o Special Deposit Account (SDAs)
You lend your money to Bangko Sentral ng Pilipinas like a bond and they will give you higher interest but it requires a huge capital ranging from 100K to 1M.
Moderate Risk:
Bonds – Investment Outlet Units (IOUs). You lend your money to corporation and they will pay you interest (corporate bonds)
Risky:
o Stock Market
o Real Estate
Robert Kiyosaki: Increase your financial intelligence
Rat Race – a term coined by Kiyosaki to mimic our general income-spend attitude (i.e., when you receive your pay, you expense it out right away to pay bills, buy clothes, etc.)
Cash flow quadrant:
o Employee – These are people who work for a boss and who love security. No work, no pay.
o Self-Employed – They work for themselves and don’t have a boss. They can decide for themselves. These are people who love to be independent (i.e. doctors, lawyers, etc.) No work, no pay.
o Big Business Owner – They love delegating tasks. They concentrate more on activities which produces most profits. They hire people who are more intelligent than them to make them rich.
o Investor – People who already built assets. These assets are working hard for them to make them rich. They don’t work for money but their money is working hard for them.
Robert Kiyosaki: Secrets of the Rich
Secret 1: What is Financial Intelligence?
o Income statement and balance sheet – two important simple concepts you need to know to increase financial intelligence
o Asset vs. Liability – Assets provide cash to our pocket. Liabilities deplete cash from our pocket. Asset will FEED us. Liabilities will EAT us.
o Is house and asset or liability?
Secret 2: Cash Flow Patterns of Poor, Middle Class and Rich Persons
o Poor: Every income from job goes out to expenses right away
o Middle Class: Every income from job goes to liabilities that they thought are assets, and then eventually goes out as expenses
o Rich: Every income from job, they use to buy assets that will provide them passive income in the future.
Secret 3: Increase Passive Income
Robert Kiyosaki: Good Debt vs. Bad Debt
Good debt helps us manage our finances
Bad debt is a burden because it drains our finances
Debt leveraging: Using debt to your advantage
o Take advantage of credit cards
Cashless Transaction – credit cards allow cashless transactions that are less prone to hold ups and snatchers
Emergency Cash – credit cards have cash advance facility that you can use in case of emergency
Float Advantage – buy now pay later.
Huge Discounts – credit cards companies have tie ups with several merchants for discounts
Reward Points – accumulate points in exchange of freebies
Raffle Points – aside fro m reward points, credit card companies conduct raffle promos from time to time.
Robert Kiyosaki: Game of Money
1st Quarter (25-35 years old)
o Savings should be your top priority
o Learn investment options
o Get insurance
2nd Quarter (35-45 years old)
o Plan for your children’s future
o Make sure you have enough for your emergency bank
o Have a business
HALF TIME – Mid-Life Crisis
3rd Quarter (45-55 years old)
o Allocate much of your income to investment capital – review your investment portfolio and ask if you need to transfer funds to other nvestments
4th Quarter (55-65 years old)
o Protect your capital – try to preserve your capital so that you can live with on its interest, And make sure to make your last will in order.
OVER TIME
GAME OVER
Robert Kiyosaki: Cash Flow Game – From Rat Race to Fast Track
Doodads. Doodads are simply the expensive wants that we can’t resist.
Opportunity. Opportunites serve as deals for you to grab. It is broken down into two: small deal and big deal. Small deals are deals that involves small money while big deals involve large sums of money. Deals can either be stocks, mutual fund, business, or real estate opportunities.
Market. Markets serve as opportunities for holders of assets. When you land in this option, you are offered by a buyer.
Baby. Baby depicts the real happening of raising a family. In the game, when you land in this option, there will be an additional cost that will be added to your expenses. And there will be a maximum of 3 babies in the entire game.
Paycheck. Paycheck depicts the real world of employment.
Downsizing. Downsizing also depicts the real happening of being fired or unemployed. In this case, you will lose 2 turns and lose a portion of your cash to fund your needs.
Charity. Lastly, charity relies on the concept of the law of reciprocation.
THANK YOU!
I hope you enjoyed my very first financial planning seminar!
Unfortunately, the company does not want me to post pictures or posters of the seminar so I cannot post it. But thanks to the certificate given to me and little present from the team.
It was a success! It was attended by around 50 attendees from our company. I was first introduced as a BS Mathematics graduate from Ateneo de Manila University, mentioned my two former employment background and my feature in Good House Keeping magazine as financial expert.
A lot of thanks for that introduction. I’ve never been given such recognition in my entire life. After that, I started discussing my financial planning powerpoint presentation.
For the readers of this blog, I would present here the details of my handout given to those who attended so that at least even though you were not able to attend, it’s as if you attended my first financial planning seminar. Basically, it’s just a summary of some of the contents of this blog.
Goals:
Goals empower us. It gives us direction. Life is full of paths. We can either go in the right direction or in the wrong direction. Goals provide us the right direction. It sets our priorities. It gives us the motivation.
When you list down your goals, you are giving direction to your life. In listing your goals, list them “smartly”. S-Specific, M-Manageable, A-Achievable, R-Realistic, T-Time Bound
S-Specific. Our goals should be specified to give us direction. To set a specific goal, it must answer any one of the following “W” questions:
o Who: Who is involved?
o What: What do I want to accomplish?
o Where: Identify a location
o When: Establish a time frame
o Which: Identify requirement and constraints
o Why: Specific reasons, purpose or benefits of accomplishing the goal.
Sample: I want to become a millionaire! But a specific goal would say, “Get a job for 10 years, establish your own food business and use your network of friends and acquaintances”
M – Measurable. To determine if your goal is measurable, ask questions such as “How much?” “How many?” “How will I know when it is accomplished?” Sample: I want to become a millionaire by age of 26!
A – Achievable. When you identify goals that are most important to you, you begin to figure out ways on how to achieve them. In the process, you develop the attitudes, abilities, skills, talents and capacity to achieve them. When you list your goals, you see yourself as worthy of these goals.
R – Realistic. To be realistic, a goal must have an objective that you are both “willing” and “able” to work. If you truly “believe” that you can achieve your goal, then it is realistic.
T – Time Bound. Goal should be grounded by time frame because if there’s no time frame, then there’s no sense of urgency. If you just say, “someday” then it won’t work. By setting a time frame, you are setting your mind to begin working in achieving that goal.
ABC to achieve goals:
ASPIRE: You start with what you want to achieve. Be specific; follow the “S-M-A-R-T” goal system. You say to yourself: “I WILL ACHIEVE THIS!”
BELIEVE: After you’ve listed down the goals that you aspire, believe in yourself that you can achieve it! I already saw a lot of people achieved it, if they can do it, then why won’t I? You say to yourself: “I CAN DO IT!”
COMMIT: The next step is to commit. This is the hardest part because your patience, attitude and determination will be tested to its fullest. It’s a test for survival. You say to yourself: “I WILL NEVER GIVE UP!”
Law of Attraction: Positive Thinking + Action = Goals
- Napoleon Hill (author of Think and Grow Rich): We become what we think about
- Newton’s Universal Gravitation: Every object in the universe was attracted by every other object -> e=mc2
- WILL POWER: What your mind conceives, your body can achieve.
Examples of Will Power:
Marathon Race: At the start of the game, the runner conditions his mind. His will power says: “I CAN DO IT!” This will power pushes his body to try harder and run faster to overcome opponents. It was the soul driving the body. The power was not in the muscles but in his will! You will notice that at the end of the race, the will let up and the body will collapse.
Rags to Riches Story: They never consider their economic status to be a hindrance to become successful in life.
