One of my favourite ideas from the Rich Dad, Poor Dad book is the .
It is a KEY concept which you must understand to help you achieve Financial Independence.
Why Financial Intelligence ?
Today, we need greater financial intelligence to simply survive. Increased financial intelligence can be used to solve many of life's common problems and produces money. Financial intelligence leads to financial independence and financial freedom.
Education and wisdom about money are important.
Without financial training, we all too often use the standard formulas to get through life, such as to work hard without smart thinking, save without investments, borrow and pay excessive taxes.
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 intelligence- 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 but 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.
Money without financial intelligence is money soon gone.
Poor people have poor habits. A common bad habit is innocently called "Dipping into savings." The rich know that savings are only used to create more money, not to pay bills.
Rule One. You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know. It is Rule No. 1. It is the only rule.
This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability.
Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets.
As you can see there are four boxes. Each box represents a different aspect of your personal finances:
This is money coming into your life, which can be from a job, a business, assets, etc.
This is money going out of your life – rent, mortgage payments, food, petrol, etc.
These are items which put money into your pocket each month – Investment accounts, stocks and shares, rental property, book royalties, etc. *Not to forget donation/infaq ( >>> 4 Penentu )
These are items which take money out of your pocket each month – your house if it has a mortgage, any loans, credit cards, other debts which you must service.
Here are some examples…
CashFlow Diagram for someone who is poor…
As you can see, their income from a job, or benefits, goes straight to pay their expenses. They have no assets, and no liabilities. They have not yet started on their route to Financial Independence.
CashFlow Diagram for a typical middle-class person…
For a middle-class person, the story is slightly different. Their income pays their expenses, but in addition, they have extra expenses in the way of mortgages, credit card payments, loan payments.
A wealthy person does not need to work to pay their expenses. They have built up income generating assets (property, stocks and shares, investment accounts). These assets provide their income. In addition, they reinvest some of their income in more income-producing assets – so their income increases every month. They are already Financially Independent.