The Big 4 Retirement Worries and How to Beat Them

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The #1 concern most Americans have when it comes to retirement is paying for health care.

According to a recent survey from Merrill Lynch and Age Wave, those age 65 and over ranked health as their greatest source of worry.

With rising health care costs and longer life expectancies, it’s no wonder covering medical expenses tops most retirees list of retirement worries.

Add to that an unpredictable future for our Social Security system, market corrections, and uncertain taxes, it’s reasonable to feel a bit on edge these days.

However, Americans do retire successfully. Studies tend to show current retirees being less concerned about these issues than those approaching retirement. They have the benefit of experience, I guess.

Although I can’t predict your future, a bit of insight and planning can still go a long way to help ease some of your retirement worries.

So today, I’m going to debunk four of the biggest worries nearly all retirees have on their mind.

Retirement Worry #1: Health Care

You see healthcare top many retirement lists and studies as a major concern because many health issues are age related.

While you can’t control your genetic makeup, you can make good choices when it comes to eating healthy and exercising regularly. In addition, I find simply giving people their options when it comes to healthcare coverage can ease a lot of the uncertainty.

Here are the basics…

Most people become eligible for Medicare when they turn 65. Medicare is made up of several parts.

Medicare Part A is hospital coverage. It’s generally free, with some exceptions.

Medicare Part B is medical insurance, and you pay a premium for coverage.

Medicare Part C, aka Medicare Advantage, is an optional replacement for traditional Medicare. You might pay more for an optional Part C plan.

Medicare Part D is your prescription drug coverage. Pard D costs will vary.

So unless your prior employer has your health insurance covered for life, you’ll most likely go onto Medicare.

Choosing the right plan depends on your health status, family history, and budget. It’s also not a bad idea to consider a Medicare Supplement plan, or a Medigap policy.

A major reason to consider a Medigap policy is if you plan on traveling.

Traditional Medicare doesn’t cover you when you travel outside the U.S. But, most Medigap policies do.

The last thing you should consider is long-term care insurance. The data isn’t pretty. Coverage is expensive and your alternative of no coverage can be worse.

The main things to consider here are whether or not your assets are needed for someone else to maintain a certain standard of living. And, whether or not you’re looking to leave a legacy.

Those are two major questions you need to ask before you consider long-term care insurance.

Retirement Worry #2: Outliving Your Money

The second biggest worry is fear of running out of money. With longer life expectancies and rising costs, the amount of money it takes to maintain a comfortable standard of living in retirement is significant.

Step one is to figure out how much you’ll need saved to retire comfortably. You can do this a number of ways but my suggestion would be to find a few different retirement calculators and run the numbers.

Once you have a few different sets of numbers, choose the worst case scenario and build your savings plan around that number.

The sooner you know how much you should have saved the better. Sometimes it can seem like a pension, Social Security and some modest savings will be enough. But that isn’t always the case.

Inflation and other uncontrollable factors can quickly eat away at your savings. It’s important to keep your spending to a minimum early in retirement, this way you give your money time to grow and you’ll have extra saved should you run into trouble later on.

Retirement Worry #3: Not Enough Cash Flow

This worry might seem similar to the second, but it comes from a different place. A lot retirees worry that their income won’t be enough to cover basic living expenses.

The fate of Social Security is up in the air. It likely won’t disappear but it could be significantly reduced, leaving a lot of retirees struggling to pay their bills.

The fix here is putting in place a solid drawdown strategy. The most common strategy is the 4% rule, where you withdraw 4% of your savings in the first year of retirement, and each year after that you take out the same dollar amount, plus an inflation adjustment.

For example, if you have $1,000,000 in retirement savings, the first year you would withdraw $40,000. Then, over the course of that year, inflation runs 3%. The next year, you’d withdraw $41,200.

There are a number of different drawdown strategies, the point being that having a sufficient cash flow is critical in retirement.

Retirement Worry #4: Debt

The last big worry is paying down debt. This worry probably wouldn’t have topped the list 20 years ago. But today retirees carry a lot more debt.