Roselle Ambubuyog: A BS Mathematics student in Ateneo who graduated Summa Cum Laude and got the title valedictorian of the Year! - BUT both eyes are blind.
Motivational Quotes:
- “I will do today what other people won’t so that I can have tomorrow what other people can’t”
- “When you want something, all the universe will conspire in helping you to achieve it”
- “Show me a person backed with passion, conviction and resolve and I’ll show you a winner”
- “When a team of dedicated individuals makes a commitment to act as one, the sky is the limit”
Frugality: Ways to Manage Funds in Work Life
- Pay yourself first:
Income – Savings = Expense
Pareto’s Principle of 80/20:
- In business, put most of your efforts on the 20% of things that bring 80% of income to your business.
- In saving, put at least 20% to savings.
Frugality: Ways to Manage Funds in Home Life
Save Money on Electric Bills
- Drop the temp. Lower the temperature on your water heater’s thermostat
- Change bulbs. Compact Fluorescent Lamps (CFLs) use a quarter of the electricity of regular incandescent light bulbs.
- Check filters. Remember to replace aircon filters and heat-pump filters to keep these systems running efficiently.
- Pull the plug. Remember to pull the plug for any electrical appliances that are not in use.
Save Money on Water Bills
o Get a gadget. Get yourself a low-flow faucet aerator. It uses less water while increasing water pressure.
o Fix leaks. Check for leaks in pipes, hoses, especially in the toilet.
o Recycle water. Collect rain water to water the plants. Just be sure not to stock it very long to avoid developing a breeding ground for dengue.
o Add a hose nose. Use a hose with a shut-off nozzle when you water the plants so that there will be no wasted water if the hose is not in use.
o Wash full loads. Cleaning less than a full load of clothes or dishes wastes both water and energy.
Frugality: Ways to Manage Funds in Family Life
Save Money in Dining and Entertainment
o Know before you go. Scan over your local newspaper, check radio stations and company websites for coupons, promos, and special discounts.
o Master menu magic. Drink water instead of ice teas, alcoholic beverages, and juices. Bypass that meaty main dish. Order a meatless meal or if it’s not enough, try two appetizers or several side orders.
o Get discount coupons. Take advantage of discount coupons and treats given by sales persons in different malls.
o Win your treat. Join contest that have prices for gift certificates, free movie passes, and free vacation packages. Some of these contests are held in radio stations.
o Ask to pay less. Use discount treats that come along with your credit card. Or if you are a senior citizen or a student, ask if they have special promos for you.
o Keep your fun cheap. Attend free cultural events and other low-priced entertainment. Or just watch a DVD movie at home with your friends.
Investments: Making Your Money Work For You
Emergency Bank
o Set up a minimum of 6 months up to one year of your monthly income for your emergency fund to cover up for emergency expenses such as job layoffs, hospitalization, and other emergency expenses
Evaluate Your Investments: Risk, Liquidity, Return
o Risk is the possibility of losing the amount you invested
Risk-Averse
Moderate Risk
Risky
o Liquidity is how an investment can easily turn back to cash
How urgent do you need your money now?
o Return is the interest income of the investment or ROI
The higher the return that we want, the riskier the investment
Investment Lessons You Need To Know
o Your Enemy: Inflation. Inflation is the rise of prices of commodity. It depreciates the purchasing power of our currency. Therefore, we must find a good investment that has returns higher than the annual inflation rate.
o Your Ally: Time. Time is of essence to investment because it takes time for you to reap the returns of your investment. In a simple savings account, time is beneficial as portrayed by compound interest.
o Know your investments. Be sure to know what the sources of the returns are and how those returns were made. Understand and learn in the process.
o Diversify. Diversify all your investments not only in one type of investment but also to others so that if it fails, you don’t lose everything.
o Minimize unnecessary expenses and taxes. Look for investments that have low taxes and other unnecessary expenses because it depletes the possible return for your money.
o Match your investment with your risk appetite: Evaluate each investment with risk, return and liquidity
o Start early. The early bird catches the worm. Time is essential in investment.
Investments: Where to Invest Extra Cash?
Risk-Averse:
o Savings Account
Lend money to bank and bank will invest it. In return, bank will give you low interest but you can withdraw our money anytime.
o Time Deposits
Lend money to bank and bank will invest it. In return, bank will give you higher interest but your investment is subject to a withholding period and you cannot withraw your money anytime you want.
o Special Deposit Account (SDAs)
You lend your money to Bangko Sentral ng Pilipinas like a bond and they will give you higher interest but it requires a huge capital ranging from 100K to 1M.
Moderate Risk:
Bonds – Investment Outlet Units (IOUs). You lend your money to corporation and they will pay you interest (corporate bonds)
Risky:
o Stock Market
o Real Estate
Robert Kiyosaki: Increase your financial intelligence
Rat Race – a term coined by Kiyosaki to mimic our general income-spend attitude (i.e., when you receive your pay, you expense it out right away to pay bills, buy clothes, etc.)
Cash flow quadrant:
o Employee – These are people who work for a boss and who love security. No work, no pay.
o Self-Employed – They work for themselves and don’t have a boss. They can decide for themselves. These are people who love to be independent (i.e. doctors, lawyers, etc.) No work, no pay.
o Big Business Owner – They love delegating tasks. They concentrate more on activities which produces most profits. They hire people who are more intelligent than them to make them rich.
o Investor – People who already built assets. These assets are working hard for them to make them rich. They don’t work for money but their money is working hard for them.
Robert Kiyosaki: Secrets of the Rich
Secret 1: What is Financial Intelligence?
o Income statement and balance sheet – two important simple concepts you need to know to increase financial intelligence
o Asset vs. Liability – Assets provide cash to our pocket. Liabilities deplete cash from our pocket. Asset will FEED us. Liabilities will EAT us.
o Is house and asset or liability?
Secret 2: Cash Flow Patterns of Poor, Middle Class and Rich Persons
o Poor: Every income from job goes out to expenses right away
o Middle Class: Every income from job goes to liabilities that they thought are assets, and then eventually goes out as expenses
o Rich: Every income from job, they use to buy assets that will provide them passive income in the future.
Secret 3: Increase Passive Income
Robert Kiyosaki: Good Debt vs. Bad Debt
Good debt helps us manage our finances
Bad debt is a burden because it drains our finances
Debt leveraging: Using debt to your advantage
o Take advantage of credit cards
Cashless Transaction – credit cards allow cashless transactions that are less prone to hold ups and snatchers
Emergency Cash – credit cards have cash advance facility that you can use in case of emergency
Float Advantage – buy now pay later.
Huge Discounts – credit cards companies have tie ups with several merchants for discounts
Reward Points – accumulate points in exchange of freebies
Raffle Points – aside fro m reward points, credit card companies conduct raffle promos from time to time.
Robert Kiyosaki: Game of Money
1st Quarter (25-35 years old)
o Savings should be your top priority
o Learn investment options
o Get insurance
2nd Quarter (35-45 years old)
o Plan for your children’s future
o Make sure you have enough for your emergency bank
o Have a business
HALF TIME – Mid-Life Crisis
3rd Quarter (45-55 years old)
o Allocate much of your income to investment capital – review your investment portfolio and ask if you need to transfer funds to other nvestments
4th Quarter (55-65 years old)
o Protect your capital – try to preserve your capital so that you can live with on its interest, And make sure to make your last will in order.
OVER TIME
GAME OVER
Robert Kiyosaki: Cash Flow Game – From Rat Race to Fast Track
Doodads. Doodads are simply the expensive wants that we can’t resist.
Opportunity. Opportunites serve as deals for you to grab. It is broken down into two: small deal and big deal. Small deals are deals that involves small money while big deals involve large sums of money. Deals can either be stocks, mutual fund, business, or real estate opportunities.
