Reviewed by
Terence Kam
Edited by
Ann Ring
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Retire Young, Retire Rich is the fifth book in Robert Kiyosaki’s Rich Dad series. Unlike the previous books in the series, which focus on the concept of cash flow, this book focuses on the concept of leverage. The following forms of leverage are explained in this book: mind, plan, actions and the first step.
Retire Young, Retire Rich by Understanding Leverage
The ‘Why vs. How’ of Getting RichThe first hindrance to becoming rich is knowing why you want to be rich in the first place. One of the major mistakes that many people commit is to pursue the ‘secrets’ of how to get rich without knowing why they want to be rich in the first place. As a result of not having such self-awareness, laziness, fears, self-doubts and lack of commitment will eventually make them give up and not do what they are supposed to do to be rich. But when they know the reason for wanting to get rich, it gives them the motivation to pursue their higher purposes and dreams.
A good suggestion to help you achieve your dreams is to cultivate and infuse passion in yourself. Passion gives you the energy and commitment to pay the price in order to accomplish your goal. The starting point to develop passion is to identify your loves and hates.
For Robert Kiyosaki, the privilege to be rich and retire early allows him to slow down, reflect, contemplate and start his life all over again.
How Robert Kiyosaki Retired EarlyRobert Kiyosaki used the leverage of good debt to help him retire early. To illustrate the point of how the usage of leverage can accelerate toward his goal of retirement, he compared the time taken for him to retire with another person. That person, as a result of using his own equity in his mutual fund, retired eighteen years later than Robert Kiyosaki. Robert Kiyosaki, on the other hand, used the leverage of good debt to retire earlier. A word of warning though: debt is a two-edged sword. Abuse and improper usage of debt due to lack of financial shrewdness can result in disaster. Wise usage of debt can be a very powerful tool to help you.
The lesson to learn here is that debt is just one of the many examples of leverage. Different people have different preferences for their choice of leverages. The trick is to understand how to use the two-edged nature of leverage wisely.
What is Leverage?Leverage is basically the “ability to do more and more with less and less.” Humans use leverages to gain power and advantage over animals. Some people use better leverages to get ahead of others. Examples of tools of leverage are computers, Internet and so on. Likewise, there are different kinds of leveraged financial tools to help you get ahead financially. Some people use a physical leverage called “hard work” which is very inefficient. For Robert Kiyosaki, he uses other people’s time (employment) and other people’s money (debt) as leverages. Other forms of leverages include health, time, education (financial, academic, professional and technical), relationships and tools.
There are many forms of leverages. Therefore, find one that works for you according to your individual tastes and preferences. Also, remember that to become rich, you have to work to increase your leverages so that you can do more and more with less and less. The moment you stop doing that, your resources will probably become someone else’s leverages.
Million-Dollar Question“How can I do what I do for more people with less work and for a better price?”
This is a very powerful question that can make you very rich if you act upon it!
Retire Young, Retire Rich by Using the Leverage of Your Mind
Expand Your MindTo be successful, you have to think beyond your reality. Instead of having a closed mind and telling yourself that you cannot make it, you have to think in terms of possibilities. That is, what “you think is real is your reality.” Therefore, to be rich, we have to be prepared “change our reality [perspectives, point of view, etc]”, which basically means to change, control and expand our minds.
For instance, many people think that investing is risky and that is their reality. But if they can see beyond their reality, they will be able to see the difference between ‘risk’ and ’risky’. For example, there are risks in starting up a business - nine out of ten businesses fail. But to succeed eventually, you have to arrange your strategy such that the success of the tenth attempt will return you a reward that is far greater than the last nine failures. But if you see in terms of either winning or losing, then you will avoid trying just to avoid losing. In that case, you will avoid winning as well! Therefore, a winning strategy must include contingency plans for losses such that your wins will far more than compensate your losses.
Therefore, do not tell yourself things (for example, “I can’t afford it”, “I can’t succeed”, “That’s impossible”, etc) that will prevent you from thinking in terms of possibilities and blind you against them. Before the Wright brothers invented the first aeroplanes, people told them that humans could not fly. But they thought in terms of possibilities and pushed beyond the current reality of the day.