Bigger mortgages, multiple credit cards — it’s a major issue that retirees face. It’s not that you can’t ever have debt in retirement, but you need to be able to manage it.

If you can, pay off your credit cards before you retire. You don’t want your retirement savings getting eaten up by high-interest payments.

In some cases, you’ll want to go into debt. Maybe you need to replace your vehicle and the interest payments are low enough that it makes sense to take out a car loan.

You might also downsize or buy a second vacation property with a mortgage. So long as you’re not relying on debt to fund your retirement and you have a plan in place to manage the debt you owe, you can overcome this worry.

The bottom line is that it’s natural to feel some anxiety about retirement. With the right plan is place and a grasp on what’s to come, you can mitigate most of your fears fairly easily.

To a richer life,

Nilus Mattive

Nilus Mattive

The post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

The Big 4 Retirement Worries and How to Beat Them

This post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

The #1 concern most Americans have when it comes to retirement is paying for health care.

According to a recent survey from Merrill Lynch and Age Wave, those age 65 and over ranked health as their greatest source of worry.

With rising health care costs and longer life expectancies, it’s no wonder covering medical expenses tops most retirees list of retirement worries.

Add to that an unpredictable future for our Social Security system, market corrections, and uncertain taxes, it’s reasonable to feel a bit on edge these days.

However, Americans do retire successfully. Studies tend to show current retirees being less concerned about these issues than those approaching retirement. They have the benefit of experience, I guess.

Although I can’t predict your future, a bit of insight and planning can still go a long way to help ease some of your retirement worries.

So today, I’m going to debunk four of the biggest worries nearly all retirees have on their mind.

Retirement Worry #1: Health Care

You see healthcare top many retirement lists and studies as a major concern because many health issues are age related.

While you can’t control your genetic makeup, you can make good choices when it comes to eating healthy and exercising regularly. In addition, I find simply giving people their options when it comes to healthcare coverage can ease a lot of the uncertainty.

Here are the basics…

Most people become eligible for Medicare when they turn 65. Medicare is made up of several parts.

Medicare Part A is hospital coverage. It’s generally free, with some exceptions.

Medicare Part B is medical insurance, and you pay a premium for coverage.

Medicare Part C, aka Medicare Advantage, is an optional replacement for traditional Medicare. You might pay more for an optional Part C plan.

Medicare Part D is your prescription drug coverage. Pard D costs will vary.

So unless your prior employer has your health insurance covered for life, you’ll most likely go onto Medicare.

Choosing the right plan depends on your health status, family history, and budget. It’s also not a bad idea to consider a Medicare Supplement plan, or a Medigap policy.

A major reason to consider a Medigap policy is if you plan on traveling.

Traditional Medicare doesn’t cover you when you travel outside the U.S. But, most Medigap policies do.

The last thing you should consider is long-term care insurance. The data isn’t pretty. Coverage is expensive and your alternative of no coverage can be worse.

The main things to consider here are whether or not your assets are needed for someone else to maintain a certain standard of living. And, whether or not you’re looking to leave a legacy.

Those are two major questions you need to ask before you consider long-term care insurance.

Retirement Worry #2: Outliving Your Money

The second biggest worry is fear of running out of money. With longer life expectancies and rising costs, the amount of money it takes to maintain a comfortable standard of living in retirement is significant.

Step one is to figure out how much you’ll need saved to retire comfortably. You can do this a number of ways but my suggestion would be to find a few different retirement calculators and run the numbers.

Once you have a few different sets of numbers, choose the worst case scenario and build your savings plan around that number.

The sooner you know how much you should have saved the better. Sometimes it can seem like a pension, Social Security and some modest savings will be enough. But that isn’t always the case.

Inflation and other uncontrollable factors can quickly eat away at your savings. It’s important to keep your spending to a minimum early in retirement, this way you give your money time to grow and you’ll have extra saved should you run into trouble later on.

Retirement Worry #3: Not Enough Cash Flow

This worry might seem similar to the second, but it comes from a different place. A lot retirees worry that their income won’t be enough to cover basic living expenses.