Market. Markets serve as opportunities for holders of assets. When you land in this option, you are offered by a buyer.
Baby. Baby depicts the real happening of raising a family. In the game, when you land in this option, there will be an additional cost that will be added to your expenses. And there will be a maximum of 3 babies in the entire game.
Paycheck. Paycheck depicts the real world of employment.
Downsizing. Downsizing also depicts the real happening of being fired or unemployed. In this case, you will lose 2 turns and lose a portion of your cash to fund your needs.
Charity. Lastly, charity relies on the concept of the law of reciprocation.
THANK YOU!
I hope you enjoyed my very first financial planning seminar!
Unfortunately, the company does not want me to post pictures or posters of the seminar so I cannot post it. But thanks to the certificate given to me and little present from the team.
Monday, May 31, 2010
Game of Money – Four Quarters of Life
Recently, I watched another video again of Robert Kiyosaki as now he talks about the so-called Game of Money where he described the four quarters of financial life dividing it into 10-year horizons and asked, “at which age will you win the game of money?”
Let’s view the four quarters of life with some inputs so that we know how will we win the game of money and retire as young as we can be.
1st Quarter (25-35 years old) – By this age, you’re probably done with your college education. Most of us start our careers when we land on our first quarter of life. We want a high-paying job, buy a car, have our credit cards and enjoy life. While many of us just want to enjoy life after graduation, it is advisable for us to:
Savings should be our top priority. When you receive your paycheck, take out a certain amount and deposit it in a savings account. Once you accumulated enough savings, transfer the bulk of it into a higher yielding deposit account. Compound interest will help it to earn more interest.
Get Insurance. Get insurance especially if you now have family and kids to support with at this age. The higher and the healthier you are, the cheaper insurance costs will be.
Learn Investment Options. Think of investment options where you can invest your extra cash. You can invest it in stocks, mutual funds, real estate, bonds, etc. Start to educate yourself financially.
2nd Quarter (35-45 years old) – By this age, you are probably at the top of your career and definitely earning much more. But this quarter may also be the time when you’re starting to have your own family so that also means higher expenses. It is advisable to:
Plan for children’s future. You are now working not just for yourself but also for your children. Plan for your children’s future by getting an educational plan or open a time deposit that’s under your children’s name and deposit an amount into it regularly.
Make sure you have enough for your emergency fund. Emergency fund is amount totally dedicated to emergency expenses such as health problems, etc. A good amount would be equal to six months up to 1 year of your monthly income. Place it in an easy accessible type of investment so that when your need arises, you can easily withdraw it.
Have a business. By this age, you could have probably known a lot of networks from friends, colleagues, acquaintances, etc. And since you’re earning much higher, then you could start your own business. Gauge yourself on what business you should start. Examine your passions and skills in choosing the right business for you.
Half Time – Kiyosaki referred after the 2nd Quarter as half time because you are in the middle before retirement. It’s also called as “mid-life crisis”. It is now time to examine yourself. You are not getting any younger anymore. Have you had enough savings to cover for your future? What did you accomplished in your life?
3rd Quarter (45-55 years old) – By this age, you are probably on top of you career, possibly a manager or vice president of the company. You could be earning more and your children may be in their college years or are already working. Retirement is just around the corner waiting for you. In this quarter of life, it is advisable to:
Allocate much of your income to investment capital. Review your investment portfolio and ask yourself if you need to transfer your funds into a higher earning investment scheme. Just be sure to have a through due diligence before you transfer your funds.
4th Quarter (55-65 years old) – By this age, your children may well be on their own now with their respective families already. You are now at the age where you can retire. You may choose to still be employed but it should not be on stressful work as you are now prone to health problems brought about by old age, which means higher health care expenses. In this age, it is advisable to:
Protect your capital. Try to preserve your capital so that you can live with on its interest. And make sure to make your last will in order.
Over Time – Kiyosaki referred after the 4th quarter as over time. If you haven’t had any accomplished things when it comes to your financial future, then that would be a great problem because sooner or later you would be “out of time” and the game of money will be “game over”.
We don’t want to retire old. As much as we could, we want to retire young so that we can still enjoy the things that we want. How could we enjoy it if we are already old with a lot of health problems associated with old age?
Personally, just like what Kiyosaki did retiring at the age of 47, I also want to win the game of money and retire on the second quarter of life. I want to enjoy life as early as I could without having to worry on going or having to work. And that is the very essence of financial freedom.
Journey to “FINANCIAL FREEDOM”
What is financial freedom? For me, it simply means having the freedom of time, a time where we can spend to the things that we enjoy and the things that are important to us.
Why do we need financial freedom? Ask yourself the following questions and you’ll find out the answer.
“If you are an employee, will you be willing to work for the rest of your life?”
“You keep working and working as an employee, who gets rich in the end? Is it you or your company?”
“Did you ever notice that as your pay increases as you work your way to climb that corporate ladder, your income taxes also increases?”
“Did you hear stories of some top executives who committed suicide or risked their health into diseases because of so much stress and failures that they faced from their respective careers?
“Did you hear stories of some children whose life were misled because of lack of guidance since their parents didn’t have enough time for them because of work?”
Everybody wants to have that freedom of time. We definitely don’t want to be working all our lives. And of course, we want to spend more time to the things that we enjoy and that are important to us which is our family.
Now how are we going to achieve it? What are the steps needed in the journey to financial freedom?
1. First, you must “Set Your Goals“. Make a checklist and monitor your performance as you move forward towards achieving those goals.
2. Second, you must have the proper discipline and mindset towards achieving it. You must have the mind and will power.
Think of positive things as it attracts opportunity.
3. Third, we must learn how to be frugal. We must live below our means.
4. Fourth, we must learn to invest. Assess yoursef first and choose where to invest that extra cash.
You can even learn how stock market works. Alternatively, you can also choose real estate investment.
Always remember what Robert Kiyosaki says: “Invest in assets and not in liabilities.”
5. Fifth, start as early as you can. There’s a saying that “the early bird catches the worm.” The earlier you started these steps to financial freedom, the earlier you can move closer to achieve it.
Finally, as an example, here are the steps that I climbed in my journey to financial freedom.
While it is through that money cannot buy happiness, money can buy our freedom of time. Achieve financial freedom and achieve that freedom of time.
Why do we need financial freedom? Ask yourself the following questions and you’ll find out the answer.
“If you are an employee, will you be willing to work for the rest of your life?”
“You keep working and working as an employee, who gets rich in the end? Is it you or your company?”
“Did you ever notice that as your pay increases as you work your way to climb that corporate ladder, your income taxes also increases?”
“Did you hear stories of some top executives who committed suicide or risked their health into diseases because of so much stress and failures that they faced from their respective careers?
“Did you hear stories of some children whose life were misled because of lack of guidance since their parents didn’t have enough time for them because of work?”
Everybody wants to have that freedom of time. We definitely don’t want to be working all our lives. And of course, we want to spend more time to the things that we enjoy and that are important to us which is our family.
Now how are we going to achieve it? What are the steps needed in the journey to financial freedom?
1. First, you must “Set Your Goals“. Make a checklist and monitor your performance as you move forward towards achieving those goals.
2. Second, you must have the proper discipline and mindset towards achieving it. You must have the mind and will power.
Think of positive things as it attracts opportunity.
3. Third, we must learn how to be frugal. We must live below our means.
4. Fourth, we must learn to invest. Assess yoursef first and choose where to invest that extra cash.
You can even learn how stock market works. Alternatively, you can also choose real estate investment.
Always remember what Robert Kiyosaki says: “Invest in assets and not in liabilities.”
