We're discussing very important words of money in our follow up to the beginners guide to investing. These are the key terms to understand as you expand your financial literacy. We'll draw again from the expertise of Robert Kiyosaki. He points out that there are more than a million words in the English language and the average person can use about 10,000 to 20,000.
If you can learn to really understand the handful plus two that are highlighted on this page, you'll be far ahead of the crowd. They are the foundation for your self-directed retirement fund growth and for all of your goal planning regarding money.
Years ago George Carlin created quite a stir with his "seven words you can never say on television." It was just a comedy bit, but at that time it was very controversial. Robert Kiyosaki created a big commotion within the real estate and banking community a while back when he explained one of of the seven words of money. We'll give you the other six first and then wrap up with the four classes within that final word.
There are three types of income. Ordinary income is taxed at the highest level. This is the stream that most people rely upon and the type the government gets the most return from via the IRS.
Portfolio income would be the type most people who have no desire to control any of their investments would receive. Mutual funds are a common type of portfolio income.
Passive income is the version most highly successful investors look to acquire. It is taxed at the lowest rate. Real estate is one type of passive investment.
Very simply, this is anything that takes money out of your pocket. Taxes are the biggest expense for most people. Medical care is not far behind and in some cases becomes the biggest. Clothing, food, and housing are other examples.
These also take money out of your pocket. Robert Kiyosaki lists these as being a bit different than expenses, but not too much. The difference is that liabilities are regular drains on your income. Mortgages, school loans, car loans and credit cards would fall into this area. Your mortgage is a liability to you, but the same debt is an asset to the bank holding that note. Conversely, if you own a rental property and mange it correctly, the passive income generated from the rent more than covers the mortgage payment, taxes, and odd expenses associated with that property.
This can be either an asset or a liability. If you owe it, such as a car loan, it is a liability to you. But if you lend it, it is definitely an asset. Your self directed IRA can be a form of free market capitalism. Your IRA can actually loan money to someone for an investment. The money paid back to you, including interest goes back in to your IRA. Tax deferred or tax free depending on the type of IRA you own. Debt is one of the words of money that warrants an entire page.
If you buy a house, renovate it, and then sell it at a profit, the difference is the capital gain. If you purchase some stock that is valued for $20.00 and sell it when it hits $30.00, the profit is your capital gain.
Robert Kiyosaki believes this is the most important of all the words of money. When you invest for cash flow, you are working toward multiple streams of income that continue to flow in month after month, in the form of long term passive income. He gives this explanation of how to define the difference between cash flow and capital gains. As with all of his explanations, it is very simple. If you cannot explain it to a six year old, your probably don't understand it your self.
Capital gains would be like buying and selling a goose for profit. Cash flow would be where you bought the goose and then continued to sell the golden eggs.
Our last of the words of money is important, but not really any more than the rest. But it is the one that drew the most ire from those hawking commissions in real estate.
He came out very clearly stating that a personal residence is not an asset. Those earning commissions on real estate were mortified. Part of their pitch was calling your home your biggest "investment." He was exactly correct of course and that was made very clear with the housing crash. Assets put money in your pocket. Your personal residence does not.
Mr Kiyosaki presents four basic asset classes in his book, "Why "A" Students Work For "C" Students And "B" Students Work For The Government." I'll give you a brief rundown. Please click the link below the image to purchase this classic book.
Business entities are types of assets. Richard Branson and Steve Jobs started with a dream and worked hard to grow their idea into a business. Don't confuse salaried managers with entrepreneurs. If they are employees, they aren't in the same category. This is such a a broad topic, I'll leave the full explanation to the pages of the great book we're reviewing.
Real estate is another asset class. Anyone can get into this one. The tax advantages are enormous as we detailed in the page about income tax. You'll also learn about how good debt is different from bad debt. And you get the opportunity for that best of all income, passive income.
Paper assets are the favorite of people who don't want a hands on approach to investing. Mutual funds are an example. Fund managers love it when people send hard earned money for them to watch over. They "manage" to get a big chunk of it via fees and commissions.
Commodities would be the fourth asset class. Oil, gold, silver and corn are just a few examples. This class takes a little more knowledge than paper assets, but can be profitable.
So there you have the "Seven Words of Money." How well you understand the real meaning of these words will go a long way in helping you prosper in the challenging times ahead. Using that extra couple of hours you've carved out each week to improve your own financial literacy and then to pass it along to your child, will give both of you a huge boost.
Our words are like our habits. They can take us to great places or drive to the lowest depths. The words we use go a long way in determining our success. Here is a link to some ideas that might help some people reading this page understand themselves and those around them.
In a web site centering around empowering books, words take on another important meaning. The wisdom found in these books can make all the difference. Robert Kiyosaki would call it an "unfair advantage." He says that in a facetious tone as that advantage is available to anyone willing to seek out the knowledge.