The fate of Social Security is up in the air. It likely won’t disappear but it could be significantly reduced, leaving a lot of retirees struggling to pay their bills.

The fix here is putting in place a solid drawdown strategy. The most common strategy is the 4% rule, where you withdraw 4% of your savings in the first year of retirement, and each year after that you take out the same dollar amount, plus an inflation adjustment.

For example, if you have $1,000,000 in retirement savings, the first year you would withdraw $40,000. Then, over the course of that year, inflation runs 3%. The next year, you’d withdraw $41,200.

There are a number of different drawdown strategies, the point being that having a sufficient cash flow is critical in retirement.

Retirement Worry #4: Debt

The last big worry is paying down debt. This worry probably wouldn’t have topped the list 20 years ago. But today retirees carry a lot more debt.

Bigger mortgages, multiple credit cards — it’s a major issue that retirees face. It’s not that you can’t ever have debt in retirement, but you need to be able to manage it.

If you can, pay off your credit cards before you retire. You don’t want your retirement savings getting eaten up by high-interest payments.

In some cases, you’ll want to go into debt. Maybe you need to replace your vehicle and the interest payments are low enough that it makes sense to take out a car loan.

You might also downsize or buy a second vacation property with a mortgage. So long as you’re not relying on debt to fund your retirement and you have a plan in place to manage the debt you owe, you can overcome this worry.

The bottom line is that it’s natural to feel some anxiety about retirement. With the right plan is place and a grasp on what’s to come, you can mitigate most of your fears fairly easily.

To a richer life,

Nilus Mattive

Nilus Mattive

The post The Big 4 Retirement Worries and How to Beat Them appeared first on Daily Reckoning.

Are You Ready for Another Recession

This post Are You Ready for Another Recession appeared first on Daily Reckoning.

Dear Rich Lifer,

Although the U.S. economy continues to grow and add jobs, talk of the dreaded “R” word is on the rise due to a number of worrying signs.

Yes, I’m talking about a “Recession”.

Between the ongoing trade war with China, an inverted yield curve, and the Federal Reserve lowering short-term borrowing costs, investors are starting to get spooked.

A question I get asked a lot is what should retirees do with their money when a recession is looming?

When the market crashed in 2008, an estimated $2.4 trillion disappeared almost overnight from Americans’ 401(k)s and IRAs.

The fear of losing everything to another recession is sending a lot of investors running for the hills.

However, there are steps you can take today to minimize losses during a recession, no matter your age or financial situation.

Here’s a checklist you can follow so that your investments and savings can weather any financial storm.

1. Start tracking your cash flow.

Step one in preparing for a recession is knowing where you stand. The best way to figure this out is by calculating your cash flow, or how much money you have coming in versus going out.

Knowing what your fixed and variable costs are each month as well as where your income is coming from will relieve some of the uncertainty should there be an economic downturn.

If you’re employed, there’s a high chance that you might get laid off during a recession, so you’ll want to know exactly how long your savings will last.

An easy way to begin tracking cash flow is with free mobile apps, like Mint or Personal Capital. You simply connect your bank accounts to these apps and the software tracks your transactions and categorizes your spending.

This way you know where your money is going each month and you can start setting budget goals or identifying expenses that can easily be cut in the future.

2. Top up your emergency fund.

Your best defense against economic hardship will be a well-funded emergency fund. Rather than rack up high-interest debt, you can tap your savings to cover basic living expenses.

As a general rule-of-thumb, I recommend building an emergency fund of 3-6 months worth of expenses. With talk of a nearing recession, however, it’s best to err on the conservative side.

The reason why an emergency fund is critical is because you’ll need liquid money to keep paying your bills. If you or your spouse lose your job, an emergency fund will come in handy to keep you afloat.

If you’re retired, you won’t have to worry about getting laid off, but you’ll still need an adequate amount of accessible cash in case your retirement accounts or pension take a hit.

3. Pay off outstanding debt.

With talk of a recession happening in the next year or so, it’s a good time to start aggressively paying down any bad debts you owe.