5. Fifth, start as early as you can. There’s a saying that “the early bird catches the worm.” The earlier you started these steps to financial freedom, the earlier you can move closer to achieve it.
Finally, as an example, here are the steps that I climbed in my journey to financial freedom.
While it is through that money cannot buy happiness, money can buy our freedom of time. Achieve financial freedom and achieve that freedom of time.
Why do you need an Emergency Fund?
Life has a lot of uncertainties. You may not know that one day you’ve been hit by a calamity, you had an accident, you suddenly became ill, or your house got burned.
In these circumstances, you need to be prepared. In personal finance, it is often called “saving for the rainy days”. These savings is often called emergency fund that is often used when we encounter emergency situations.
WHERE SHOULD YOU PUT YOUR EMERGENCY FUND?
Since emergency funds are savings that should be used anytime you encounter an emergency situation, you should put it in a type of investment that is liquid, safe, and don’t have long holding period. We say that an investment is “more liquid” if it’s easily converted into cash. What are these types of investments?
ATM Savings Account - You can put your emergency fund by opening a regular savings account in a bank that is accessible through ATM. Choose the bank with the most number of branches so that you can almost anytime access your emergency fund when the need arises.
Passbook Savings Account - Alternatively, you can also use a passbook savings account to lessen the temptation to withdraw your funds just anytime you want since withdrawing from a passbook account is not as convenient as compared to an ATM account. You might want to open a passbook account with a bank that is nearer to your place and provides the highest interest.
Time deposits - If you are looking for a type of investment that can provide higher interests for your emergency fund, then you might as well consider time deposits. Just remember the holding period. You should consider the time deposit with the least holding period.
HOW DO YOU BUILD AN EMERGENCY FUND?
Pay yourself first: The easiest way to build an emergency fund is to pay yourself first. If you are employed, which I believe most of us are, set aside a portion of your salary every time you receive it. Depending on your expenses, the least amount advisable is 20% but of course, the higher the better.
One of the most useful personal finance equation is: INCOME - SAVINGS = EXPENSES. That is, set aside a portion of your salary as savings before you can spend the rest. Why? It is because savings is the most important expense as it buys your own future.
Budget. Learn to budget your money. Prioritize your expenses more on the needs and not on the wants. There are a lot of ways on how to squeeze your money into savings to build up your emergency fund.
HOW MUCH SHOULD YOU SAVE FOR AN EMERGENCY FUND?
The amount you need to save for an emergency fund depends on your situation. If you are the sole breadwinner of your family, it is advisable that you need to save at least 6 months to 1 year worth of living expenses. Compute you average monthly living expenses and you need to save 6 months up to 1 year worth of that. This is also enough just in case you get laid off in your job.
However, if you don’t have a lot of dependents or if you have other sources of income to support you, you might want to consider up to 3 months worth of your monthly living expenses.
Just remember if you were able to save for your emergency fund already, invest your extra cash in other types of investments where it can provide more interests for your money. Here are some of the options on where to invest your extra cash.
Power of Compound Interest
As I mentioned in my previous article on return on investments, we will now tackle the power of compound interest. You will see how powerful compound interest is as it is one of your allies in achieving financial freedom.
Let’s see how compound interest works by comparing simple interest vs. compound interest. You will see that it is really advantageous that you should really leave your money UNTOUCHED in the bank.
SCENARIO 1: Suppose you were able to save your first 100,000 at the age of 21. You decided to deposit it in the bank that gives a fixed 2% interest per year. You left it for 5 years.
Simple Interest:
Using the formula for simple interest where P is the principal amount, r is the interest and n is the number of years:
Interest = P multiply by r multiply by n = Prn = 100,000 (0.02) (5) = 10,000. So every year, your 100,000 earn 2,000 and after 5 years, it already earned 10,000.
Amount = P(1+rn) = 100,000 [1+(0.02)(5)] = 110,000. So your 100,000 became 110,000 after 5 years.
Compound Interest:
Using the formula for compound interest where ^ denotes exponent:
Amount = P[(1+r)^ n] = 100,000 [(1+0.02)^5] = 110,408.08. So your 100,000 became 110,408.08 after 5 years.
That means you have an extra interest of 408 as against the 110,000 earned using the simple interest. How did this happen? It is because your principal changes every year, as the interest earned every year now becomes part of the principal. To illustrate this, let’s see the computation below on the interests and principal amounts:
1st year interest = 100,000 (0.02) = 2,000. Add this interest to the original 100,000 principal, the new principal becomes 102,000.
2nd year interest = 102,000 (0.02) = 2040. Add this interest to the 102,000 principal, the new principal becomes 104,040.
3rd year interest = 104,040 (0.02) = 2,080.80. Add this interest to the 104,040 principal, the new principal becomes 106,120.80.
4th year interest = 106,120.80 (0.02) = 2,122.416. Add this interest to the 106,120.80 principal, the new principal becomes 108,243.22.
5th year interest = 108,243.22 (0.02) = 2,164.8644. Add this interest to the 108,243.22 principal, the new principal becomes 110,408.08.
Let’s see an example of frugal person leaving below his means, equipped with the right knowledge in investments and he regularly saves money.
SCENARIO 2: Suppose Charles is a frugal single person, age 21, living with his parents, and because of his employment and other sideline jobs, he was able to save 200,000 per year. He is equipped with the right knowledge in financial literacy and he was able to find a well performing fund that guarantees at least 10% fixed interest per year and he invested his money into it. How many years will it take him to be a millionaire?
Let’s see how powerful compound interest in this scenario given that he’s adding 200,000 each year to the principal.
1st year: 200,000 [1+0.10] = 220,000.
2nd year: 220,000 [1+0.10] + 200,000 = 442,000.
3rd year: 442,000 [1+0.10] + 200,000 = 686,200.
4th year: 686,200 [1+0.10] + 200,000 = 954,820.
5th year: 954,820 [1+0.10] + 200,000 = 1,250,302.
So Charles is a millionaire even BEFORE the end of 5th year at the age of 26. What if the fund earned 12%? 15%? 20%? He can definitely achieved a million in less than 5 years.
So imagine, if you equipped yourself with the right knowledge in financial literacy and you are regularly saving as a result of your frugal living, the power of compound interest will help you as you build your pile of assets eventually achieving financial freedom as time passes.
Let’s see how compound interest works by comparing simple interest vs. compound interest. You will see that it is really advantageous that you should really leave your money UNTOUCHED in the bank.
SCENARIO 1: Suppose you were able to save your first 100,000 at the age of 21. You decided to deposit it in the bank that gives a fixed 2% interest per year. You left it for 5 years.
Simple Interest:
Using the formula for simple interest where P is the principal amount, r is the interest and n is the number of years:
Interest = P multiply by r multiply by n = Prn = 100,000 (0.02) (5) = 10,000. So every year, your 100,000 earn 2,000 and after 5 years, it already earned 10,000.
Amount = P(1+rn) = 100,000 [1+(0.02)(5)] = 110,000. So your 100,000 became 110,000 after 5 years.
Compound Interest:
Using the formula for compound interest where ^ denotes exponent:
Amount = P[(1+r)^ n] = 100,000 [(1+0.02)^5] = 110,408.08. So your 100,000 became 110,408.08 after 5 years.
That means you have an extra interest of 408 as against the 110,000 earned using the simple interest. How did this happen? It is because your principal changes every year, as the interest earned every year now becomes part of the principal. To illustrate this, let’s see the computation below on the interests and principal amounts:
1st year interest = 100,000 (0.02) = 2,000. Add this interest to the original 100,000 principal, the new principal becomes 102,000.
2nd year interest = 102,000 (0.02) = 2040. Add this interest to the 102,000 principal, the new principal becomes 104,040.