One of the suggestions that Robert Kiyosaki gave for expanding our minds is to read up on and learn from the biographies of people who had achieved their dreams and goals.
What is Risky?Rich people and the poor and middle-class have opposite thinking in their reality. A person’s reality depends on what they think to be ‘risky’ and ‘smart’.
For example, the middle-class people think that job security is smart and building a business is risky. Rich people think the opposite. Today, with downsizing and outsourcing being the norm, job security is a thing of the past.
Thus, since your thinking will affect your reality, you need to have the right thinking to be rich.
What Types of Income Are You Mainly Working For?There are three types of income: Earned income is the one from which you receive from your employment; Portfolio income is the one from which you receive from your paper assets (e.g. shares, bonds, managed funds); Passive income is the one from which you receive from assets (e.g. rents from real estate, patents, royalties). The type of income where you devote the main bulk of your effort will determine how fast you become rich.
Earned income generally frowned upon because it is the most burdened by tax (in Australia, the top marginal tax rate can be as high as almost 50 percent!), time-consuming and lacks leverage. He prefers passive income because it is consistent over the long term, least burdened by tax and does not require the least amount of work to maintain. Portfolio income is good too, but depending on the tax laws of your country, it may have higher tax burden than passive income.
Also, please note that each type of income has its own advantages and disadvantages and it is not wise to completely abandon one for the other.
What Is the Advice You Are Getting?It is important to seek good financial advice. Good advice may be more expensive upfront, but will put you in a financial advantage in the long run. Bad advice may be cheap or free initially, but will put you in a financial disadvantage in the long run. Thus, those ‘free’ or ‘cheap’ advices are more expensive in the long run.
Tax ‘Loophole’ For the RichRobert Kiyosaki advised that owning a business is the best way to earn more and more and work less and less. One of the reasons for it is because a business can pay tax after expense whereas an employee has to pay tax before expense. The tax laws favour businesses far more than individual employees. For the latter, their superannuation fund is so far the best tax loophole for them.
Working For Free?To be rich, you have to spend your resources learning how to create and buy income-producing assets and accumulating them. That would almost certainly mean you have to work and study for ‘free’ much of the time. This is because time spent on learning and accumulating income-producing assets cannot be used for earning income from your employer simultaneously.
The Fastest Way to Get Rich- Expand Your MindTo be rich, you have to make yourself less employable (in the good sense, of course). To be less employable, you have to embark on a paradigm shift in your thinking (that is, to change your realities in your mind).
Content, Context and CapacityIn the old days, content is king. Schools teach us content (e.g. skills and knowledge) in the belief that a good academic qualification that leads to a good job is secure. In today’s rapidly changing world, with rampant downsizing and outsourcing becoming common and permanent, context (e.g. your reality in your mind and ability to learn independently and critically, resulting in a paradigm shift in your thinking) is king. Your context will determine your capacity to be rich.
How to Expand Your ContextTo expand your context, you have to watch out for ideas and beliefs that slip into your mind that will prevent you from being open-minded and think in terms of possibilities. Examples of such ideas include:
- “I can’t afford it.”
- “It can’t be done.”
- “It is impossible.”
- “It’s too hard to do.”
- “I’m right and you are wrong.”
However, please be wise enough not to let cynicism or foolishness control you. The former prevent good ideas from taking root and the latter allows bad ideas to enter.
Retire Young, Retire Rich by Using the Leverage of Your Plan
Coming Up With a PlanTo retire young and rich, you need to come up with a financial plan. Here are some ideas on how to do so:
- Before you start investing, you need to define your exit strategy first. That is, you need to know “how, when, where and with how much” you want to retire.
- Next, you need to create a plan that works for you. Each one of us is different. We have different strengths, weaknesses, values, talents, desires and so on. Therefore, the plan that works for me may not work for you.
