Rich Dad's Basics

The Basics

It's important to master the 'basics' of the Rich Dad messages and mission so that you have a secure and clear foundation upon which to build your financial future. Here are a few key concepts and Rich Dad's Definitions for review:

Assets vs. Liabilities
Asset: something that puts money in your pocket
Liability: something that takes money out of your pocket.

Is the home in which you live an asset or a liability? In Rich Dad's world, your house is a liability. Even if you own the property with no mortgage, you still pay property taxes, utilities, maintenance, etc. Therefore: money is being taken out of your pocket.

Types of Asset Classes
There are three types of assets:
1) Paper Assets This includes stocks, bonds, mutual funds, insurance
They create PORFOLIO INCOME
2) Real Estate This includes residential and commercial properties
They create PASSIVE INCOME
3) Businesses They create PASSIVE INCOME

Earned Income:
This includes income derived, generally, from a job or some form of labor. In its most common form, it is income from a paycheck. It is also the highest taxed income, so it is the hardest income with which to build wealth. When you say to a child, "Get a good job", you are advising them to work for earned income.

Passive Income:
This is income that is, generally, derived from real estate. It can also be income derived from royalties from patents, license agreements or an established network marketing business. In approximately 80% of passive income scenarios, the income is from real estate. There are many tax advantages afforded with real estate investments.

Portfolio Income:
This income is generally derived from paper assets such as stocks, bonds and mutual funds. Portfolio income is, by far, the most popular form of investment income simply because paper assets are so much easier to manage and maintain than other types of investments.

   E-Employee
   S-Self-Employed
   B-Business Owner
   I-Investor

CASHFLOW Quadrant
The CASHFLOW Quadrant describes the four different types of people represented in the world of business: the employee, the self-employed, the business owner and the investor.

Employees (E) and self-employed (S) individuals reside on the left side of the CASHFLOW Quadrant. The right side of the Quadrant is for individuals who receive their cash from Businesses (B) they own or investments (I) they make. Each of us resides in at least one of the four quadrants. Where we fall within the quadrant is determined by what types of efforts generate our cash. From what quadrant -- or quadrants -- does your cash come?

Three important points in summarizing the B-I Triangle:
1. Money always follows management. If any of the management functions of the five individual levels are weak, the company will be weak. Once you identify your weakness, you may then want to consider turning it into your strength or hiring someone with that strength.
2. Some of the best investments and businesses are the ones you walk away from. If any of the five levels are weak and the management is not prepared to strengthen them, it is best to walk away from the investment.
3. The personal computer and the Internet have made the B-I Triangle more available, affordable and manageable for everyone. When a business fails, it is often due to failure in one or more sectors of the B-I Triangle. The B-I Triangle gives structure to your ideas. It represents the knowledge required to be successful in the B and I quadrants on the right side of the CASHFLOW Quadrant.

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