3rd year interest = 104,040 (0.02) = 2,080.80. Add this interest to the 104,040 principal, the new principal becomes 106,120.80.
4th year interest = 106,120.80 (0.02) = 2,122.416. Add this interest to the 106,120.80 principal, the new principal becomes 108,243.22.
5th year interest = 108,243.22 (0.02) = 2,164.8644. Add this interest to the 108,243.22 principal, the new principal becomes 110,408.08.
Let’s see an example of frugal person leaving below his means, equipped with the right knowledge in investments and he regularly saves money.
SCENARIO 2: Suppose Charles is a frugal single person, age 21, living with his parents, and because of his employment and other sideline jobs, he was able to save 200,000 per year. He is equipped with the right knowledge in financial literacy and he was able to find a well performing fund that guarantees at least 10% fixed interest per year and he invested his money into it. How many years will it take him to be a millionaire?
Let’s see how powerful compound interest in this scenario given that he’s adding 200,000 each year to the principal.
1st year: 200,000 [1+0.10] = 220,000.
2nd year: 220,000 [1+0.10] + 200,000 = 442,000.
3rd year: 442,000 [1+0.10] + 200,000 = 686,200.
4th year: 686,200 [1+0.10] + 200,000 = 954,820.
5th year: 954,820 [1+0.10] + 200,000 = 1,250,302.
So Charles is a millionaire even BEFORE the end of 5th year at the age of 26. What if the fund earned 12%? 15%? 20%? He can definitely achieved a million in less than 5 years.
So imagine, if you equipped yourself with the right knowledge in financial literacy and you are regularly saving as a result of your frugal living, the power of compound interest will help you as you build your pile of assets eventually achieving financial freedom as time passes.
Saving Wisely With Our Paychecks
I know a lot of us are employees working for a company and struggling hard to survive on our paychecks. I belong to that category. When that paycheck comes, a lot of us spend it from paying our bills to treating ourselves like buying gadgets and other entertainment wants.
If we want to achieve our financial goals, then we must start to save as early as possible. And that is NOW! The earlier we started our savings attitude, the more possible we can achieve our financial goals.
We are used with this equation, INCOME - EXPENSE = SAVINGS. This is the scenario given above. As long as we received our paychecks, we spend it on a lot of ways. Whatever left from our expenses is our savings. I always believe in the concept of ‘delayed gratification’. That is, we delay our satisfaction in order to prepare for a future goal.
And this is where we need to save wisely. We need to arrange our equation. Instead of the equation written above, why not use INCOME - SAVINGS = EXPENSE. In this scenario, we pay ourselves first more than anything else. Each time we received our paychecks, we set aside a portion of it to our savings. We treat SAVINGS as an EXPENSE.
Savings is the most important of all expenses because it buys the most important thing - YOUR FUTURE.
If we view ourselves as a corporation, then a corporation must have a plan and budget for expenses. What is the first priority expense of a corporation? Yes, it is the payroll of employees. If you agree with this, your first priority should be “paying yourself first” because you are the sole employee of your own company. Paying yourself, in this instance, means compensating yourself for the use of an income-generating asset which is yourself. This compensation is your savings. Thus your income must first be reduced by your savings. What is left after will then be available for your living expenses.
I was lucky, I’m still living with my parents with less bills to be paid. And so I’m saving my paychecks regularly from a minimum of 20% to a maximum of 50% every pay day. And I started doing this at the age of 21.
I hope you will also do the same and start building your savings by saving wisely with your paychecks to prepare for your future financial goals.
If we want to achieve our financial goals, then we must start to save as early as possible. And that is NOW! The earlier we started our savings attitude, the more possible we can achieve our financial goals.
We are used with this equation, INCOME - EXPENSE = SAVINGS. This is the scenario given above. As long as we received our paychecks, we spend it on a lot of ways. Whatever left from our expenses is our savings. I always believe in the concept of ‘delayed gratification’. That is, we delay our satisfaction in order to prepare for a future goal.
And this is where we need to save wisely. We need to arrange our equation. Instead of the equation written above, why not use INCOME - SAVINGS = EXPENSE. In this scenario, we pay ourselves first more than anything else. Each time we received our paychecks, we set aside a portion of it to our savings. We treat SAVINGS as an EXPENSE.
Savings is the most important of all expenses because it buys the most important thing - YOUR FUTURE.
If we view ourselves as a corporation, then a corporation must have a plan and budget for expenses. What is the first priority expense of a corporation? Yes, it is the payroll of employees. If you agree with this, your first priority should be “paying yourself first” because you are the sole employee of your own company. Paying yourself, in this instance, means compensating yourself for the use of an income-generating asset which is yourself. This compensation is your savings. Thus your income must first be reduced by your savings. What is left after will then be available for your living expenses.
I was lucky, I’m still living with my parents with less bills to be paid. And so I’m saving my paychecks regularly from a minimum of 20% to a maximum of 50% every pay day. And I started doing this at the age of 21.
I hope you will also do the same and start building your savings by saving wisely with your paychecks to prepare for your future financial goals.
Cashflow 101 E-Game
Basically, there are two tracks of the game: The Rat Race and The Fast Track. The rate race is simply for the average person while the fast track is for rich persons. You can play the game against a maximum of 4 other players.
Both of them are tracks of income and spend but for the fast track, you’ve got options for lavish lifestyles and big expenditures such as taking a vacation, funding a research, running for a mayor position, etc.
I think the dice perse in the game represents the uncertainty in the real world. In the rat race, there is an income statement and balance sheet column for which you need to place each transaction in the game and sum it up. This is also a good practice to know basic principles of accounting and auditing.
For every roll of the dice, you can land into one of the following:
Doodads. Doodads are simply the expensive wants that we can’t resist. In the game, you cannot resist it and definitely you are compelled to buy it which you can pay by either cash or credit cards. These are things such as a huge discount on items, a promotional discounted vacation, etc.
Opportunity. Opportunites serve as deals for you to grab. It is broken down into two: small deal and big deal. Small deals are deals that involves small money while big deals involve large sums of money. Deals can either be stocks, mutual fund, business, or real estate opportunities. Each opportunity represent an ROI or return on investments. You can borrow a loan from the bank to fund these deals if you don’t have enough cash provided you can also pay them or else you will go bankrupt.
Market. Markets serve as opportunities for holders of assets. When you land in this option, you are offered by a buyer. Say for example, you bought a land when you landed on the opportunity option, it is this time that a buyer will offer you to buy that land. Be sure though to implement the basics and that is to buy low during the opportunity and sell high during the market.
Baby. Baby depicts the real happening of raising a family. In the game, when you land in this option, there will be an additional cost that will be added to your expenses. And there will be a maximum of 3 babies in the entire game.
Paycheck. Paycheck depicts the real world of employment. At the start of the game, you will be notified of your profession or your job. And each time you land on this option, you will get your paycheck that will be added to your cash. The paycheck though, in this game, is not fixed. It would be based on your net monthly cashflow in your income statement.
Downsizing. Downsizing also depicts the real happening of being fired or unemployed. In this case, you will lose 2 turns and lose a portion of your cash to fund your needs.
Charity. Lastly, charity relies on the concept of the law of reciprocation. In other words, you should give but it would be an option on your part. If you chose to give, then the amount will be deducted to your cash. Kiyosaki says that if you want money, you should first give money.
So there you are the rat race track. The very idea of the game is to accumulate enough passive income by buying assets. As you increase your passive income, the green color also increases. And if you have enough passive income, you can now go to the fast track where you can now enjoy a lot of your dreams.
