What makes rich gets richer? We notice that the rich keeps on getting richer while some of the poor gets poorer. Kiyosaki continued his teachings on his “Rich Dad Guide to Investing”. If you are not familiar, there’s this one rule originated by the Italian Economist Vilfredo Pareto in 1897 called “Pareto’s Principle or 80/20 Rule” also known as the Principle of Least Effort.
In business, we can apply it and we can say: put most of our efforts on the 20% of things that bring in 80% of the income in our business. Kiyosaki agreed with the 80/20 Rule for overall success in all areas but not for money. He went on to say that when it comes to money, he believed in the 90/10 Rule.
He noticed that 10% of people had 90% of the money. In the world of show business, 10% of the actors and actresses had 90% of the money. In the world of sports, 10% of the athletes made 90% of the money. The same 90/10 Rule applies to the world of investing. That is, 10% of the investors gained 90% of the wealth in the world. Would you want to be included in that 10% that owned 90% of the wealth?
Kiyosaki differentiated between an average investor vs. rich investor or commonly known as the 90/10 investor with regards to their thinking. This is also what makes the rich even richer. Let’s look how rich investor thinks.
Most investors say, “don’t take risks,” the rich investor takes risks. The world is full of risks and this is also applicable to the world of investing. We all know that a high return involves a high risk. And the higher the returns, the more profitable the investment is. The rich investor thinks about how to improve his skills so he can take more risks. While most investors lives in fear of stock market crashes, the rich investor looks forward to market crashes as an avenue or opportunity to make more money.
Most investors try to minimize debt. The rich investor increases debt in their favor. I think this idea has something to do with good debt vs. bad debt. A bad debt is simply a burden because it will drain our finances. A good debt, on the other hand, helps us to manage our finances and somehow makes us even richer. A debt can be considered a good debt if the interest income from where that debt is invested is more than the interest expense of the debt availed. This is what you called in finance as DEBT LEVERAGING. Let’s look at some of these examples of a good debt.
Charles availed of a loan from a bank to use in his business. The interest of the debt was 10% per year. However, his business was good and in fact surpassed the interest of his debt averaging at 15% per annum. In effect, he made 5%. So, his debt worked for him and in fact he turned debt into income. He just proved that a rich investor does not necessarily have some money to make more money.
Credit cards are known to be good sources of debt IF we do not know how to discipline ourselves. Tyrone took advantage of credit cards and he regularly pays his debt. In effect, he has accumulated points and later on exchanged these points for a camera. He later on sold this camera and made income from it. Did he buy the camera? No. It was just a freebie from being a loyal credit card user. His debt turned into income. The rich investor knows how to increase debt to make them even richer.
Most investor has a job. The rich investor creates jobs. It suffices to say that a rich investor is an entrepreneur. He belongs to the B-Quadrant or the Business Owner Quadrant of the cashflow. He is innovative and possesses the qualities of an entrepreneur. He makes his business ideas into reality and in return helps more people by providing employment.
Most investor works hard. The rich investor works less and less to make more and more. The rich investor is financially literate. He accumulates assets and he makes those assets to make more money for him enabling him to work less and less yet making more and more money. He makes his money work for him to make more money. In effect, he can retire early and even if he sleeps, he is still making money. He belongs to the I-Quadrant or the Investor Quadrant of the cashflow.
Today, because we are already in the Industrial Age and because of the power of the Internet, the idea of “money begets money” does not necessarily hold true. It does not require massive sums of money, land, and people to join the crowd of rich investors. The price for you to belong in the 10% that owns 90% of wealth is simply an idea and ideas are free. You can see that a new web retailer such as Google is perceived to be more valuable today than say an investment bank such as Merrill Lynch with more than 100 years of solid experience, massive real estate holdings, and more assets.
If you want to join the rich investor crowd or the 90/10 investors, you must learn to make money mentally more than physically. What makes rich gets richer? They think like a rich investor!