Whatever you plan is, you need to open-minded, embrace change and move on with the times, both externally and in your thinking. This will give you the insight and vision to anticipate the future and invest in “what is going to happen”, rather than “what has already happened.” One of the ways to learn how to see the future is to study history, which has a tendency to repeat itself. In today’s fast moving world, investment and business opportunities slip by very quickly. So act fast!
Having a VisionTo achieve your dreams, you need a plan, which is your bridge between where you are right now and your vision for the future. Begin by watching out for the negative and discouraging words and thoughts that you have been telling yourself all this time. Change your actions and habits that you know will lead to dead ends.
To help you develop visions to see into the future, you need to expand your vocabulary (words) in order to contain the concepts in your mind that are vital to help you be rich. Examples of words that can expand your mind with new concepts are: “raise capital” (as oppose to “save money”), “cash-flow” (as oppose to “high-paying job”) and “private placement memorandum” (as oppose to “mutual fund”).
Knowing the Definition of WordsWords are the tools of your mind. Therefore, get to know their definitions well and make them a relevant part of your life. Some words are more significant personally than others. The following definitions are the important ones that you should know:
- Debt-to-Equity or Liquidity ratio - that is the ratio of your total debt over your total equity. The value of this ratio in itself is meaningless, but the trend of this ratio over time gives an important indication of your personal financial situation.
- Wealth ratio - that is, your combined passive and portfolio income over your total expenses. A value of one and above means you are out of the rat race.
Integrity is very important. Having it means there is a consistency between your words and actions. Without integrity, one is likely to have money problems. Make sure that you match your words with your actions, which involves keeping promises and agreements (regardless of its magnitude). Integrity allows you to build strong lasting relationships with people, who are crucial in your path to wealth. Integrity also means knowing the meaning of words and definitions well in your heart, to the point of living them out in your life instead of utilising them uselessly as passive knowledge in order to impress others.
Inspiring StoriesRobert Kiyosaki’s rich dad always encouraged himself with fairy tales and Biblical stories to keep him going despite facing ridicule, discouragements and unhelpful people. He then related a story where ten years ago, he and his wife spotted a real estate opportunity but did not have the means to grab that opportunity. That challenged them emotionally to a near breaking point, causing them to almost give up. However, through sheer tenacity and persistence, finally found a breakthrough. The result was an expanded context in their mind. With the benefit of hindsight, such a challenge is trivial to them today. At the present moment, they are experiencing new challenges that are bringing them to the next level of wealth. As they reflected, had they given up on that challenge ten years ago, they would not be at this level of wealth today! Thus, fairy tales can serve to inspire you to achieve your dreams. Do not write them off as nonsense.
Being GenerousPeople have the view that those in business are there simply because they are greedy. Robert Kiyosaki’s rich dad differed in that opinion. He believed that everyone is greedy to a certain extent - most people are not rich simply because they are not generous enough. He saw that the richest people are those who think of ways to be generous by serving as many people as possible.
Path to WealthRobert Kiyosaki stressed again the importance of expanding your context and content by having an open mind, rising above “personal doubts, limitations, and complacency, being willing to learn, and taking action.” With an expanded context, you will then be able to increase your leverage.
As an employee or self-employed person, your leverage is usually confined to a 1:1 ratio. This is because you are limited by a natural limit of your own time and labour for which you can use to earn income. Furthermore, they have no long-term enduring value for you to continuously derive income from. Of course, there will be special exceptions in life, like sports and movie stars, who earn millions out of their time and labour.
On the other hand, as an investor and businessperson, your earnings potential is infinite. This is because the value of your income-producing assets (that you spend your time and labour on procuring) can have the potential to increase exponentially. On the other hand, an employee or self-employed person’s earnings potential (salary) can only increase incrementally. However, to be an investor and businessperson, you need to dare to fail and keep going despite setbacks.
Power of NetworksMetcalfe’s Law states that the “economic power of a business is the square of the number in the network.” That partially explains the quantum leap in the growth of wealth and why the rich gets richer and the poor gets poorer. That is the reason why self-employed people join associations and employees join unions in order to be members of a network, which gives them more power collectively. Therefore, Robert Kiyosaki recommended the network marketing business because it harnesses the power of networks. A solid network marketing business can be much more financially secure than a superannuation fund.