Once you are already in the fast track, it is very easy to win the game as your income will be multiplied by 100. You will have a definite passive income goal to win in the fast track and to win the entire game. It would then be a race towards that goal against other competitors. Beware though that there is such thing as divorce in the fast track where you will lose all your cash.
I initially played the cashflow 101 e-game thrice. The first time I won with 910 points against one competitor. The second one, I went to play against two other competitors but unfortunately, I ended up bankrupt because of a bad deal that I went into. And the third time, I finished the game as a second placer against two other. Good thing I bought a high cost business that has zero cashflow at first, but eventually improved in the course of the game raking in a passive income of $400, and I ended up selling it as there was a buyer that offered me good amount when I landed on a market. After I sold it, I used the cash to pay all my debts.
Overall, the cashflow 101 e-game is very educational. Each time you roll a dice, you have the option to watch the video of Kiyosaki teaching various lectures on financial education. I believe this is a very powerful tool in one’s financial education and in achieving financial freedom. I’m looking forward to play the actual cashflow game with humans as my competitors.
I will next play the cashflow 202 e-game and I will write a post about it once I played it.
Sunday, May 30, 2010
Overcome Fear in Investing
Without doubt, each of us don’t want to invest because we are afraid of losing our hard earned money. The fear of losing money is the main reason a huge percentage of the public struggles financially. But fear isn’t the real problem. It’s how people handle fear that matters. Kiyosaki tells people that the primary difference between rich people and poor people is how they handle the fear of losing money. Some people, when hit with a financial loss, give up. Others transform the loss into a win. As John D. Rockefeller said, “I always tried to turn every disaster into an opportunity.” Losers are defeated by failure. Winners are inspired by it.Kiyosaki often commented that the real reason for lack of financial success was that people played it too safe. “People are so afraid of losing money that they do lose it,” he would say. If they have some cash, they buy big houses and big cars rather than big investments. Or they invest all of their money in balanced portfolios—in CDs and low-yield bonds and mutual funds and a few individual stocks. These are people, driven by fear, playing not to lose.
Rich Dad Tip:
“The primary difference between rich people and poor people is how they handle fear.”Of course, a balanced portfolio is a lot better than no portfolio at all. It seeks safety through diversity. Having a financial plan for security and comfort first are important. But if you have any desire to become rich, you must focus, not diversify. You must put a lot of eggs in a few baskets rather than putting a few eggs in many.
FEAR: I’ll lose all my money if I invest in anything riskier than CDs, bonds, and mutual funds.
FACT: If you lose some money, you can learn from the failure. Once you become an educated investor you’ll be positioned to reap potentially huge rewards.
FREEDOM: Financial failure can be transformed into financial gain.If the prospect of failure frightens you, then play it safe. Keep your daytime job until you have enough cash to buy bonds and mutual funds and consult with a financial planner. But if the prospect of failure inspires you to fight and win, maybe you should challenge yourself to change your financial habits. Educate yourself and take some financial risks. The more education you have, the less risk there will be.
In investing, the higher the risk, the higher the reward. You won’t become successful if you didn’t take risks and part of that risk is the fear of losing money. Personally, when I increased my financial education, my risk appetite also increased. I started investing in mutual funds and unit investment trust funds and then went to a riskier type of investment - the stock market. As I increased my business acumen, sooner or later, I will begin engaging myself into business. The more financially educated I am, the less the fear that I am feeling about.
Source: Robert Kiyosaki’s Coaching Program
Saturday, May 29, 2010
Cash Flow Management in Business
Cash flow is the heart of a business. Cash flow determines if your business will prosper or fail. A positive cash flow provides good return of investment while a negative cash flow means that you are draining money in your business.Whatever kind of business you have, you must have the right cash flow management skills. Attention to details in the early stages of your business will pave the way for success. Here are some pointers I learned from Rich Dad Coaching Program to help you contain and direct your cash flow in your business.
- Call on an accountant, banker, or financial consultant for advice in structuring your cash management system.
- Delay taking a salary until your business is generating cash flow from sales. If you’re terribly strapped, keep your day job and start your company part time.
- Review your cash position daily, looking at cash sources and needs for the coming week, month, and quarter. This way you can plan for any large cash need before it becomes a crisis.
- Keep a close eye on your ratio of assets to liabilities. This will enable you to move quickly when money needs to be borrowed. Be alert when liabilities rise over assets. You should be generating enough cash flow to pay for those liabilities.
- Bill customers as soon as your product is shipped or your service provided. Do it outright. Don’t delay.
- Require payment up front until credit has been earned by your customers. Business customers need to gain your trust before you can avail of credit.
- Pay your bills promptly, but ask for extended-payment terms from day one. Ask for extended-payment terms again after you’ve made several timely payments.
- Keep your overhead to a minimum. Don’t purchase anything new—such as a copy machine—until sales justify the purchase. You must examine your expenses thoroughly. Expenses are negative cash flows and if not managed properly, it can eat your business.
- Invest your cash on hand to maximize its earning potential. If you have extra cash in your business, try to look for other investments options where it can generate the highest yields.
- Establish tight internal controls over the handling of cash.
- As your business grows, continue to keep a close eye on cash management. Losing sight of cash flow during expansion is a common reason businesses go under.
- Make sure your bank account is reconciled by someone other than the person preparing checks or signing them. Always have a check and balance.
Rich Dad Tip:
“The ability to run a company from financial statements is one of the primary differences between a small business owner and a big business owner.”Follow your cash from receipt to deposit, from purchase order to writing the check, and have an outside accountant review your system to make sure you have adequate internal control procedures
Wednesday, May 26, 2010
How to Find Business Mentors
Now that you’ve chosen your business, it’s time to choose your business mentors and your team. If you were planning to climb Mount Everest next year, wouldn’t you want to speak with someone who had survived the journey to the top? You’d be surprised how many people, starting to climb up their own financial mountains, ask the advice of people who are languishing below sea level. It doesn’t occur to these climbers that their advisors have little or no firsthand experience.
Kiyosaki said that the world is full of S- Self Employed quadrant types trying to tell others how to enter the B or I quadrant. Seek out a mentor who “walks the talk”—someone who has already achieved what you would like to achieve. For instance, you would not want someone who achieved his or her success in real estate to necessarily become your mentor for building a business to sell car supplies.
As you begin, you’ll also need a team of business mentors and advisors. You should not risk the ordeals of building or investing in businesses without the expert help of others.
Rich Dad Tip:
“You don’t need to know every answer, but you do need to know who to call for the answer.”Find a Business Mentor
Amateurs might not have mentors, but professionals do. One of the most important steps you can take upon entering the B- Big Business Owner quadrant is to set aside any discomfort you might have about asking for help. Seek out role models and learn from them.
Fishing for prospects isn’t all that difficult. It’s a matter of swallowing your pride, working up your courage, and approaching people. Business people are busy but they are generally willing to share their success stories. Many talented folks in the B and I quadrants are willing to lend a helping hand. You can find them out through the following avenues:
- Successful business people that you know. They may know someone who has succeeded in the business you have chosen and be willing to introduce you.
- Your local civic and volunteer organizations. Join several organizations and you will meet others who may have experienced success in the very business you are starting.
- Your local newspaper and local TV news station. Start by looking for successful people in your own backyard. Which of them do you admire and would you like to approach?
- Your local chamber of commerce. Your chamber of commerce and other local business organizations sponsor classes, seminars, and social events for you to meet potential mentors.
- The business department of a community college near you. Community colleges often offer mentoring programs in association with local businesses.
Once you’ve found a business mentor. . .
