Are You Playing by the Rules of the Rich?
When I was a young boy in elementary school, my rich dad was already putting ideas in my head about the differences between the rich, the poor, and the middle class.
My rich dad would say, “If you want job security, follow your dad’s advice” — my real father — “if you want to be rich, you need to follow my advice.”
Rich dad then went on to show me the difference between his investment plan and my dad’s investment plan.
“My business buys assets with pre-tax dollars,” said rich dad as he drew the following diagram. “Your dad tries to buy assets with after-tax dollars. His financial statement looks like this,” said rich dad.
To sum it up nicely, rich dad combined the two diagrams to highlight the difference between my dad and him.
Playing by Different Rules
The point that rich dad was making was that even though we live in a free country, not everybody plays by the same rules. The rich have laws of their own that allow them to become richer.
Rich dad went on to teach me that because my dad was an employee, he had to pay his taxes first and then invest. That meant that up to 50% or more of his income would be spoken for before he could even begin investing.
As a business owner, rich dad was able to buy assets through his business and then pay taxes on what income was left over. He bought his assets first and paid his taxes later.
“I pay my taxes on net income,” he said. “Your dad pays taxes on his gross income, and then tries to buy assets. Because of that, it is very, very hard for him to achieve any kind of wealth.”
If we were to map this to the CASHFLOW Quadrant, rich dad’s points would look like this:
How my poor dad invested
How my rich dad invested
“Always remember,” said rich dad, “that the rules are different for the different quadrants. Make your decisions about your future wisely. Decide which rules you want to play by.”
You Can Do This Too
I try to pass on the bits of wisdom I learned from my rich dad. Today, as my rich dad taught me, I invest through my businesses, and I teach others to do the same.
When I speak on this, invariably people raise their hands and say things like:
“But I’m an employee, and I don’t own a business.”
“Not everyone can own a business.”
“Starting a business is risky.”
“I don’t have the money to start a business, let alone invest.”
To these types of statements, I remind people that less than 100 years ago, approximately 85 percent of people in the US did own their own businesses as either independent farmers or small shopkeepers. Only a small percentage of the population was employee-based. I know my grandparents were small business owners.
Today, in just a couple generations, it seems that the Industrial Age—with its promise of high-paying jobs, job security, and pension benefits—has bred the independence out of us.
The Tax Code is Made to Incentivize
Most people’s biggest misconception is that a corporation is a big company owned by fat cats. While this is true at times, many corporations are small, or at least start small, and are the vehicle for becoming rich and staying rich.
I started my first corporation while I was working as a salesman at Xerox. As I excelled at sales, my income went up, but so did my taxes. Dismayed, I started a corporation on the side for my real estate investments. As money built up in my corporation, I was motivated to work harder at Xerox so that I could invest more money in my corporation, make more money, and pay less in taxes.
Soon the cash flow from my corporation was higher than the money I made at Xerox, and I bought my first Porsche. My fellow Xerox employees thought I was spending my commissions, but I was instead investing my commissions in my assets and reaping the benefits of my cash-flowing investments. My money was working hard to make me more money.
The reason is that government leaders learned a long time ago that the tax codes could be used to make people and businesses do what they want by utilizing the tax code.
In short, the many credits and breaks that are found in the tax code are there precisely because the government wants you to take advantage of them. For instance, the government wants cheap housing. Because of this, there are many tax credits for affordable housing that developers and investors can take advantage of that minimize their tax liability, put more money in their pocket, and in turn, create affordable housing. Everyone wins.
There are many scenarios like this in the tax code that incentivize investors and entrepreneurs to do activities the government is looking for while rewarding those who take those actions with lower-or zero-tax burden.
Because of this, limiting your tax liability actually means you’re doing what the government wants you to do through the tax code. And that is the most patriotic thing you can do.
What Do You Want to Do?
Chances are that you have the potential to be a great business owner if you have the desire to develop the skills necessary.
Our ancestors developed and depended on their entrepreneurial skills, and so can you. Instead of miserably handing your money over, I encourage you to merrily protect it through the power of the corporation.
If you don’t have a business today, the question is: Do you want to go through the process of learning how to build a business?
You are the only one who can answer that question.
I may have made my own decisions, but rich dad was there to help me process them—and follow through on them—every step of the way. I couldn’t have done it without him, and chances are you can’t do it on your own either.
Editor, Rich Dad Poor Dad Daily