The Path to Financial Freedom
This is an excerpt to the “Business of the 21st Century” book of Robert Kiyosaki. You can buy the book at Amazon or at your local bookstore.
Robert Kiyosaki and his wife Kim were able to attain financial freedom without jobs, without government assistance, and without any trading of stocks and mutual funds. Why no trading of stocks or mutual funds? Because they believed they were risky investments. In their opinion, mutual funds are the riskiest of all investments.
Instead, they used a simple four-step plan to retire young and rich. It took them nine years, from 1985 to 1994, starting with nothing and retiring financially free – without a single share of stock or mutual funds. It goes like this:
- Build a business
- Reinvest in your business
- Invest in real estate
- Let your assets buy luxuries
- Achieve financial freedom
1. Build a Business
Building a business allows you to generate a lot of money. Furthermore, the tax laws are very favorable to people who earn their income in the B Quadrant and punish people in the E Quadrant.
A business is like a child: It takes time to grow. While it can take less time, getting a business off the ground typically takes about five years. Afterwards, you may either be financially free or you start another business.
2. Reinvest in Your Business
The key to this process is that you don’t try to use your business as an income source to live on. A lot of first-time businessmen make this mistake. As soon as they start seeing an income stream develop from their new business, they use that new income to expand their living expenses. They buy a car, buy a bigger house, take expensive vacations and so forth.
Why do people do this? It’s not because their idiots: they are very intelligent, well-informed people who follow this pattern. They do it for one reason and for one reason only: They are still living in the E Quadrant. If you want to build wealth, you have to get your head out of the left-hand side of that diagram and start thinking in the B and I Quadrant. Financial freedom cannot be achieved if you are thinking in the E Quadrant.
Here’s how to Achieve Financial Freedom
First, keep your day job. Your goal is not to replace your job without your business – that’s just treating your business like your new job. You’ll never build that way. Instead, once your new business is making some money, go right into Step 2: Reinvest your new income in that business in order to grow it still further.
“But I don’t want to keep my day job – I hate working there! Isn’t that the whole point? I want to stop working as an employee!”
Fair enough: You want to get out of the E Quadrant and quit that job. Maybe you hate your job. Or you may be like a lot of professionals who actually love what they do, but don’t love the fact that they have to keep doing it forty, fifty or sixty hours a week. Whatever your reasons, here is the blunt truth: If you suck all the income out of your new business to burn on monthly living expenses, then you’re not building a business; you’re just building yourself another job.
A true business owner never stops investing and reinvesting to build the business. The reason so many people fail to achieve great wealth in any business is simply that they fail to reinvest continually in the business.
3. Invest in Real Estate
As your business income continues to grow, you begin using that supplemental income to buy real estate.
You’ll notice that there are no mutual funds, stock portfolios, or other paper assets in this plan. That’s because even though they’re the easiest to build (all you have to do is buy them), trading in mutual funds is risky, profits made are taxed at the capital gain rate, and investing takes financial education to lessen risk. The idea here is to use your new supplemental money to build an income-generating asset. There are many types of assets that can generate income, but the one Robert recommends most often is real estate, for two principal reasons.
First, the tax laws are written in favor of business owners who invest in real estate.
Second, you banker loves to lend you money for real estate. Try asking your banker for a thirty-year loan at 6.5% to buy mutual funds or stock and they’ll laugh you out of the bank. But you cannot buy real estate when you have barely enough to pay the rent. That is why this step comes after building a business and reinvesting its continued growth so you have the extra cash.
What does “Invest in real estate” mean?
What you want to do is to buy real estate and hold it so you it can earn you recurring income. The purpose of buying real estate is not to sell it; the purpose of buying real estate is to build an income-generating asset. It’s not to buy a property and sell it at a higher price.
Learning how to do this takes time, education, experience and money. As with learning anything new, it’s difficult not to make some mistakes. And mistakes in real estate can be very expensive. Unless you have the extra steady income and the tax advantages, real estate is either too risky or too slow.
The reason many people fail to become rich in real estate is that they don’t have the cash it takes. The truth is, the best real estate deals are usually expensive. If you don’t have much money, often the only real estate deals you can get are deals that people with real money have passed on. The reason so many people try looking for “no money down” investments is that they have nothing to put down! Unless you are really experienced and have plenty of cash on hand to use when you need it, putting nothing down could be the most expensive investment of your life.
4. Let Your Assets Buy Luxuries
For many years, even long after they could afford to have have more, Kim and Robert continued to live in a small house. They only have a monthly mortgage of about $400 and drove average cars. Meanwhile, they were using whatever cash they generated to build their business and invest in real estate.
Today, they live in a large home and have six luxury cars between them – but they didn’t buy the house or those cars. Their assets bought them. They just enjoy them. That’s what financial freedom is all about.
Luxury doesn’t mean something extravagant or ostentatious. Rather, it means something that you want and enjoy, and exists beyond what you need. How do you get that luxury? Often, it’s the same as any other: You let your business or real estate holdings buy it for you. For that to happen, you have to build those assets to the point where they can buy it for you. You don’t use your income to buy yourself luxuries. You use your income to build your assets and then, once they are sufficiently built to be able to do so, you let them buy your luxuries.
These are the steps Robert Kiyosaki and his wife Kim used to achieve financial freedom. For some it’s easily achieved. For others it’s a journey. How do you achieve yours?