Rich brother poor_brother_national_convention_

Rich Brother, Poor Brother

Lessons on How to Learn, Grow and Give Back

Nick Wolff Region VI Volunteer and Investor

Disclaimer

The information provided in this presentation discusses general themes of investing,

financial planning and taxation and should be seen as informational only. Consult

appropriate professionals about your specific circumstances.

Disclaimer

Some of you will find some topics unsettling if not upsetting.

The purpose is to expand your Context—to grow your concept of what money is and what money could be.

“Money is the root of all evil.”

~1 Timothy 6:10

Why is it difficult to discuss wealth?

Difficulty studying wealth?

• Emotional topic• Puritan work ethic• Not taught in schools• Some are more risk averse• Many people providing bad advice• Bad stigma (Rich are cheap, crooks)• We are environmentally conditioned• The rat race

Why is it important we do so?

Why do we do it?

• We want to retire someday• Everyone should anticipate a layoff• You cannot depend on your employer or

government to care for you• Good people should have more free time• How can we expand our limits to give?

What are ways to become wealthy?

Popularly believed ways to become wealthy

• Get out of debt• Save every penny you can• Be frugal• Work hard in your job• Buy “wealthy looking stuff”• Win lottery• Born into it• Max out 401(k)• Know someone who has money• Steal it

The Financial Life of the Average American

• Meet Joeo Grows up in a working class homeo Good grades, goes to college

• Gets Degree - Finances with Student Loans• Opens credit card accounts – Lives it up• Buy a truck – 5 year note • Buy a house – 97% Financed• Live with fiancée – Woohoo two Incomes!• Gets married – Pays for wedding on credit cards• Has kids – Buy food and clothes on credit

The Financial Life of the Average American

• Has never been taught about money • Starts in a hole of debt• Is highly encouraged to keep digging• Spends more than he/she earns• Is less than 3 months away from financial

disaster• Trapped in their jobs – The Rat Race

I want you to learn to avoid the trap

What are your opinions about money?

How much is a lot of money?

How Much is a Lot of Money?

• $2 – When I was 8


• $2 – When I was 8• $20 – When I was in college


• $2 – When I was 8• $20 – When I was in college• $200 – When I graduated


• $2 – When I was 8• $20 – When I was in college• $200 – When I graduated• $2,000 – 2 years ago


• $2 – When I was 8• $20 – When I was in college• $200 – When I graduated• $2,000 – 2 years ago• $20,000 – This is a decent chunk


• $2 – When I was 8• $20 – When I was in college• $200 – When I graduated• $2,000 – 2 years ago• $20,000 – This is a decent chunk• $200,000 – This a lot for me


• $2 – When I was 8• $20 – When I was in college• $200 – When I graduated• $2,000 – 2 years ago• $20,000 – This is a decent chunk• $200,000 – This a lot for me• $2,000,000 – Pocket change for Trump

What does that mean?

If we know the rules, we can win the game!

Rich Dad, Poor Dadby: Robert Kiyosaki

• Discusses what rich people teach their kids vs. poor/middle class people

• Emphasizes financial literacy• Opens up one’s mind to a new paradigm

when thinking about money

Completely Different Opinions

• Poor Dado I work for money o A house is an asseto I can’t afford ito I’m not interested in

moneyo Pay myself lasto Acquires bad debt

• Rich Dado Money works for meo A house is a liabilityo How can I afford it?o Money is empowering

o Pay myself firsto Acquires good debt

Completely Different Opinions• Poor Dad

o Investing is riskyo Believed more money

would solve his problems

o Believed the company you work for or government should take care of you

• Rich Dado Learn to manage risko It’s not how much you

make—but keep

o Believed in personal responsibility and self reliance

What is Money?

• Poor Dado Money is valuableo Work hard for ito Money is the root of

all evilo I don’t need moneyo Money is hard to geto Money doesn’t buy

happiness

• Rich Dado Money is a mediumo Money is my servanto Lack of money is root

of all evilo Money is powero Money is easy to geto Money helps

1st Key of Wealth:Cash Flow Management

Cash Flow• Cash Flow: Monthly Income – Monthly Expenses• More money will not solve the problem if the problem

is cash flow management• Use a system. (Excel, Quicken®, Money®)• Be Honest. Don’t leave anything out• Allowance for unusual expenses• Cash Flow should be at least 10% positive to get

started. (Cash Flow/Income > 10%)• Don’t spend it! Invest that 10%!