Should a recession strike, you’ll want your income going toward monthly living expenses and not paying the bank.

Plus, if you miss too many payments you could end up wrecking your credit score, which will make your life even more challenging when the economy recovers.

Also, whatever you do, don’t dip into your 401(k) to pay off debt, especially if you’re not yet retired. Start with high-interest debt first, like credit cards and build debt payments directly into your budget so you don’t forget.

4. Rebalance your investment portfolio.

Once you’ve taken care of your emergency fund and paid down any outstanding debts, it’s time to review your investments.

If you’re already retired or close to retirement, you’ll want to mitigate as much risk as possible but still maintain enough growth in your portfolio to pay for living expenses and outpace inflation.

Traditional wisdom of maintaining a 60/40 mix of stocks and bonds is no longer enough diversification.

The reason being that retirees are now living longer, which means your portfolio needs more room for growth. Look to diversify your portfolio to include a wide range of asset classes, like foreign stocks and bonds, this will put you in a better position to endure a downturn.

5. Manage your 401(k) wisely

If times get really tough, it can be tempting to want to sell or make significant alterations to your 401(k). My advice: don’t touch it.

Most likely, your 401(k) is part of your long-term financial plan, which means economic downturns are part of the deal. You don’t want to jeopardize any long-term gains by panic-selling the moment markets start dropping.

Lastly, if you’re not already maxing out your 401(k) contributions or taking advantage of any employer-match programs, make sure you do. That’s your money to keep.

Finally, understand that recessions are a normal part of the economy. They’re cyclical in nature and notoriously hard to predict. Control what you can by heeding the warning signs and preparing best you can.

To a richer life,

Nilus Mattive

Nilus Mattive

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The Investing Mystery Solved

This post The Investing Mystery Solved appeared first on Daily Reckoning.

For many new investors, the numbers of investing are a mystery.

They may even appear intimidating and mind numbing. The reality, however, is that they are just the opposite! Numbers are the clues for solving the mystery.

Every investment has a story. Every time someone approaches you to invest money in his or her particular investment, whatever it may be, they will tell you that story.

  • “This company has just discovered the cure for cancer and will be coming out with its new wonder product in five months. The stock will explode!”
  • “This 24-unit apartment building is where the growth in Texas is moving. Boeing is opening a new plant there next year, so the demand for rentals will be extremely high.”
  • “My partner and I have created a new clothing line geared for women at colleges and universities. We’ve been in the fashion world for 25 years. So far, 30 of the major universities have picked up our line. We have verbal agreements that that number will double in the next six months.”

Where people get into trouble with investments is when they act upon the story without getting into the facts that the numbers tell. The numbers may tell the same story or a very different one. It’s up to you to uncover the true story and to solve the mystery.

Rich dad often said, “It is through the expense column that the rich person sees the other side of the coin. Most people only see expenses as bad, events that make you poor. When you can see that expenses can make you richer, the other side of the coin begins to appear to you.”

He said, “One of the reasons so few people become rich is that they become set in one way of thinking. They think there is only one way to think or do something.

“While the average investor thinks, ‘Play it safe and don’t take risks,’ the rich investor must also think about how to improve skills so he or she can take more risks.” Rich dad called this kind of thinking, “Thinking on both sides of the coin” by standing on the edge.

Numbers as Clues

Consider every investment you pursue as a mystery to be solved. The numbers that make up that investment’s story by themselves means nothing. I never see numbers from an investment analysis as just numbers. Instead, I look at the numbers as clues to guide me to discovering the truth about the investment. What is the investment? How is it really performing? How can we expect it to perform in the future?

Many investment pitches show you pretty brochures. They give you lots of facts about the industry and not the specific company, city, or property.

Here’s a general rule: The bigger the brochure, the worse the deal.

If the offering is not clear and concise, then chances are, the investment is anything but great. Don’t baffle me with your BS (blue sky).

Finding a Good Deal in the Numbers

Imagine you are told a story like this: “For the past two years, my business sold $5,000 worth of product. My projection for this next year, with your investment money, is that we will sell $100,000 worth of product!”

