What The Rich Teach Their Kids About Money—That The Poor And Middle Class Do Not!

To parents everywhere,
a child’s first and most important teachers,
and to all those who educate, influence,
and lead by example

The Richest Businessmen
In 1923 a group of our greatest leaders and richest businessmen
held a meeting at the Edgewater Beach hotel in Chicago. Among
them were Charles Schwab, head of the largest independent steel
company; Samuel Insull, president of the world’s largest utility;
Howard Hopson, head of the largest gas company; Ivar Kreuger,
president of International Match Co., one of the world’s largest
companies at that time; Leon Frazier, president of the Bank of
International Settlements; Richard Whitney, president of the
New York Stock Exchange; Arthur Cotton and Jesse Livermore,
two of the biggest stock speculators; and Albert Fall, a member of
President Harding’s cabinet. Twenty-five years later, nine of these
titans ended their lives as follows: Schwab died penniless after
living for five years on borrowed money. Insull died broke in a
foreign land, and Kreuger and Cotton also died broke. Hopson
went insane. Whitney and Albert Fall were released from prison,
and Fraser and Livermore committed suicide.

So here is the argument I put forth. I really don’t expect most
people to agree with it because your home is an emotional thing
and when it comes to money, high emotions tend to lower financial
intelligence. I know from personal experience that money has a way
of making every decision emotional.
• When it comes to houses, most people work all their
lives paying for a home they never own. In other words,
most people buy a new house every few years, each time
incurring a new 30-year loan to pay off the previous one.
• Even though people receive a tax deduction for interest
on mortgage payments, they pay for all their other
expenses with after-tax dollars, even after they pay off
their mortgage.
• My wife’s parents were shocked when the property taxes
on their home increased to $1,000 a month. This was
after they had retired, so the increase put a strain on their
retirement budget, and they felt forced to move.
• Houses do not always go up in value. I have friends who
owe a million dollars for a home that today would sell
for far less.
• The greatest losses of all are those from missed opportunities.
If all your money is tied up in your house, you may be forced
to work harder because your money continues blowing
out of the expense column, instead of adding to the asset
column—the classic middle-class cash-flow pattern. If a
young couple would put more money into their asset column
early on, their later years would be easier. Their assets would
have grown and would be available to help cover expenses.
All too often, a house only serves as a vehicle for incurring a
home-equity loan to pay for mounting expenses.

Mind Your Own Business

In summary, the end result in making a decision to own a house
that is too expensive in lieu of starting an investment portfolio impacts
an individual in at least the following three ways:

  1. Loss of time, during which other assets could have grown
    in value.
  2. Loss of additional capital, which could have been invested
    instead of paying for high-maintenance expenses related
    directly to the home.
  3. Loss of education. Too often, people count their house
    and savings and retirement plans as all they have in their
    asset column. Because they have no money to invest, they
    simply don’t invest. This costs them investment experience.
    Most never become what the investment world calls “a
    sophisticated investor.” And the best investments are usually
    first sold to sophisticated investors, who then turn around
    and sell them to the people playing it safe.

Work to Learn—Don’t Work for Money

I remind people that financial IQ is made up of knowledge from
four broad areas of expertise:

  1. Accounting
    Accounting is financial literacy or the ability to read numbers.
    This is a vital skill if you want to build an empire. The more
    money you are responsible for, the more accuracy is required,
    or the house comes tumbling down. This is the left-brain
    side, or the details. Financial literacy is the ability to read and
    understand financial statements which allows you to identify
    the strengths and weaknesses of any business.
  2. Investing
    Investing is the science of “money making money.” This
    involves strategies and formulas which use the creative
    right-brain side.
  3. Understanding markets
    Understanding markets is the science of supply and demand.
    You need to know the technical aspects of the market, which are
    emotion-driven, in addition to the fundamental or economic
    aspects of an investment. Does an investment make sense or does
    it not make sense based on current market conditions?
  4. The law
    A corporation wrapped around the technical skills of
    accounting, investing, and markets can contribute to explosive
    growth. A person who understands the tax advantages and
    protections provided by a corporation can get rich so much
    faster than someone who is an employee or a small-business
    sole proprietor. It’s like the difference between someone walking
    and someone flying. The difference is profound when it comes
    to long-term wealth.
    • Tax advantages
    A corporation can do many things that an employee cannot,
    like pay expenses before paying taxes. That is a whole area of
    expertise that is very exciting. Employees earn and get taxed,
    and they try to live on what is left. A corporation earns,
    spends everything it can, and is taxed on anything that is
    left. It’s one of the biggest legal tax loopholes that the rich
    use. They’re easy to set up and are not expensive if you own
    investments that are producing good cashflow. For example,
    by owning your own corporation, your vacations can be
    board meetings in Hawaii. Car payments, insurance, repairs,
    and health-club memberships are company expenses. Most
    restaurant meals are partial expenses, and on and on. But it’s
    done legally with pre-tax dollars.
    • Protection from lawsuits
    We live in a litigious society. Everybody wants a piece of
    your action. The rich hide much of their wealth using
    vehicles such as corporations and trusts to protect their
    assets from creditors. When someone sues a wealthy
    individual, they are often met with layers of legal protection
    and often find that the wealthy person actually owns
    nothing. They control everything, but own nothing. The
    poor and middle class try to own everything and lose it to
    the government or to fellow citizens who like to sue the
    rich. They learned it from the Robin Hood story: Take
    from the rich, and give it to the poor.

Which one sounds harder to you?

  1. Work hard. Pay 50% in taxes. Save what is left.
    Your savings then earn 5%, which is also taxed.
    OR
  2. Take the time to develop your financial intelligence
    Harness the power of your brain and the asset column.

I have said it before, but it’s worth repeating. Financial intelligence
is made up of these four main technical skills:

  1. Accounting
    Accounting is financial literacy, or the ability to read
    numbers. This is a vital skill if you want to build
    businesses or investments.
  2. Investing
    Investing is the science of money making money.
  3. Understanding markets
    Understanding markets is the science of supply and
    demand Alexander Graham Bell gave the market what it
    wanted. So did Bill Gates. A $75,000 house offered for
    $60,000 that cost $20,000 was also the result of seizing
    an opportunity created by the market. Somebody was
    buying, and someone was selling.
  4. The law
    The law is the awareness of accounting corporate, state and
    federal regulations. I recommend playing by the rules.

Getting Started

  1. Find an opportunity that everyone else missed.
    You see with your mind what others miss with their eyes.
    For example, a friend bought this rundown old house. It was
    spooky to look at. Everyone wondered why he bought it.
    What he saw that we did not was that the house came with
    four extra empty lots. He discovered that after going to the
    title company. After buying the house, he tore the house
    down and sold the five lots to a builder for three times what
    he paid for the entire package. He made $75,000 for two
    months of work. It’s not a lot of money, but it sure beats
    minimum wage. And it’s not technically difficult.
  2. Raise money.
    The average person only goes to the bank. This second type
    of investor needs to know how to raise capital, and there are
    many ways that don’t require a bank. To get started, I learned
    how to buy houses without a bank. It was the learned skill
    of raising money, more than the houses themselves, that
    was priceless.
  1. Organize smart people.
    Intelligent people are those who work with or hire a
    person who is more intelligent than they are. When you
    need advice, make sure you choose your advisor wisely.

Still Want More? Here Are Some To Do’s

The main management skills needed for success are:

  1. Management of cash flow
  2. Management of systems
  3. Management of people

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