A Basic Cash Flow Statement

Cash Flow• You can make modest reductions in

expenses (Generally 2 to 8%)• Hurts to cut back• Your income is not a hard limit• Income gains (if invested) grow

exponentially• It is possible to replace your salary with

passive income

Cash Flow• You can make modest reductions in

expenses (Generally 2 to 8%)• Hurts to cut back• Your income is not a hard limit• Income gains (if invested) grow

exponentially• It is possible to replace your salary with

passive income = Early Retirement

How do you spend your money?

How do you spend your money?

• Investment: Something that more than pays for itself

• Doodad: Something that rapidly loses value• Asset: Something that puts money in my

pocket every month if I work or not• Liability: Something that pulls money from

my pocket whether I work or not

What is your biggest asset?

Assets and Liabilities

• The rich buy assets which pay for their liabilities and doodads

• The poor and middle class buy liabilities that pay for their doodads, including ones that they have been told are assets

• Let’s talk about Choices

Financial Statement

Financial Statement of a Poor Person

Financial Statement of a Middle Class Person

Financial Statement of a Rich Person

2nd Key of Wealth: Understand the Rules of the Game - Taxes

Who pays the taxes in the United States?

Taxes

• You’re taxed when you earn.

Taxes

• You’re taxed when you earn.• You’re taxed when you spend.

Taxes

• You’re taxed when you earn.• You’re taxed when you spend.• You’re taxed where you live.

Taxes

• You’re taxed when you earn.• You’re taxed when you spend.• You’re taxed where you live.• You’re taxed when you die.

Taxes

• The top 1% of wage earners pay approximately 29% of income tax in the U.S.

• The top 5% of wage earners pay 50% of income tax in the U.S.

• Bottom 50% of wage earns pay <2% Congressional Budget Office Statistics, 2005

Did you know…

• The US government will give you a tax deduction for interest on your home mortgage, but will charge you tax on interest in a savings account?

• Why do you think that is?

How do tax laws work?

• Government encourages people to do things for the public good that it can’t do itself wello Create jobso Build affordable and quality housingo Provide for technical innovation

• Tax laws are written to encourage the creation of businesses (owners) and those who help build them (investors)

The US Government encourages you to:

• Pay interest to banks• Spend your money

Types of Income

• Earned income - You are paid for workingo 50% moneyo Most time consuming – Earned by employeeso Highest and quickest taxed

• Portfolio income - Stocks, bonds, mutual fundso 30% moneyo Lower tax and often tax deferred - Investors

• Passive income – Mostly real estateo Often no tax - Investors

• No income – Business Ownerso Most of one’s lifestyle is untaxed

Taxes: Individuals vs. Businesses


Highly Educated, Upper Income Employees


Highly Educated, Upper Income Employees

Also known as US!!!

New Service: Helping Kids Read

Personal BusinessComputer* $1,500 $1,500Software $ 100 $ 100Children’s Books $ 600 $ 600Gas (1000 miles) $ 150 $ 150Marketing $ 150 $ 150Training $ 500 $ 500Legal $1,000 $1,300Total Out-Of-Pocket $4,000 $4,300*Also for personal use

Tax Incentives

Expenses (Minus Gas) $3,850 $4,150Personal Expenses - $1,500 $ 0“Phantom Expenses”House Depreciation $ 0 $1,100Utilities $ 0 $ 600 Mileage Deduction $ 140 $ 330Total Deduction $1,490 $6,180

Compare

Personal Effort - $4,000 out of pocket• $1,490 is an itemized deduction• Doesn’t help if you don’t itemize

Business Entity - $4,300 out of pocket• $6,180 is an “above the line” deduction

o Lowers your AGI • $1,700 in “phantom” deduction• Larger mileage deduction• You can still use standard deduction

3rd Key to Wealth: Debt and Decisions We Make

If I have a credit card balance of $25,000, what should I do?

Why I Love Debt

• Debt can be good• Use leverage• It’s easier to borrow $1 Million than earn it• DON’T USE CREDIT TO BUY DOODADS!• Buy an ASSET now with OPM

If you borrow wisely, what you borrow today will be what you are worth in the

future!