At that point, you have only one question to ask, “How?” Everyone knows you do not go from $5,000 to $100,000 without a strong plan in place. If she can’t show you how she will get there, then the $100,000 prediction is meaningless.

If an investment opportunity is a good deal, then:

  • Show me the numbers—past operating numbers, as well as the worst-and best-case scenario of future numbers.
  • Explain why and how this investment will increase in value in the future.
  • Give me the expected rate of return on the money I invest in this investment.

Use the three bullets above to obtain information and start your research. Even if you trust someone, check to see if their numbers are correct. It’s a good learning experience. Plus, people trying to sell something tend to expand the truth… even if they are powerful and respected.

For example, according to an article in Harvard Business Review, a study done by Dana Carney from Columbia University Graduate School of Business found that, “a sense of power buffers individuals from the stress of lying and increases their ability to deceive others.”

The purpose of the numbers is for you to identify the red flags, the possible inconsistencies, of what you are being told. The numbers help you discover what the facts really are and raise the right questions.

Untangling the Numbers

Let’s say you are considering the purchase of a rental duplex. The seller tells you that the property has very low operating expenses. That sounds like a good thing, right?

You review last year’s numbers and see that the owner has indeed spent very little on maintenance and repairs for this duplex. It raises a question (could be a clue) in your mind, so you dig a little deeper. The owner is telling you part of the truth.

Yes, it’s true his expenses to maintain the property were very low. Upon further inspection, however, what he did not tell you is that, because he has spent so little to maintain the property, there are many repairs that need to be done to the building to keep it operating.

His maintenance-and-repair expenses are low, but yours, especially when you first buy it, will be very high.

The numbers are just as important if you are purchasing shares of stock in a publicly traded company. Most people buy and sell stocks based upon rumors, tips, and current news. When you buy shares of stock in a company, you own a piece of that company.

If you are going to invest in a company, wouldn’t you want to review its past performance numbers and future projections, just as you would a privately-held company?

The numbers don’t lie. Keep this in mind as you move forward on your journey to independence, financially. Learn to overcome your fear of numbers and use them to uncover the mysteries of a good investment versus a bad investment.

The more comfortable you become through practice and experience at understanding the numbers of any investment, the greater success you will have as an investor.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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Brace Yourselves: A Crash Is Coming

This post Brace Yourselves: A Crash Is Coming appeared first on Daily Reckoning.

I know we are in the midst of a joyous time of year, but that doesn’t mean the world has stopped turning. And the start of 2019 brings us to a critical moment. We’re on the brink of the third wave crash.

Let’s take a gander at recent history: First, there was the 1980’s savings and loan crisis. Then, in 1987, the stock market crashed, and the Dow Jones index lost 23% of its value. The next major event was the dotcom bubble and subsequent crash from 1999 to 2000. And the most recent event was the global financial crisis in 2007-08, which was triggered by the subprime mortgage crisis and collapse of the U.S. housing bubble. I’m leaving out a few smaller ones in between, but those are the true highlights (or lowlights, really) of the crash cycle in the past forty years.

Essentially, the economic cycle is longest period of tranquility took place during the 1990s when the economy went an entire decade without a down cycle. That was a rare—and glorious—decade.

As you can see, it’s been 10 years since the last major event—if history repeats itself, we’re due for a crash. And soon. That is if we’re not already seeing the needle headed toward the bubble.

Let’s examine the evidence: Both the Dow Jones Industrial Average and the S&P 500 are up for their worst December performance since 1931, when stocks were battered during the Great Depression.

December is typically a very positive month for markets. The Dow has only fallen during 25 Decembers going back to 1931.

The S&P 500 averages a 1.6 percent gain for December, making it typically the best month for the market, according to the Stock Trader’s Almanac.

Bitcoin, the highly volatile cryptocurrency, has created a complete frenzy in recent weeks. Last year at this time, Bitcoin saw a 1600% increase in value. That being said, Bitcoin’s bubble literally popped and millennials, like generations before them, just got a painful lesson about speculation. Also, in the news there’s talk of housing bubbles and auto loan bubbles forming left and right.

