Unfair Advantage -The Power of Financial Education (2 page)

In the Industrial Age, all it took to be successful was the following two types of education:

• Academic education: The ability to read, write, and solve basic mathematical problems.
  

• Professional education: Education to earn money with by being a productive member of society.
  

For example, medical doctors go to medical school, lawyers go to law school, pilots go to flight school, chefs to go cooking school, and so on.

In the Information Age, we need the following three types of education:

• Academic
  

• Professional
  

• Financial
  

The following question thus arises: Why is there not any financial education in schools?

The answer: Humans trap and train monkeys in school.

If a person has a solid financial education, they will not cling so tightly to job security, a steady paycheck, and a pension. If a person knows the tax laws, they will not pay unnecessary taxes. If they understand the banking system, they will not save money. Rather than call their home an asset, they will know that it is a liability. If they understand inflation, they will not try to live below their means. Rather than get out of debt, they will learn how to use debt to gain wealth. And they will not mindlessly turn their money over to Wall Street bankers, financial planners, and real estate agents in the hope of obtaining a secure retirement.

Most importantly, they will question why they are going to school, who their teachers are, and where their education is leading them.

Education Is a Process

In 1973, I returned home from the Vietnam War. I had one year left on my military contract, and I was looking forward to the next direction my life would take.

In 1973, I was 26 years old, a college graduate with two professional licenses: one as a third mate on oil tankers sailing for Standard Oil, and the second as a pilot, flying for the U.S. Marine Corps. Although both professions could be high-paying with job security, I did not want to either sail or fly.

When I asked my poor dad for advice, he recommended that I follow in his footsteps, which would be to go back to school, get my master’s degree, get my PhD, and then get a job with the government.

The problem was that in 1973 my dad was 54 years old, the former superintendent of education for the State of Hawaii, a former Republican candidate for lieutenant governor of Hawaii, and unemployed.

My dad was unemployed because he resigned from the superintendent of education position to run on the Republican ticket against his boss, the governor, a Democrat. When Judge Samuel King and my dad lost the gubernatorial election, the governor informed my dad that the price for his lack of loyalty was to never be allowed to work in state government again.

My dad, although highly educated, could not survive in the real world outside of the educational system. Knowing he could not find a paying government job, my dad took his retirement savings, bought an ice cream franchise and lost it all when his ice cream business failed.

In many ways, it was my poor dad who gave me a glimpse of the future, not for his generation, but for mine.

When he recommended that I follow in his footsteps, I knew whose advice I would follow. After leaving my poor dad’s home, I drove to Waikiki to my rich dad’s office and asked for his advice.

Education Is Very Important

Both dads had tremendous respect for education—but not for the same education. One of my unfair advantages is to know the differences between different types of education.

The following are three concepts that are helpful when considering different types of education:

1. Education is a process.

A person goes to school to go somewhere and become something. For example, I went to flight school to become a pilot. The problem with traditional education is that traditional education is a process to becoming an employee. That is why most people say, “Go to school to get a job.”

Monkeys don’t question why they stuck their hands in a hole in a tree. Most people do not question going to school to get a job and become an employee. An intelligent person would ask, “What if I don’t want to be an employee?”

2. There are four choices in education.

My rich dad explained the diagram of the CASHFLOW Quadrant for me. It was his way of giving me choices in my education and what I wanted to be when I grew up.

E stands for employee

S stands for small business or self-employed

B stands for big business (500 employees)

I stands for investor Introduction 12

Traditional education prepares students for the E and S quadrants. Examples of S-quadrant schools are law schools, medical schools, and dental schools.

It is interesting that it is the top students from our medical and law schools that pay the most in taxes, and they do so because they are in the S quadrant. To me, if I were a top student, I would want to know how to pay less in taxes. Paying higher taxes is one of the traps of the S quadrant.

When an employee quits their job to start their own business, most wind up in the S quadrant, operating a highly-specialized small business or service business, such as computer consulting or selling real estate

Like a monkey trapped at one tree, most people only know about the E and S quadrants.

A financially intelligent person would want to know what they have to learn to operate from the B and I quadrants. The B and I quadrants create the richest people in the world, people who earn the most and pay the least in taxes.

In this book you will gain an unfair advantage by understanding what the B and I quadrant people know that E and S quadrant people do not.

3. You can choose between traditional or non-traditional education.

My poor dad respected only traditional education. That is why he thought grades and the school you graduated from were important. He believed that good grades and a good school got you a good job.

