Mission Improbable Part 5: Education, Schmeducation

Robert Kiyosaki defines an Asset as something that is a “source” of Cash. He distinguishes it from Liabilities, which are a source of Expenses (and thus a “use” of Cash). So a rental property that produces rent income every month is an Asset, but a family home, which requires upkeep but produces no Cash is a Liability. Yes, your family home, often considered the bedrock of one’s financial future, is a Liability!

One needs to look no further than the current real estate crisis to understand why. It is true that if the value of one’s family home is appreciating, it can be sold for a profit and generates Cash. This would appear to make it an Asset. But across the country the “equity” value of this perceived Asset has been mortgaged and re-mortgaged to a fair-thee-well in the last few years, and the resulting glut of new mortgages, often granted to households that were unable even to make the first payment, is what triggered the downfall of the financial giants you are reading about in the news. If the family home were an Asset, it would have been reliably generating Cash rather than requiring Cash to sustain it. The “bedrock” of many people’s financial future turned out to be sandstone.

Rental property is only one kind of Asset, one that’s easy to wrap the brain around – it’s easy to understand how rental properties generate Cash. A business is another such Asset - a service or product sold for a profit provides Cash, and the business is as such an Asset.

But Kiyosaki states that the most valuable asset one can obtain is financial education. Education an Asset? But doesn’t Education cost money, making it a Liability? Yes, at first glance. But a sound financial education can position a person to recognize financial opportunities. Taking advantage of such opportunities can generate income for decades, far exceeding the initial Cash outlay for the education that made it possible. Education is an Asset, if it is geared to recognizing financial opportunities.

As an accountant, you’d think that I’d had more than enough financial education to be a success. I can read a Balance Sheet and an Income Statement. I understand the Accounting Equation: Assets minus Liabilities equals Owner's Equity! I know how to spot financial problems and figure out the sources of those problems so that they can be corrected before profit is impacted.

But my Accounting education taught me how to monitor and evaluate Wealth – NOT how to attain it. This is a key quality that distinguishes an Entrepreneur from his or her financial Controller – the ability to spot financial opportunities and boldly seize them. And it was a key ingredient missing from my education and career.

So I left my job back in February, and was soon aware that I’d never be able to return to the grueling, stressful career that I had tended and nurtured for nearly thirty years. And where had it gotten me? I had some cash in the bank, but no real understanding of investments, no way to use that cash in ways that would build wealth and allow me to escape the career that had been destroying my health. So I decided to embark on a program of real, financial education.

Most schools teach people how to be employees. Think about it: An MBA – that cherished prize of people who want to embark on a profitable career in business, often prepares its recipient for nothing more than a cubicle farm.

Even doctors in our age, once considered the epitome of financial success, have succumbed to employee mentality, often working for hospitals and HMOs in overworked, underpaid, and horrendously stressful conditions. Combine that with a right-out-of-college debt well in excess of $100,000, and it makes for a pretty miserable career choice for all but a few select specialties.

There is nothing wrong with being an employee. But I’ve decided the whole financial paradigm of employment is wrong, and will not provide sustainable income in the current global economy.

The trouble with employment? You work once and get paid once. It is LINEAR income. Reasonable pay for an honest day’s work. What’s wrong with that, you ask? Well, linear income will pay the bills, but only the highest linear income (think CEOs) can provide a truly secure financial framework. Look at the news: CEOs get paid generous, contractual bonuses for destroying companies these days! When was the last time an employee besides a top manager got such a parachute?

But here’s what’s even more alarming about my situation right now: What’s a guy with training in Accounting and a successful twenty-five year background as a financial analyst and Controller, with not even a CPA or MBA, supposed to do in an environment where CPAs and MBAs are now a dime a dozen? In my city, that would mean preparing myself for an extended period of unemployment, likely followed by an extended period of underemployment.

What’s a guy to do? In my case, I began educating myself about opportunities. I had to turn off the risk-aversive accountant inside of me, ignore the advice of my CPA and the tsk-tsking of my attorney, and start looking at new earning paradigms.

I’ve heard it said: Profits are better than Wages. The meaning: Owning your own business is preferable to employment. That’s great. But I’m no Entrepreneur – I’ve only been trained to keep an eye on other people’s money. What kind of business would work for me?

I started desperately trolling the Internet for investment and business opportunities. This was the period of terror I described in an earlier post. Fueled by the image of that child in Kiyosaki’s Rich Dad Poor Dad who observed his environment and spotted opportunities to earn money, I began watching – god help me – infomercials and ordering materials about possible Internet businesses. I took advantage of coaching opportunities offered by some of these programs. I learned a great deal about the kinds of businesses and investments that are available out there.

Let me be blunt: I do not recommend that ANYONE do what I have done here. My fear-based foray into “financial education” was scattered and random - like a shotgun - and pretty expensive. I am ashamed to say that I fell prey on occasion to the unholy Nemesis of Reason: Advertising Copywriters! Curious about any and all wealth-building programs that purported to “work,” I invested in a few dogs. And not cute, fluffy ones – mean, snarling dogs that would have chewed my throat out if I’d let go of the leash for a second.

But it gave me an eye to the opportunities that are everywhere. And I began to affirm that I deserved to benefit from one of the good ones. Practicing this affirmation, I just kept looking and learning until I found some things that fit. In retrospect, I don’t think I would have done anything differently (except for picking the "dogs" a little more carefully!), and I’m positioned now for an entirely different life. More about that in the next post!