Do you know what bubbles always do? Pop!

Preparing for The Pop

I’m not trying to end the year on a note of doom and gloom. We don’t know when this bubble will burst, but we can certainly start preparing for it. How? It all comes down to financial education.

You see, it all begins with understanding that money doesn’t make you rich. Your financial IQ is what makes you rich. I guarantee that if you give the same $100,000 to a person with a low financial IQ and a person with a high financial IQ, you’ll see an immense difference in how they spend and grow that same money.

Central to the difference between those with low and high financial IQs is a simple but profound literacy: the ability to understand a financial statement—an income statement and balance sheet.

balance sheet

Strangely, accounting classes teach how to read an income statement and balance sheet separately. But, it’s actually the understanding of the relationship between them that’s crucial. After all, how can you tell what an asset or liability really is without the income column or the expense column? Understanding the relationship between the two allows you to easily see the direction of your cash flow so you can effortlessly determine if something is making you money or not.

Bottom line: If something is making money, it’s an asset. If not, it’s a liability. The reason most people with low financial IQs suffer money-wise is that they purchase liabilities and mistakenly list them under the asset column.

Cash Flow is the Only Way to Go

It’s this simple insight that explains why those with a low financial IQ are still poor even when they make a six-figure income. They have no clue how to move their money into assets that make them more money. And cash flow is king.

Because financial subjects have a way of turning unnecessarily complicated, let’s keep the concepts simple and use diagrams for added clarity. If you can understand the following diagrams, you have a better chance of acquiring great wealth.

Cash flow patterns

cash flow pattern

An asset is something that puts money in your pocket. This is the cash-flow pattern of an asset:

A liability is something that takes money out of your pocket. This is the cash-flow pattern of a liability:

cash flow pattern

The Confusing Part

Now, confusion can happen because accepted methods of accounting allow for the listing of both assets and liabilities under the asset column.

To explain this, look at this diagram:

cash flow pattern

In this diagram, we have a $100,000 house where someone has put $20,000 cash down and now has an $80,000 mortgage. Confusing indeed! How do you know if this house is an asset or a liability? Is the house an asset just because it is listed under the asset column?

The answer is, of course, no. In order to know for sure, you would need to refer to the income statement to see if it was an asset or a liability.

To illustrate this, let’s look at a diagram that depicts the house as a liability:

cash flow pattern

You can tell it is a liability because it’s only line items are under the expense column. Nothing is in the income column.

Next, let’s look at a diagram with the addition of a line that reads “rental income” and “net rental income”—the key word being “net.” Do you see how that addition to the financial statement changes that house from a liability to an asset?

cash flow pattern

Put simply, if the rental income of the house, minus the expenses of the house, equal positive net rental income, then the house is an asset. If not, it’s a liability.

Did you find this lesson profound? It’s essentially the basis for building all great wealth. Going back to my earlier comment, a person with a high financial IQ and $100,000 would be able to know how to invest it in assets that are true assets—ones that put more money back in the pocket each month. The person with the low financial IQ would spend that same money on liabilities but wouldn’t be able to diagnose what was wrong. Instead, they would try and work harder to make more money—a vicious cycle we call the Rat Race.

Back to The Bubble

Understanding the relationship between the income statement and the balance sheet allows you to quickly understand if an investment is an asset or a liability—and this understanding will allow you to make the right investment every time. While you can’t control how the economy behaves or when this unavoidable bubble will occur, you can absolutely control your ongoing education and financial prowess to minimize its impact.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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The Secret to Getting Rich on Real Estate

This post The Secret to Getting Rich on Real Estate appeared first on Daily Reckoning.

Before I began my business career, my rich dad insisted that I learn to be a real estate investor. At first, I thought he wanted me to invest in real estate simply for the real estate itself. As the years went on and my base of education grew, I came to better understand the bigger picture of the world of investing.

Rich dad said, “If you want to be a sophisticated investor, you must train your mind to see what your eyes cannot see.”