You probably won’t get all the information you need after a single meeting. What you want to do is establish an ongoing relationship. You want a business mentor who will teach you everything, then be available for support once you’re on your own. The problem is, what’s in it for the mentor? Why should this person bother to take you under his or her wing? While it may be true that at this time your resources are limited, that doesn’t mean you have nothing to offer.Rich Dad Tip:
“What are you willing to give in exchange for receiving guidance? Your relationship with your mentor is based on the simple concept of exchange.”Find out what your mentor needs. Fortunately for you, it’s unlikely to be money, since this person is already financially successful. Feel out your mentor. In exchange for information and training, offer whatever you can in the way of help. The possibilities are endless, and of course depend on the nature of the business and your own field of expertise.
Source: Robert Kiyosaki’s Coaching Program
Advantages and Disadvantages of Having Business
So are you planning to establish your own business? Are you willing to take that risk? Before jumping into that conclusion, here are some of the advantages and disadvantages of having a business:
ADVANTAGES:
- You are your own boss.
- You have the freedom and luxury of time.
- You do something that you really enjoy.
- You are not compelled to follow company rules.
- You can fulfill your dreams and become wealthy.
- You can employ jobless friends, relatives and other colleagues.
- You can meet more interesting people.
- Some fo your current personal expenses can be tax-deductible.
DISADVANTAGES:
- You will have several bosses, which are your clients.
- You risk your health becasue of stress and long hours of work.
- You will mo longer receive regular paychecks and other benefits from your company.
- You will incur more unexpected expenses.
- You necome a sub-collector of the government for income and other taxes.
- You have to file a lot of papers with the government.
- Your risk losing your money invested in your business.
Tuesday, May 25, 2010
Business Entity: Corporations
A third and very different choice of business form is the corporation. Unlike the sole proprietorship and the partnership, the corporation is an entity completely separate from you, the person incorporating it. Your company is now an “Inc,”, an Incorporated and with that designation comes some additional paperwork and compliance issues based on the laws of incorporation in which you choose to incorporate. However, the corporation provides a level of protection for you. Because it is a separate entity, it should provide protection for your personal assets from creditors of the corporation. Although you may want to do some of this legwork yourself, you should use a lawyer for much of it.
There are basic steps in creating a corporation. Here in the Philippines, you will file articles of incorporation and by-laws in Securities and Exchange Commission (SEC). The document should contain the shareholders of the company, their addresses, how many shares they hold, and other details. Here is a sample articles of incorporation form from SEC.
Once you incorporate, there are certain rules and formalities that must be observed. For instance, for publicly listed companies, they are required to hold shareholders’ meetings and keep updated business records such as financial statements. If not, your corporation could be dissolved and you might end up paying a fine. There are consultants who specialize in assisting companies with compliance requirements. A consultant will make sure all necessary meetings are held and documented, and that all incorporation paperwork is filed. Check with your legal counsel, who may provide this service or direct you to a consultant in your area.
On the bright side, remember that the corporation owns its own assets and pays its own debts. This is the secret of the rich. If, on paper at least, you don’t own anything, then you can’t lose it. If a party claims injury from your business and sues, your personal assets should be protected.
Is Corporation for you?
Here are a few questions to ask before you decide to form a corporation. The more yes answers you come up with, the more applicable a corporation is to your business.
- Is your business growing so rapidly that you can no longer handle it alone?
- Do you need to raise more capital?
- Do you want less risk personally?
- Can you visualize sharing control of your business with another?
- Has your business outgrown your goals?
- Would the business benefit from managerial and creative skills that you lack?
- Do you want to offer fringe benefits that are only available through a corporation?
“This is a secret of the rich: The corporation owns its own assets and pays its own debts.”Source: Robert Kiyosaki’s Coaching Program
Business Entity: Partnerships
Today, we would tackle the next business entity and that is partnership. Like a sole proprietorship, a partnership requires no special paperwork. It is simple and relatively cheap to start. You and your partner(s) will probably want to operate under a business name, so be sure to register it with the appropriate government agency.
In addition, you should set up an agreement so that each partner’s rights and liability are clearly outlined. Kiyosaki said that in any partnership agreement it’s important to include the following:
- Date of agreement
- Names of partners
- Type of business entity
- Amount of investment from each partner
- Location of business
- Description of proposed accounting system
- Employee management roles
- Draws, salaries, or bonuses
- Division of profit or loss
- Restrictions on fiscal authority and expenditures
- Duration of partnership
- Plans for altering or dissolving the partnership
- Distribution of assets upon dissolution of partnership
- Provisions for settlement of disputes
- Settlement in case of death or incapacitation
Is a partnership the right business entity for you?
Let’s say you don’t want to run the show by yourself. Perhaps you lack the experience to make a success of your business, or you simply prefer sharing responsibility with others. Then you may consider a partnership. It is often said two heads are better than one, and for some people the additional ideas and enthusiasm generated by a partnership can bring comfort to what would otherwise be a daunting task. Partnerships can also increase the amount of available capital, and new businesses need plenty of that.On the down side, in a partnership you give up a certain measure of freedom and control. People being people, disputes are bound to occur, causing many sleepless nights. It is also important to remember that business decisions and actions taken by your partner are legally your business decisions and actions too, even if you do not know about them in advance.
You are obligated by your partnership to live up to all agreements entered into by the partnership. In a general partnership, as in a sole proprietorship, liability rests entirely on the shoulders of the owner(s). Not only are you fully liable for your decisions, you’re also fully liable for the decisions of your partner. Once again, your personal assets are completely at risk, but now they’re at risk for decisions your partner may make.
Two Types of Business Partnerships:
Kiyosaki said that there are two types of business partnership: general partnership and limited liability partnership.
In a general partnership, you risk your personal assets if the business fails not only for your decisions alone but also from the decisions of your partners.
In a limited liabiliy partnership, as the name implies “limited liability”, one business partner may not be responsible for the another’s misconduct or wrong decision.
Choosing the right business partner(s)
Just as important as the decision to form a partnership is your selection of partner(s). When considering a partner, Kiyosaki recommends to ask yourself the following questions:
- Are you keeping emotions out of the selection process? Best friends don’t always make the best partners.
- Have you taken a careful look at this person’s financial history? A poor credit rating could seriously hobble your business.
- What professional talent does this person bring to the partnership?
- Will this person’s personal life interfere with business?
- Do you share the same values?
Source: Robert Kiyosaki’s Coaching Program
Business Entity: Sole Proprietorship
Let’s go first with the most common - Sole Proprietorship. “Sole”, as the word implies means “one” - you are the only sole owner of your business and you don’t have anyone to share your profits or losses.
Kiyosaki said that this is not the entity of business that he can recommend. As a sole proprietor, all you need do is decide the nature of your product or service, advertise, and start plying your trade. You won’t have to deal with complicated legal documents or hire expensive legal advisors.
Sometimes paperwork is still required for sole proprietorships, so make sure you check with the proper local government entities and obtain any necessary documents. For example, you may need a business license or a Mayor’s Permit. Relatively speaking, the legal matters associated with establishing a sole proprietorship are simple and straightforward, things you can tend to yourself. However, this is a very risky way to start a business.
Rich Dad Tip:
“The important word in sole proprietorship is sole. You alone are responsible and liable. Do you want your personal assets put at risk if there is a problem with your business?”
Is a sole proprietorship for you?
Sole proprietorships offer people the opportunity to run their businesses as they see fit, with minimal intrusion from the government. You are the sole owner, and decisions and profits are all yours. The sole proprietorship requires little paperwork and is the simplest business entity to operate. Moreover, if you decide to discontinue your business, no one else need be consulted: Pay off your debts, liquidate your assets, and close up shop.A sole proprietorship is ideal for people like freelancers and consultants who want to keep their businesses small and their staffs limited. If you intend to bring in partners or you need investors, the sole proprietorship won’t work because it precludes anyone else from owning equity. Nor is the sole proprietorship ideal if you have reason to be concerned about liability. As a sole proprietor, you are personally liable for all the debts your business incurs. All of your personal assets are also at risk because you choose to operate as a sole proprietor. Liability can be a big drawback.