To be successful, it is important to be generous and mutually support and help each other in the network. That means being cooperative and looking out for the benefit of others instead of being selfish and only care about taking.
Looking at the examples of billionaires like Bill Gates and John Rockefeller, each of them became rich because they know how to harness the power of networks.
Who Gets Paid First?A person who only cares about being paid first for the job that he or she has done does not have what it takes to be a business person. That is the mindset of an employee or self-employed person. A successful businessperson has to be generous enough to pay the business first (assets, employees, specialists, investors) before being paid. But in the long term, it is the business person who gets paid the most through his or her business. Therefore, generosity is an important virtue to have in order to be rich.
Final Word on GenerosityRobert Kiyosaki’s rich dad believes in the Law of Reciprocity- he believes that you have to be generous and give first in order to receive. Thus, to be rich, you have to think about how to serve the needs of as many people as possible.
Retire Young, Retire Rich by Using the Leverage of Your Actions
Your HabitsThe first habit you should acquire is to hire a professional bookkeeper for your financial life. A professional bookkeeper will ensure that you have a professional financial record, which is a pre-requisite for any financial loans from the bank. This way, you will be able to treat your personal life as a business, which is the first step in moving from an employee or self-employed person to a professional business person. A professional bookkeeper can look at your financial life objectively and “bring your financial challenges out into the open.” Hiring one is a good expense that will eventually put you in a financial advantage and is the first step towards being serious in the responsibility for your financial life.
The second habit you should acquire is to “create a winning team.” Surround yourself with a team of professional advisors (e.g. banker, accountant, attorney, brokers) to help you financially and to learn from them. Though your professional team may cost you a lot upfront, you will reap far more in the long term.
The third habit you should cultivate is to continuously broaden your “context and content.” That means you have to make it a habit to learn continuously.
The fourth habit to nurture is to “keep growing up.” Growing up means taking responsibilities for our failures and not make others the scapegoat for our mistakes. In today’s Information Age, the world is changing more rapidly than before. That makes it even more important for us to grow up. We should shed the mentality of relying on our government to take care of us and realise that there is no such thing as job and financial security.
The fifth habit to acquire is to be “willing to fail more.” That is, we have to be humble enough to be wrong more often. Humility will then give us the courage to try new things and not be afraid of change.
The last habit to develop is to “listen to yourself.” Instead of focusing what you do not want in life, focus on what you do want instead. Be aware of your negative feelings and cling on to positive ones instead. Take corrective actions towards what you want instead of avoiding what you do not want. However, be aware that sometimes we still do not get our way despite our focus on the positives. Therefore, know when to quit and understand that “losing is part of winning.”
Your MoneyAre you working harder than your money? Relying on your superannuation funds for your retirement is risky because your wealth is dependent on the rising of the stock market indices. Some people work harder than their money and letting them do nothing by parking them on their savings or retirement fund.
Robert Kiyosaki advocated making our money work hard by moving them fast. Know the difference between an investor and a trader. The former is one who buys to hold whereas the latter is one who buys to sell. By moving your money fast, you can get your money back as soon as possible and re-deploy it to acquire other assets.
For Robert Kiyosaki, he uses investments in real estates to move his money around. He also employed his knowledge of tax laws and corporate entities to move his money between income and expense of one business entity to another. He also buys shares in small cap stocks and sells them at a pre-determined price to get back his initial investment.
Real EstateMany people have the idea that ‘diversifying’ means diversifying their wealth in many different types of managed funds. This is highly unsafe. Also, there is a flaw in managed funds in which you get taxed for capital gains when you actually make a loss by selling units in your mutual funds. Robert Kiyosaki advocated investing in real estates because there are much more financial and tax advantage compared to investing in managed funds. However, to find good deals in real estates, you need to have the experience that will enable you to see what others fail to see. To have such kind of experience, you need to go ‘shopping’ for real estates. For Robert Kiyosaki, he and his wife had looked at and analysed literally thousands of properties over the years to gain that kind of experience. They had made many mistakes in their real estate investments, learning and improving their investment skills in the process.