What my eyes could not see were the legal and tax advantages that real estate investing offers (informed) investors. In other words, there is far more to real estate than land, sticks, and bricks.

Today I make my money from all for asset classes: commodities, businesses, real estate, and paper assets. (And if you like quick-market gains, I have a video you need to see…)

But I hold the bulk of my wealth in real estate. I am able to magnify my wealth using the advantages that real estate offers the sophisticated investor.

There have been challenges for real estate investors in the recent past. But if you learn the ins and outs of real estate investing, you can make money in real estate whether the market is going up, down, or sideways.

That is why my rich dad preferred investing for cash flow instead of capital gains. As long as your property is cash-flow positive, you can ride out a downturn in the real estate market. The flippers and capital-gains buyers who are left holding properties for resale in a plummeting market are the ones who will be hurt the most.

You also need to surround yourself with good advisors. As a real estate investor, you must seek tax and legal advice from professional.

I do not know all of the details of the tax and legal advantages he describes—but I am glad that he, as my advisor, does.

Right Side of the Quadrant

We’re taught to “park” our money. So, it sits there, doing very little but waiting for us to use it.

Most people are on the left side of the Quadrant, working for their money instead of having their money working for them. In that scenario, the bulk of their money pays off bills—liabilities—while only the “leftovers” go into savings or investments. So, most of their money is flowing away from them.

But for the people on the right, the B-I people, their money is working for them. It’s flowing toward them. Their income is passive; their own money, as well as other people’s money, time, and energy, all generate wealth for them.

Does this mean you have to give up your current career or employment? Absolutely not. It simply means that your goal should be to increase your assets—right-sided, dynamic income generators—in order to get your income working for you, and not the other way around.

To me real estate represents freedom. Real estate means control over my life and my future. I am not depending upon a retirement plan filled with stocks, bonds and mutual funds—investments that someone else manages. I want control over my financial destiny.

Cash Flow

When I speak of making money in real estate, I’m speaking of cash flow. This is income coming in every month, regardless of whether I work or not. Achieving sustainable cash flow requires a higher degree of financial education. The good news is you don’t have to go to college to get this education.

Cash flow is realized when you purchase an investment and hold on to it, and every month, quarter, or year that investment returns money to you. Cash-flow investors, unlike capital-gains investors, typically do not want to sell their investments because they want to keep collecting the regular income of cash flow.

If you purchase a stock that pays a dividend, then, as long as you own that stock, it will generate money to you in the form of a dividend.

That is called cash flow. To cash flow in real estate, you could purchase a single-family house and, instead of fixing it up and selling it, you rent it out. Every month you collect the rent and pay the expenses, including the mortgage.

If you bought it at a good price and manage the property well, you will receive a profit or positive cash flow.

The cash-flow investor is not as concerned as the capital-gains investor whether the markets are up one day or down the next. The cash-flow investor is looking at long-term trends and is not affected by short-term market ups and downs.

Capital Gains

When people say their house has appreciated in value, or they flipped a property, they are speaking of capital gains. Capital gains is the game of buying and selling for a profit. You have to keep buying and selling, buying and selling, and buying and selling…or the game and the income stop.

Capital gains occur, for example, when you buy a share of stock for $20. The stock price goes to $30, and you sell it. Your profit is called capital gains.

The same is true with real estate. You buy a single-family house for $100,000. You make some repairs and improvements to the property, and you sell it for $140,000. Your profit is termed capital gains. Any time you sell an asset or investment and make money, your profit is capital gains.

Of course, there are also capital losses. This occurs when you lose money on the sale.

The Advantage of Cash Flow Investing

The best thing about cash flow is that it is money flowing into your pocket on a continual basis whether you’re working or not. It is your money working for you.

And generally, cash-flow investing is based on fundamentals that aren’t as susceptible to market swings like capital-gains investments, which means that even in bad times, money still flows into your pockets.

Additionally, cash flow is what is known as passive income, which is the lowest taxed type of income.

This is not always the case with capital gains taxes, which vary depending on the type of asset you’ve invested in and how long you’ve owned that asset. In some cases, the taxes can be very high.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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