As they say: “Two heads are better than one”.
Source: Robert Kiyosaki’s Coaching Program
The “Perfect Business”
For me, I think there’s no perfect business. We can see a lot of huge businesses but even the most admired and established one can be like a building that can one day collapse. This is what happened lately to one of the largest securities firm Lehman Brothers.
Nevertheless, I gathered some ideas to at least minimize the possibility of loss in your business. If you are thinking to establish a business, then these can be very useful. These are not the rule of thumb so it does not mean that if your current business does not meet these ideas, then you have to abandon it.
Universal Product or Service - This should mean that products or services that your business offers should be appealing to the masses. It is very advisable to have a product or services that is not limited to your locality or to your country but can be sold in other countries as well. It must have a huge potential market.
Inelastic Demand - This means that the market demand of your product or service is not very sensitive to the changes to its price. In other words, when you have a slight change in your price, say for example, you decided to increase it because of inflation, then your customers will still be there to support your products or services. I think that examples of these products are our basic needs such as foods and household products. No matter how high the inflation is, people will still buy products from Procter & Gamble or Unilever.
Basically, I think that any consumable product is an ideal product. There will always be a steady cashflow in these businesses. This is very important since cash is the lifeblood of a business. A company producing toilet papers makes more money than the company producing toilet bowls. Why? Since toilet paper is consumable. On the contrary, there are some businesses whose products are seasonal. And so you cannot sell much ice cream during rainy or winter season.
Low Labor Requirement - Of course, a business must have employees. And definitely this is a huge expense of an owner. All you can do is minimize the need by capitalizing on machineries or subcontracting your products. A perfect example of this are Business Process Outsourcing (BPO) companies. They outsource their services in other countries where labor costs are low. Another perfect example of this is an entrepreneur who subcontracts his products in Multi Level Marketing (MLM) companies. They have instant sales agents with the help of the MLM company without incuring much labor costs.
Low Overhead - It shouldn’t only be the labor costs that should be minimized but also the overhead costs. This means the lesser the maintenance fees are, the better. Nowadays, people come to virtual businesses in the Internet. Why? Because there is not much expenses except for the low maintenance costs in maintaining your website. A perfect example of this is the owner of the largest google adsense check which is the owner of the large dating website named Plenty of Fish. A lot of webmasters say that he can easily earn around US$1 Million per year yet he only maintains two employees - himself and his girlfriend maintaining the business at the comfort of his own home.
Unique Product or Service - Make a difference! Be unique and innovative! There would always be competitors. And in order for you to survive stiff competition, your product or service must be unique. A unique product or service will drive customers to your business. You should have something that is difficult for a competitor to copy or duplicate. Set the trademark. If you had a unique product or service, then try to have it patented to avoid being copied by others. Many services are unique though such as singers or surgeons.
Portability - Basically, this means that you can carry your business anywhere you go. And still be able to continue to operate profitably. If you started a business and then suddenly decided to migrate to another country, then you will still be able to continue your business. Today, there is a growing number of businesses in the Internet because you can operate it just about anywhere in the world where there is an Internet connection.
Low need for inventory - There are some inventory-related problems that can prop up if you have a business with huge inventory such as grocery or supermarket. Some of these problems include a possible theft from your employees, the hassle of time-consuming balancing of inventory against your sales, the time constraints to quickly sell perishable inventories with expiration dates, etc. As much as possible, choose a business with low stock up of inventory.
These were just some of the ideas that a perfect business can possess. Assess the business that you want to start before you invest your hard earned money. Minimize your losses.
House: Asset or Liability?
Is you house an asset or liability? This is also the topic in one of the forums that I visited. We are used in the traditional accounting principles that a house is considered as an asset. When you are making a balance sheet where assets and liabilities are listed down, a house falls under the asset column since an asset is defined as anything that has value. And of course, a house has value.
Well, according to Kiyosaki, an asset is anything that flows CASH IN our pockets and a liability is anything that flows CASH OUT of our pockets. Now, how do you classify a house? Is it an asset or a liability? Kiyosaki said it would depend on the INCOME STATEMENT and not on the balance sheet.
In another video that I watched, Kiyosaki said that if he stopped working, ASSETS will FEED him while LIABILITIES will EAT him.
If a house provides rental income more than the expenses associated in owning it such as maintenance costs, utility bills, real estate taxes, and insurance costs, then a house is considered as an asset since it flows CASH IN our pockets. However, if your house has more expenses than income, then it is a liability.
Let’s look at the following example to illustrate it more clearly. Suppose you own a house that has a tenant renting it at 1,200 per month. As an owner, you are paying the real estate taxes, insurance costs, and some maintenance costs with an aggregate amount of 1,000. In this case, your house is considered an asset because it has a NET INCOME of 200 which provides CASH IN your pocket.
Now, as an educated investor, you should know the difference between an asset and a liability. Kiyosaki continued to tell that an educated investor does not look into one financial statement alone but to at least two financial statements.
When your bank told you to avail of a home loan to own a house and they keep on telling you that your house is the best asset that you will have, yes it is the best asset but not yours. It’s the BANK’s ASSET since you will keep on paying the mortgage for years with interest to them. You will end up paying double or even triple the original value of your house as you pay your mortgage and interests for 10, 20 or even 30 years. What’s worst, if you were not able to pay them, then they will foreclose it and you will end up paying for nothing. It provides CASH IN to the pockets of banks! However, it is your liability. It flushes CASH OUT of your pocket.
So one’s asset is someone else’s liability and one’s liability is someone else’s asset. We must look on to the income statement and not on the balance sheet in determining whether our house is an asset or a liability.
“LAND BANKING” Investment
Personally, I don’t know the term Land Banking until I attended a seminar by the Walton International Group about their business called “Land Banking”. Land Banking is the business of purchasing raw agricultural lands, developing it, and eventually converting its zone from agricultural to residential or commercial use. Doing this will double or even triple the value of the land which will then be sold to real estate developers.
Based on the seminar that I attended, there were three main factors on choosing their strategically located projects and these are: Population Growth, Unemployment Rate, and Infrastructure. Let’s get to them one by one.
Population Growth. Everybody needs a house or a shelter because it is one of our most basic needs. Whatever the economic conditions will be whether be it in a recession or progression, a house or a shelter is needed by a person. And so on choosing the location on where to acquire raw lands and eventually developing it, they study the location with the increasing population growth.
Unemployment Rate. Everybody needs some source of income to provide for their basic needs most especially food. And so on choosing the location of their projects, they consider the one with the lowest unemployment rate. When a company open its plant or facilities, say for example, in Texas, and you are located in Washington D.C. but cannot find a job, will you not be forced to move to Texas at least temporarily? Of course you will.
Infrastructure. The status of the neighborhood is also a consideration. Nobody wants to live in an uncivilized place where there were no nearby establishments like supermarkets, churches, etc. or even as simple as roads except if you are a hermit.
Here in the Philippines, based on the study that we did before, the development of real estate is towards the south especially in the provinces of Cavite, Laguna, Rizal and Batangas areas. Prices of land is increasing and a lot of companies are establishing their facilities in these areas.
If you are thinking of buying your own investment in real estate, consider the three main factors stated above. Moreover, on a more detailed basis, you should also take a detailed due diligence of the property you’re eyeing for.
As Will Rogers say; “Don’t wait to buy land, buy land and wait”.
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