What are great investments?

What’s a good rate of return?

Typical Rates of Return (Long Term)

• Lottery Tickets ~-100%• Casinos -20 to -50%• Savings account – 1 to 3%• Money Markets – 3 to 5%• US Bonds – 5 to 7%• Corporate Bonds – 6 to 15%• Stocks – 7 to 25%• Stocks on Margin – 7 to 50%• Options – 30% to 100%• Real Estate – 30% to Infinity• New Businesses – 100% to Infinity

There is no free lunch:Big returns require big efforts

Investing Considerations

• Investor “experts” assume you are unsophisticated • “Get out of debt, diversify, invest for long term” is a

slow and uncertain way to get rich.• Most investors are lemmings. If everyone’s doing it,

GET OUT!!! Find deals elsewhere.• Be aware of your emotions (Fear and Desire).• If you’re buying from a broker, find out HOW THEY

GET PAID!• The most successful investors assemble

investments for others in which to invest.

Let’s compare 3 investments over 1 year

Leverage: Three Investments 1 year

Buy a $100,000 Bond• Cash Outlay: $100,000• Interest rate: 7% compounded monthly• Interest earned: 7,229.01• Rate of return: 7.23%


Buy a $100,000 rental house• Cash Outlay: $10,000• Cash Flow $50/month ($600 annually)• Rate of Return: 6%• Mortgage balance reduction: $750• Appreciation rate: 5%• Home value: $105,000• Net earnings: $6,350• Total Rate of Return: 63.5%


Private Lending – Be the Bank!• Borrow $25,000 on credit card

o (incentive 2% for 12 months)• Total Cost: Bank fee $75 • Lend it at 12%• Interest rate spread: 10%• Net interest earned: $2,500• Rate of return: 3,333%

When will I pay off the $25,000?

When Will I Pay Off $25,000?Not Any Time Soon!!!

• Gymnasium with long term tenant• Partners Pay Cost-of-funds + Income• Triple Net Lease – No

Maintenance/Little Risk• 2% stake in $1.4 Million Property• All on money that is not mine!

Leverage: Bonus – With Education and Friendships

Deal Specifics• Group of Friends buying Gym for

$900,000; Valued at $1,400,000• Borrow $25,000 on credit card

(incentive 8% for life of balance)• Total Cost: Bank fee $199

Leverage: Bonus – With Education and Friendships

Deal Benefits• Cost of Funds plus 2% of Income =

$36,000 X 2% = $720• Net dividends earned: $720+ $10,000

Equity Share • Refi out to 80% = $220,000 in cash more

deals to do this again• Rate of return: 5,387%

Compare Returns

• Stock market – 8% historic rate of returno High Variability

• Bond – 7.23% ROI - 0.9 Years Stock Market equivalent

• Rental House – 63.5% - 6.4 Years SM• Private Loan – 3,333% - 46 Years SM• Gym Project – 5,387% - 52 Years SM

And we are ready to enter another deal!

Why Do The Rich Get Richer?

• Rich become more proficient at using financial leverage on a daily basis

• Rich have invested the time in knowing the rules of the financial game

• Financial education is the best investment you can make

The 4th Key to Wealth: The Only Lasting Investment

You Can Make

Learn, Grow and Give Back

Wealth Carries with it Responsibility

• We live in the best country on earth• The cost of living here - is giving back• As your wealth grows, give a portion of it

back• Teach others how to be successful• What the world needs are Servant

Leaders with More Free Time!!!

Suggested ways to get started

• Know your cash flow. Use a budget and stick to it • Diligently invest at least 10% of what you earn• Avoid buying doodads• Contribute to your 401(k) up to your match• Find people you trust that will help you invest• Learn, learn, learn and learn more!• Earn value on your savings (Get good returns)• Grow your credit lines and invest them• Learn to guard principal from loss – Due diligence• Own a home (that you can afford)

Adapted from The Richest Man in Babylon – George Classen

References

• Rich Dad, Poor Dad – Robert Kiyosakio How has your perspective changed?

• Richest Man in Babylon – George Classeno What do you plan to do?

Thank you for your ongoing service to Alpha Phi Omega!

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