My rich dad respected non-traditional education. He did not care about grades or what school you went to. All he cared about was what skills you learned, who your teachers were, and how prepared you were for the real world of business.

My rich dad did not value a high-paying job. Being an entrepreneur, he valued how many high-paying jobs he could create.

That is why in 1973, while still in the Marine Corps, I signed up for non-traditional classes in which I would learn how to:

1. Use debt to invest.
   

2. Develop sales skills (because “sales equals income”).
   

3. Reduce taxes paid.
   

Taking the path of non-traditional education in 1973 has given me the biggest unfair advantage in my life.

I continue to take non-traditional educational classes today. Non-traditional education gives me an unfair advantage, even over the smart kids who went to good schools, got good grades, and became well-paid doctors, lawyers, and corporate executives.

Most monkeys do not know the difference between food and food in a trap. That is why they are easily trapped.

A strong financial education teaches students that there are three types of income. They are:

1. Ordinary earned income
   

2. Portfolio income
   

3. Passive income
   

Most E’s and S’s are trained to work for ordinary earned income. That is why they are so easily trapped, work the hardest, and pay the most in taxes.

In this book you will find out why the financially intelligent work for portfolio, passive, and non-taxable income.

The Difference Between Monkeys and Humans

It may sound cruel to compare human beings to a monkey stuck with its fist in a tree.

I do not do it to be cruel but to make a point. You see, it is cruel to allow Americans to remain financially uneducated, naïvely working hard, paying taxes, and saving money—all the while knowing that something is deeply wrong but not knowing exactly what to do in this period of financial change and uncertainty.

There are similarities between humans and monkeys. For example, a monkey will clench its fist and hang onto fruits and nuts. A human being will hang on tightly to old ideas.

Most of us know this law of physics: Two objects cannot occupy the same space at the same time. For example, you cannot have two cars in a one-car garage. The same is true with thoughts and ideas.

Just as the monkey must let go before it can be free, humans must let go of old ideas before they can be free.

In this book you will learn many unconventional ideas about money and why the rich are getting richer. The main purpose of this book is to present these ideas and challenge any old ideas you might have in place. Then it is up to you to decide if you want to let go of your old ideas and begin to adopt new ideas about money.

Examples of old ideas about money are:

1. “I’ll never be rich.”

If that idea is not replaced, then the idea becomes your reality. This book was written to change that thought—if you want to change it.

2. “The rich are greedy.”

In this book you will find out that being rich requires being generous. You will find that E’s and S’s are often more greedy than B’s and I’s.

3. “I’d rather be happy than rich.”

Why not be both? Thinking you can only have one is caused by limited thinking.

4. “Taxes are unfair.”

In this book you will find that taxes are very fair and how taxes make the financially educated richer.

5. “I’ve got to work hard.”

In this book you will find out why those that work hard pay the most in taxes.

6. “Investing is risky.”

In this book you will find out why investing is not risky. Most importantly, you will find out why the financially uneducated are sold the riskiest investments of all.

7. “Get a good education.”

In this book you will find out why you need to question where education will take you and who your instructors are.

For example, I enrolled in an MBA program in 1973. My instructors were all employees in the E quadrant. I resigned after six months because I realized that the two-year course of study was programming me to become a well-paid employee in the E quadrant.

If you want to grow into the B and I quadrants, you need instructors and mentors from those quadrants.

In flight school, my first instructors taught me the basics of flying. The next level of instructors taught me advanced flying, which allowed me to graduate from flight school. My next instructors were combat pilots. They were a completely different level of instructor. I already knew how to fly, but the combat-pilot instructors were preparing me for the real world of war.

Financial education is much like flight school. Learning to fly is not a do-it-yourself project. It is best to have the most talented pilots available to educate and train students and give them the opportunity for hands-on experience before they go on to the next level.

One of the problems with traditional education is the absence of real-world experience. Most kids leave school with technical answers to problems but lack the skills needed to put their technical knowledge to good use. This means their most important instructors are the teachers or mentors they meet once they graduate.

One tragedy of this financial crisis is that many college graduates are leaving school but not finding jobs. It is this real-world experience that is crucial to a person’s lifelong learning and development and defines who they ultimately become in life.

One reason why so many students leave school and are unable to find a job is that they have been trained to be an employee. They lack the real-life skills to become an entrepreneur.

To make matters worse, many students leave school deeply in debt. Without a job, they cannot pay off their school loans.