In conclusion, a study found out that most rich people made or stored their wealth in real estates because of the various tax and financial advantages over other forms of wealth.
Paper AssetsIt is important to invest in paper assets (e.g. stocks and bonds) with insurance. Sophisticated investors can make money both when the stock market goes up and comes down. They also know how to hedge their assets with insurance. One of the insurance tools that are used by sophisticated investors is option.
A sophisticated investor also knows the difference between a trader and an investor. They also know the difference between fundamental analysis and technical analysis. To be a good investor in paper assets, you need to know the meaning of important words: trends, moving averages, stop orders, call options, put options, straddles, collars and shorts.
There are three basic trends: up trend (bull), down trend (bear) and sideways trend. Each of these trends requires different strategies and a sophisticated investor never go against trends. The market usually shows signs before it changes trend. A sophisticated investor will change strategy when these signs show up. Some of the strategies include stop orders, shorts, call options, and put options.
BusinessThe best investment you can make is on your own business. Most of the self-made rich people make their own fortune from their businesses. However, the reason why there are so few rich people is because it is hardest to be successful in business. In addition, no matter which profession you are in right now, it is important to be open-minded and develop your context (business, employment, self-employment and investor) in as many quadrants as possible. When you have your own business, the rate of return on your investment can potentially be infinitely more staggering than the return on your superannuation fund.
Since building your own business is so lucrative, why is it that the majority of people do not go into business? The reason is because the “hardest thing about business is working with people.” Therefore, to build a successful business, you need to be an entrepreneur with very good people skills. A successful business is the stitching together of many expertises from many diverse kinds of people into a great team by a competent entrepreneur, who is foremost, a great leader. As such, you need to devote a lot of your time in developing your leadership skills in order to become a successful businessperson. Most people devote more of their time in developing their professional and career skills, which is only useful for helping them become a better employee or self-employed person. To develop your leadership skills, you can volunteer to accept and handle challenges.
As a leader, you have to be prepared to do the right thing by making tough decisions to ensure that the mission comes first. The team comes next followed by the individual. The leader must also be a follower, recognising that his team’s mission is part of a higher mission and calling.
More Mental and Emotional ProcessThe process to retiring young and rich is more of a mental and emotional process than a physical process. Below are some of the mental and emotional processes.
To be able to retire young and rich, you need to wean yourself from the idea of depending on a wage. Once you are able to do that, you have to decide for yourself what type of income you want (earned, portfolio or passive). This would mean focusing your attention on acquiring assets and improving your financial IQ. For Robert Kiyosaki, he chose passive income from real estate investments.
In addition, in order to put ourselves in the mindset of retiring young and rich, we need to technically ‘lie’ about our future. That is, instead of saying negative things to ourselves regarding our future (which is technically a ‘lie’ because the future is yet to be a fact), we should instead say positive things to ourselves regarding our future (which is technically a ‘lie’ too). Our own pronouncements regarding our own future have the tendency to become self-fulling prophecies. Positive pronouncements help us be more optimistic in life and let us not worry unnecessarily about our worst fears. Of course, Robert Kiyosaki is not advocating lying (to others and ourselves) with the intention to deceive or cover up the truth.
To retire young and rich, we have to make a point of daily deciding who and what we want to be. We also need to seek out supportive friends and loved ones who are to share the same journey with us. In addition, we need to build our own team of financial and legal advisors to help us towards our goals. Set a pre-determined retirement date, write down your plans to achieve it and plan for your retirement party. Open our eyes daily that can help us improve our financial IQ and try to attend seminars once a year. Remember that the market can only go three ways: up, down and sideways. One of poorer. That is the reason why self-employed when the trend changes (that is, be at the right place at the right time) and flow with the trend. Visit the richdad.com web site often for more ideas and financial education. Increase your content and context with words, which are free.