We have recently been examining some key books that can help you to learn how to achieve a financially rewarding life. Understanding and practising the basic principles of money success are fundamental steps to creating a prosperous future.

As Robert Kiyosaki explained in his bestseller, Rich Dad Poor Dad, “If you want to be rich, you need to be financially literate.”

Reading Kiyosaki’s account of the lessons he learned from the mentor whom he called his ‘rich dad’ was an eye-opening experience, as it revealed some financial concepts that I had never encountered before. It was impossible to think the same way about money after being exposed to the wealth secrets that ‘rich dad’ shared.

Last week, we shared Kiyosaki’s description of the ‘rat race’ which explained why many people kept chasing after money without ever becoming financially successful. Many people spin around in a continuous cycle of working hard and spending hard, which leads them to be tied to jobs that they may not even like.

“Most people struggle financially,” he concluded, “because they do not know the difference between an asset and a liability.” Kiyosaki offered a basic prescription for anyone who wanted to create wealth, which he insisted was the only rule they needed to follow. “Know the difference between an asset and a liability, and buy assets.”

Acquire assets, lessen liabilities

“That sounds easy enough,” I remember thinking when I first read this profound declaration. But how would I know where to find assets? ‘Rich dad’ had a straightforward explanation which defied the commonly held notions of bankers, accountants and other financial professionals: an asset puts money in your pocket; a liability takes money out of your pocket.

With that insightful statement, ‘rich dad’ blew away the conviction that many people have that their possessions such as homes or cars were assets. With simple diagrams, he demonstrated that the key factor in determining asset vs. liability was the cash flow pattern that was created. Assets bring in an inflow of cash, while liabilities create additional expenses that lead to an outflow of cash.

When many persons get paid from their jobs, they use most or all of their income, to purchase consumable items. Then they may decide to set some goals in order to get ahead in life, so they try to find ways to earn more. However, this plan usually fails, as Kiyosaki explained that getting more money “will often not solve the problem, in fact it may actually accelerate the problem.”

Want to learn how to be a smart investor? CLICK HERE!

Unfortunately, more money usually intensifies people’s negative spending habits. “Money only accentuates the cash-flow pattern in your head,” Kiyosaki pointed out. “If your pattern is to spend everything you get, most likely an increase in cash will just result in an increase in spending.” This is why many people who get a windfall, such as lottery winnings, lose all their money in a short time.

Kiyosaki also noted that most people’s work efforts help to make their employers richer, provide the government with more taxes, and increase the coffers of financial institutions via interest payments on mortgages and loans. Working harder, he clarified, only results in these three entities taking a bigger share of your hard work.

Start minding your own business

Kiyosaki’s answer to this vicious work cycle is to learn how to build your own business, not necessarily in the traditional way, but by increasing your assets. Instead of just chasing more income, you should focus more time on minding your own business. “Keep your daytime job,” he counselled, “but start buying real assets, not liabilities or personal effects that have no real value.”

Once you learn the difference between assets and liabilities, Kiyosaki encouraged, and put away some of your earnings into income-producing assets, then you will kick-start your wealth-generation process. Eventually, your asset base will get bigger and produce enough income to cover your expenses, while leaving excess money to be reinvested into more assets.

This progression of buying assets that create income that will eventually finance your lifestyle is not an overnight route to wealth. Kiyosaki recommended that you learn how to defer immediate gratification until you have created a sufficient asset base to pay for your desires. “When I want a bigger house,” he revealed, “I first buy assets that will generate the cash flow to pay for the house.”

While Kiyosaki described a rather aggressive approach to the accumulation of assets and was comfortable taking risks to attain greater returns, you do not necessarily have to pattern his methodology to be successful. High-risk wealth-building techniques might not be suitable for everyone.

The key to ‘minding your own business’ is to commit your efforts to learning more about various investment techniques. You can accomplish this by reading widely, surfing the Internet, attending seminars and getting advice from financial experts who can help you to design appropriate strategies to achieve your objectives over time.

Copyright © 2011 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer,  February 17, 2011

See other articles on Investing:

Make Time to Make Money, Investing Basics

DON’T MISS MY NEXT ARTICLE! CLICK BELOW TO RECEIVE IT IN YOUR EMAIL:

Cherryl is a financial consultant and coach, founder of Financially S.M.A.R.T. Services. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl