6
Basic Rules of Investing
Income
Raise Capital
Evaluate
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First Download Edition: August 2015
intro Understanding and Mastering
the Game of Investing
When I was a young boy, my best friend Mike, the son of my rich dad,
took up both the game of golf and investing. Both were games, in a sense,
both were difficult to master, and both required understanding the rules
of the game.
Fifteen years later, when we were both 25-years-old, Mike was an expert
at both golf and investing. I was just beginning to learn the rules.
I make this point because, regardless of how young or old you are,
learning the basics of anything is important. A lot of people take golf
lessons to learn the basics before playing golf. Unfortunately, most people
never learn the simple basics of investing before investing their hard-
earned money.
The following pages show the 6 basics of investing needed to shape your
context before you take that first step.
1
1 Basic Rule #1
Types of Income
Most people think only of making money. They dont realize that there are
different kinds of money to work for and invest in. For years, rich dad drilled
into Mike and me that there are three kinds of income:
Ordinary earned income: Generally earned from a job via a paycheck.
Its the highest-taxed income, and thus, the hardest to build wealth with.
Portfolio income: Generally derived from paper assets such as stocks,
bonds, and mutual funds.
Passive income: Generally derived from real estate, royalties, and
distributions. It is the lowest-taxed income, with many tax benefits,
and its the easiest income to build wealth with.
If youre going to begin investing, take a look at what kind of income your
investments will generate. It makes a difference.
Rich dad said, If you want to be rich, work for passive income.
2
2 Basic Rule #2
Education
Most people try to predict what and when things will happen. But a true
investor is prepared for anything to happen whether the economy goes
up or down. Rich dad said, If you are not prepared with education and
experience, a good opportunity will pass you by.
Once you decide what type of investing youre passionate about, there
are so many ways to get going with your education. You can take online
courses, attend local workshops, and/or attend seminars.
Reach out to people in the industry and pick their brains. We all had to start
somewhere; we had to ask help from mentors too. If theyre good people, and
they have the time, theyll be happy to talk with you on getting get started.
Next is the crux of getting financially educated: Take action. You can take
all the classes you want, listen to all the speakers, talk to mentors, and
attend all the seminars you want. Your education will never truly take hold
unless you apply what youve learned.
Get out there and look at the deals. Make offers. Sign that contract. Only
then will your education be truly underway.
3
3 Basic Rule #3
Cash Flow
Most people start their life out by making ordinary earned income as an
employee. The path to building wealth starts by converting your earned
income into the other types of income as efficiently as possible.
To illustrate this, rich dad drew a simple diagram:
Earned
Income
Passive Portfolio
Save a portion of your earned income from your job (pay yourself first),
get educated on a specific investment vehicle, then put that money into
an investment.
That, in a nutshell, said rich dad, is all an investor is supposed to do. Its
as basic as it can get.
4
4 Basic Rule #4
Risk Management
Many people think investing is risky. Laziness is risky.
How much research do people do when buying a car? They research the
brands, the different body styles, colors, features, fuel economy, etc. After
they have spent a lot of time narrowing down what they want, they spend
countless hours on Craigslist or Autotrader trying to find the perfect car.
How many cars do they actually call on? How many do they go test drive?
Id wager more than one or twoprobably at least six or seven.
Its a lot of work! People go through all of that work because they want a
solid, good-looking car that will last them a long time. They dont want a
lemon. When it comes to investing though, most people just pick mutual
fund option 1, 2, or 3, and then forget about it. That is, until their ROI is
crap. Then, they say its risky.
To mitigate the risk of an investment: You must get educated, talk with
mentors, do the research, make the calls, and view the properties. Most
importantly, you need to take a test drive on a small investment and
actually learn what makes up a good investment or not.
5
5 Basic Rule #5
Raise Capital
One of my big concerns as a beginning investor was how I would raise
money. Most people will say, It takes money to make money. I hate
hearing that. It couldnt be further from the truth. Saying that shuts down
your creative brain and your ambition to get out and create your future.
Rich dad said, If you are prepared, which means you have education and
experience, and you find a good deal, you will find the money.
If you have the team, systems, and the right deal, youll be able to raise
the money you need. You will be hard-pressed to find an investor who
will invest with you based on a deal you havent found yet. Talk is cheap.
Do the work and find a good deal. Youd be surprised how many people
are looking for a solid deal to invest in.
So, dont shut down your creative brain and your ambition by saying,
It takes money to make money. Thats the biggest load of crap.
It takes finding the right deal to make money.
6
6 Basic Rule #6
Evaluate
As you get into being an investor, you must quickly learn to evaluate risk and
reward. Rich dad used the example of a nephew building a burger stand.
If you had a nephew with an idea for a burger stand and he needed $25,000,
would that be a good investment?
No, I answered. There is too much risk for too little reward.
Very good, said rich dad, but what if I told you that this nephew has been
working for a major burger chain for the past 15 years, has been a vice-president
of every important aspect in the business, and is ready to go out on his own and
build a worldwide burger chain? And what if you could buy 5 percent of the
company with $25,000? Would that be of interest to you?
Yes, I said. Definitely because there is more reward for the same amount
of risk.
Whether it is an investment in the stock of a company or purchase of real estate,
I always analyze the financial statements. I can determine how profitable a
business is by looking at its financial statements and calculating financial ratios.
For a real estate investment, I calculate what the cash-on-cash return will be,
based on the amount of cash I need to spend for the down payment.
7
outro The Basics
Ive just gone over a very high level of what it takes to get into the investing
game. Its really not rocket science. It just requires some effort and putting
yourself out there.
The great part about investing is you can get into it in your spare time. And,
in spite of what most people say, you dont need money to make money.
You just need to put yourself out there and get going.
Need more information?
Get a copy of Rich Dads Guide to Investing: Click here
Its Time to Get Out of the Rat Race!
www.richdad.com
4330 N. Civic Center Plaza Suite 100 Scottsdale, AZ 85251 USA
tel 480.998.6971 800.317.3905 fax 480.348.1349
[email protected] www.richdad.com
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