Over the summer, I listened to the audio book version of Robert T. Kiyosaki’s Rich Dad, Poor Dad and I experienced what could be described as a financial awakening. Apart from being a very enjoyable listen, the book offered some valuable lessons about how the rich get rich(er) and why the poor stay poor.
The key concept taught by the book is that of financial aptitude; knowing how to make your money work for you. It explained how the rich invest their money in income generating assets instead of the liabilities that poor people spend their money on. When asset buying is done well, it leads to more income without having to invest more time. That extra income can then be reinvested and the money making cycle not only continues, but grows.
For most people, their only source of significant income is through their jobs working for somebody else. Whilst there are those in jobs that pay well, the way in which they make extra money is to invest more of their time into their jobs. On the surface, this seems like a fair deal, but it’s hardly scalable and the extra income generated stops as soon as the overtime stops.
If you could get paid continuously for the time you invest, why would you instead choose to only get paid once for it?
I already appreciated that getting paid once for my time is unlikely to make me rich and that the smarter way to do things was to have automated income streams that aren’t directly proportional to the amount of time I spent on them. This was crucial because my time was one factor that will always be limited so I had to make use of someone or something else’s time in order to be where I wanted to be financially.
This is why, I’ve been working on reducing the amount of time I spend on single-pay work and instead reinvesting that time on developing assets that will generate income continuously. Gary of OSWorld has a large spread of 250 products that generate his income. In my opinion, he’s a good example of someone who has lots of individual income generating assets and has been able to escape the rat race because of them.
Back in September, the Northern Rock bank hit the headlines for the wrong reasons and their stock value plunged. I watched with interest as their share value bounced from the roller coaster ride it was on and I remembered that investing in the stock market was one of the ways of making money work for you suggested by Rich Dad. It was then I decided to take a closer at investing on the stock markets as a means of making my money work for me.
After speaking with a friend about my new found interest in the stock markets, he explained how his dad had tens of thousands of pounds invested in a variety of assets and was living a very enjoyable life in retirement. I always wondered how his parents were able to afford what seemed to be dozens of holidays throughout the year only to discover that my friend had a “rich dad”!
Within the space of the following few weeks, I researched and invested in a variety of different financial vehicles, moving as much money I could from bank accounts that offered a relatively low return.
Here’s a summary of my investments so far:
- Mini cash ISA offering a safe 6.3% return over the short term.
- FTSE 100 index tracking fund which could return a higher percentage over a longer term, but with greater risk. In order to minimise the tax I’ll have to pay on any income generated, I’ve wrapped it in a mini stock ISA.
- Shares in a number of FTSE 100 companies. Although these are large blue chip businesses, they’re still a risky investment as has been demonstrated recently with the likes of Northern Rock.
- Shares in a FTSE SmallCap company I consider to have great growth potential. Another risky investment, but with the potential to offer massive gains.
All of the above was set-up online and now only require minimal input from me as all I need to do is monitor their progress.
It’s still very early days for my stock portfolio, but in my mind, the financial switch has been well and truly flicked. Now, every significant purchase I make is categorised as being either an income generating asset or a liability. Doing this has already helped to reduce my outgoings significantly.
Interestingly, Rich Dad, Poor Dad categorises a house as a liability whereas everyone I’ve asked considered their homes to be assets. What do you think?
As part of my new interest in the stock market, last week, I bought a share in Google at just under the $700 mark. With hindsight, the stock would have been an excellent purchase back when it first went public in 2004 at sub-$100 or even just a few months ago like another blogger whose 5 shares bought at $2399.80 are now worth in the region of $3465. That’s a 44% return in just 7 months, if that stock was sold now.