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To teach pre？teen boys； rich dad kept everything simple； using as many pictures as possible； as few words as possible； and no numbers for years。
〃This is the Cash Flow pattern of an asset。〃
The above box is an Income Statement； often called a Profit and Loss Statement。 It measures income and expenses。 Money in and money out。 The bottom diagram is the Balance Sheet。 It is called that because it is
supposed to balance assets against liabilities。 Many financial novices don't know the relationship between the Income Statement and the Balance Sheet。 That relationship is vital to understand。
The primary cause of financial struggle is simply not knowing the difference between an asset and a liability。 The cause of the confusion is found in the definition of the two words。 If you want a lesson in confusion； simply look up the words 〃asset〃 and 〃liability〃 in the dictionary。
Now it may make sense to trained accountants； but to the average person； it may as well be written in Mandarin。 You read the words in the definition； but true comprehension is difficult。
So as I said earlier； my rich dad simply told two young boys that 〃assets put money in your pocket。〃 Nice； simple and usable。
〃This is Cash Flow pattern of a liability。〃
Now that assets and liabilities have been defined through pictures； it may be easier to understand my definitions in words。
An asset is something that puts money in my pocket。
A liability is something that takes money out of my pocket。
This is really all you need to know。 If you want to be rich； simply spend your life buying assets。 If you want to be poor or middle class； spend your life buying liabilities。 It's not knowing the difference that causes most of the financial struggle in the real world。
Illiteracy； both in words and numbers； is the foundation of financial struggle。 If people are having difficulties financially； there is something that they cannot read； either in numbers or words。 Something is misunderstood。 The rich are rich because they are more literate in different areas than people who struggle financially。 So if you want to be rich and maintain your wealth； it's important to be financially literate； in words as well as numbers。
The arrows in the diagrams represent the flow of cash； or 〃cash flow。〃 Numbers alone really mean little。 Just as words alone mean little。 It's the story that counts。 In financial reporting； reading numbers is looking for the plot； the story。 The story of where the cash is flowing。 In 80 percent of most families； the financial story is a story of working hard in an effort to get ahead。 Not because they don't make money。 But because they spend their lives buying liabilities instead of assets。
For instance； this is the cash flow pattern of a poor person； or a young person still at home：
Job （provides income）…》 Expenses（Taxes Food Rent Clothes Fun Transportation）
Asset （none）
Liability （none）
This is the cash flow pattern of a person in the middle class：
Job （provides income）…》 Expenses（Taxes Food Mortgage Clothes Fun Transportation）
Asset （none）
Liability （Mortgage Consumer loans Credit Cards）
This is the cash flow pattern of a wealthy person：
Assets（stocks bonds notes real estate intellectual property）…》income （dividends interest rental income royalties）
Liabilities （none）
All of these diagrams were obviously oversimplified。 Everyone has living expenses； the need for food； shelter and clothing。
The diagrams show the flow of cash through a poor； middle class or wealthy person's life。 It is the cash flow that tells the story。 It is the story of how a person handles their money； what they do after they get the money in their hand。
The reason I started with the story of the richest men in America is to illustrate the flaw in the thinking of so many people。 The flaw is that money will solve all problems。 That is why I cringe whenever 1 hear people ask me how to get rich quicker。 Or where do they start？ I often hear； 〃I'm in debt so I need lo make more money。〃
But more money will often not solve the problem； in fact； it may actually accelerate the problem。 Money often makes obvious our tragic human flaws。 Money often puts a spotlight on what we do not know。 That is why； all too often； a person who comes into a sudden windfall of cash…let's say an inheritance； a pay raise or lottery winnings…soon returns to the same financial mess； if not worse than the mess they were in before they received the money。 Money only accentuates the cash flow pattern running in your head。 If your pattern is to spend everything you get； most likely an increase in cash will just result in an increase in spending。 Thus； the saying； 〃A fool and his money is one big party；〃 I have said many times that we go to school to gain scholastic skills and professional skills； both important。 We learn to make money with our professional skills。 In the 1960s； when I was in high school； if someone did well in school academically； almost immediately people assumed this bright student would go on to be a medical doctor。 Often no one asked the child if they wanted to be a doctor。 It was assumed。 It was the profession with the promise of the greatest financial reward。
Today； doctors are facing financial challenges I would not wish on my worst enemy； insurance companies taking control of the business； managed health care； government intervention； and malpractice suits； to name a few。 Today； kids want to be basketball stars； golfers like Tiger Woods； computer nerds； movie stare； rock stars； beauty queens； or traders on Wall Street。 Simply because that is where the fame； money and prestige is。 That is the reason it is so hard to motivate kids in school today。 They know that professional success is no longer solely linked to academic success； as it once was。
Because students leave school without financial skills； millions of educated people pursue their profession successfully； but later find themselves struggling financially。 They work harder； but don't get ahead。 What is missing from their education is not how to make money； but how to spend money…what to do after you make it。 It's called financial aptitude…what you do with the money once you make it； how to keep people from taking it from you； how long you keep it； and how hard that money works for you。 Most people cannot tell why they struggle financially because they don't understand cash flow。 A person can be highly educated； professionally successful and financially illiterate。 These people often work harder than they need to because they learned how to work hard； but not how to have their money work for them。
The story of bow the quest for a Financial Dream turns into a financial nightmare。 The moving…picture show of hard…working people has a set pattern。 Recently married； the happy； highly educated young couple move in together； in one of their cramped rented apartments。 Immediately； they realize that they are saving money because two can live as cheaply as
one。
The problem is； the apartment is cramped。 They decide to save money to buy their dream home so they can have kids。 They now have two incomes； and they begin to focus on their careers。
Their incomes begin to increase。
As their incomes go up。。。their expenses go up as well。
The No。 1 expense for most people is taxes。 Many people think it's income tax； but for most Americans their highest tax is Social Security。 As an employee； it appears as if the Social Security tax combined with the Medicare tax rate is roughly 7。5 percent； but it's really 15 percent since the employer must match the Social Security amount。 In essence； it is money the employer cannot pay you。 On top of that； you still have to pay income tax on the amount deducted from your wages for Social Security tax； income you never receive because it went directly to Social Security through withholding。 Then； their liabilities go up。
This is best demonstrated by going back to the young couple。 As a result of their incomes going up； they decide to go out and buy the house of their dreams。 Once in their house； they have a new tax； called property tax。 Then； they buy a new car； new furniture and new appliances to match ＇heir new house。 Ail of a sudden； they wake up and their liabilities column is full of mortgage debt and credit…card debt。
They're now trapped in the rat race。 A child comes along。 They work harder。 The process repeats itself。 More money and higher taxes； also called bracket creep； A credit card comes in the mail。 They use it。 It maxes out。 A loan company calls and says their greatest 〃asset；〃 their home； has appreciated in value。 The company offers a 〃bill consolidation〃 loan； because their credit is so good； and tells them the intelligent thing to do is clear off the high…interest consumer debt by paying off their credit card。 And besides； interest on their home is a tax deduction。 They go for it； and pay off those high…interest credit cards。 They breathe a sigh of relief。 Their credit cards are paid off。 They've now folded their consumer debt into their home mortgage。 Their payments go down because they extend their debt over 30 years。 It is the smart thing to do。
Their neighbor calls to invite them to go shopping…the Memorial Day sale is on。 A chance to save some money。