Mission Improbable Part 4: Actively Creating Passive Income

Yes, we’re finally coming to it, at long last! You thought I’d never get to my business plan, my vision, my mission statement, my goals and objectives, my strategies! But yes, I’m getting there!

If the mindset (actually: Mindset, “Bodyset,” and “Spiritset”) were not so important, I would have put the Vision Statement in the first posting. But as a former bean-counter propelled suddenly into the world of entrepreneurship, the first step of realizing the necessary fundamental shift in my world-view was far more important than a business plan.

I have been aware since early on that my business approach would eventually be (at least) three-pronged, involving Real Estate Investment (the “First Habit LLC” part), Stock and Equities trading, and Internet Marketing, or some other kind of Internet-based business. So I began educating myself in all three areas. It made for a somewhat psychotic educational experience, but slowly the pieces are coming together, and I know it’s just a matter of time and effort.

A key goal of my business will be the generation of “passive income,” the Holy Grail of financial freedom. Robert Kiyosaki explains the process in Rich Dad Poor Dad: Poor people earn money from a job and buy “toys” and other Liabilities using that income. Wealthy people, by contrast, use the money they acquire from their jobs to buy Assets, and pay for their “toys” using the income generated by those Assets. That distinction is the definition of passive income: Liabilities cost money, while Assets are a source of money. When you buy an Asset – for example, an apartment building – you can rent out the apartments for monthly rental income. You will be paid that money month in and month out, as long as there are tenants. You earn this income whether you are working your nine-to-five job or not – and that’s why they call it “passive income.” When you earn enough in passive income each month to pay for your day-to-day expenses, you are financially free. You no longer need the job to pay your bills.

A new mentor of mine (whether he knows it or not) is a man by the name of Jordan Adler. I will tell you about my (remote) relationship with this man in a future post. (I’m sure he doesn’t even know who I am – yet.) But he has written a wonderful book called Beach Money, all about the power of passive income (and network marketing – more about that later, too). The “Beach Money” he refers to is money that you earn while you are lying on the beach – true passive income. He explains that when you work a “day job,” you get paid once for your work – you work one hour, and you get paid for one hour of work. But with passive income, you work one hour, and get paid over and over and over again – for years if you work it right. That’s the power of passive income, and that’s why it’s a central goal of my business plan.

Kiyosaki defines the “poverty cycle” of working a job to buy toys and pay bills as the “Rat Race.” Only by generating true passive income can we hope to escape the Rat Race and build the financially secure life of our dreams.

In these tumultuous times, with the threat of failure in the Social Security system, the decline of the dollar, the volatility in the stock market, and the insanity of the privatized health care system in the United States (including the stress that is being put on Medicare), I think we could do much worse than adopt this change in perspective regarding the treatment of money in our lives. Our futures, and the futures of the coming generations, depend on how we decide view the Rat Race – as a necessity based on a dysfunctional misunderstanding of the “work ethic,” or as a destiny to be escaped at all costs. Kiyosaki advocates prioritizing the acquisition of Assets even before monthly bills have been paid – escaping the Rat Race is that important.

As an aside, if you'd like to read an almost Apocalyptic vision of the future as predicted by Robert Kiyosaki's "Rich Dad" himself, pick up a copy of his book Rich Dad's Prophecy - it will scare the bejesus out of you!

Do you own a house? Do you consider that an “Asset”? Let me disabuse you of that notion. A family home is a LIABILITY – not an Asset. Think about it: Do you earn money from it every month? No – you pay money to keep it in good condition. And for what – resale value? I think the recent burst of the real estate bubble is evidence enough that even a family home is not “safe” as sources of passive revenue go.

There are ways to make the acquisition of real estate into an Asset – don’t misunderstand me. What I’m saying is that if you are counting on your family home as a “nest egg,” you’d better at least build a second nest to put some eggs in. Putting all of your eggs in the investment-basket of your family home is risky at best.

So what is the best Asset you can buy, when you’re just starting out? Is it stocks, bonds, or rental units? Is it gold, or other commodities? I’ll submit (along with Robert Kiyosaki, by the way) that the answer is Financial Education. Education, an “Asset,” you ask? Yes, Financial Education is perhaps the most powerful asset, because once you have it you will be attuned to the vast world of opportunities out there, and be in a position to wisely discern which opportunities are in your best interest.

As a former accountant, I understand Robert Kiyosaki’s Assets/Liabilities formula very well. But as clearly stated as it is in his book, I can tell you that this equation was never presented this clearly in any of my accounting classes. We learned how to keep track of other people’s money – not to build wealth for ourselves. This is an entirely different skillset, and a powerful distinction: true Financial Education is learning how to recognize and acquire Assets, and determine with reliability that they will generate passive income.

So having left my soul-depleting job back in February, and having now read Robert Kiyosaki’s powerful book Rich Dad Poor Dad (have I mentioned that this book is a must read?), I determined that my first course of action would be to expand my Financial Education.

As I said, my educational experience in the past six months has been psychotic – perhaps “multiple personality disorder” is a better description – but I know it will eventually come together in a workable package – it will just take the addition of that magic concoction of “Practice, practice, practice.”

I’ll speak more about the education I’ve pursued in a subsequent posting. Stay tuned!