Imagine a lake near a village that is filled with water. The villagers use the lake’s water for farming and for their personal use. But the problem is that sooner or later the lake is going to dry up because even though water is being taken out from the lake no additional water is being poured into it, which is why the villagers might face a drought after some time.
Now consider the same scenario, only that this time the lake is continuously being supplied by fresh water that flows into the lake 24/7 from the surrounding mountain valleys. This means villagers have a continuous supply of fresh water forever.
The second scenario is of Passive Income which is what Robert Kiyosaki is trying to explain in his book Rich Dad Poor Dad. The main crux of the book is that in order to get RICH, people should work for ASSETS rather than LIABILITIES. Assets include those things that put money in your pocket and liabilities, things that take money out of your pocket.
For example, many people consider their home sweet home an asset which it is not. Why? Because it is taking money out of your pocket as you have utility bills, property tax, maintenance expenses. But if you make it a cash generating asset like put it on rent no matter what happens, i.e. even if you work or not you are going to get a guaranteed income monthly. This concept of passive income that is measured in TIME and not in quantity is that “How many days or months or years can you survive if you just stop working today?” That is, if you have assets like real estate that give you monthly rent, stocks that give you quarterly dividends, bonds that give you semiannual interest payments, or even other business investments in which you are a sleeping partner and receive a fine cheque every month out from the sales (depending upon the profit/loss ratio decided between your partner and you), how many days can you survive without doing your job?
The idea is that people should work for others at jobs, like in banks, MNCs, for government, but their aim should not be restricted to the point that some day the company or the government will throw a bone at them and they might be a CEO or in one of the top management positions of the company. Because, frankly speaking, employers don’t really care about people who work for them. People come and go but corporations remain for years and years.
However, if you are a business owner or an investor (like Donald Trump, Warren Buffet, Bill Gates) you will have people work for you and make money for YOU even if you are not working, and the best part is that just like the villagers in the second case mentioned above, your lake of money will never be dried up since it is continuously being filled up with streams of income from other businesses and investments.
GK Question: Do you know who is a rich person according to Forbes?
Ans: According to Forbes a person is rich when he earns an annual passive income of $1 million i.e. 8.7 Crores in PKR annually…. :-)
Think about it. How on earth will you earn 8.7 Crores in Pakistan annually while working at a job?
An IBA Dean earns approx. 16 lacs a month (16 x 12 = 192) 1 crore and 92 lacs a year, but not 8.7 crores so even a super duper personality and an ex-state bank governor is NOT RICH by FORBES definition. :-)
(Biz Guru is an ordinary IBA student with extraordinary dreams and a penchant for reading business and success literature. The plethora of books he has read on the subject makes him an expert, capable of advising us lesser mortals on the intricacies in the world of money-making.)
Source of Image: http://static.bigstockphoto.com/thumbs/4/2/1/large/1246699.jpg
Wow. I never thought that something that is normally classed as an asset can actually be a liability if you analyze it within the true definition of the word.
ReplyDeleteIt true, how can an be an asset if it's pulling off money from your pocket instead of filling it.
Enlightening Stuff Guru jee.
*thumbs up*
Yeah. Pretty good stuff in this book.
ReplyDeleteIts a really different philosophy waisay. If we work towards gaining as much assets as we can, we might not need to work at all. . .
Dreams ohhhh dreams....
[But very realistic dreams]
this is a good viewpoint, but when a person is from a middle income family, how is he supposed to have ENOUGH share or estate to get him enough rent to survive without a job?
ReplyDeleteawsum insight
ReplyDeleteDear H,
ReplyDeleteIt’s not JUST about shares or estates. I’ll come to these two in the end.
For a middle income person let’s say Aamir has a family of 4 with a salary of 25,000/- Rs. Now the concept of Rich Dad and Poor Dad (and if you have time do read The Richest Man In Babylon) also illustrates that when starting from scratch you should first pay YOURSELF rather than everyone else no matter what. You see even if you have utility bills, food, clothing, transport your children fee etc always always set something aside .. In this case we’ll assume 3000 Rs/- on monthly basis and deposit them in a bank account and just don’t touch it (DO NOT expense it OUT!). In three years time your money + investment profits will be somewhere near 1 lac (100,000 Rs.); now with these 100,000/- what do most people do? THEY GIVE IT TO OTHERS e.g. go to a vacation, buy a second hand car, or even buy their wife some expensive jewellery that has a 10% less value when they go and sell it back. So what to do?
Now what Aamir should do is start a business that he is passionate about. (Now many in fact everyone says 1 lac isn’t enough, business needs millions. STUPID STUPID STUPID‼) Business is not established by money it is by ideas, you see Shan Foods was started in a small garage and now its founder sells 1.5 billion Rs of masalas EVERY YEAR. Dhirubhai Ambani started off with nothing ZIP! NADA! And when he died in 2002 his estimated net worth was $6.5 billion.
So let’s suppose Aamir has interest in export of leather goods. What he can do is that start a company go to websites like Alibaba.com, tradekey.com, made-in-china.com (these sites are actually B2B sites on which millions of importers and exporters register their bids and offers for various products in terms of L/C: so that there is no chance of fraud) and hire someone who is active in dealing leather goods, give him his 100,000/- Rs. and split the profits fifty fifty. This way he is acting like a sleeping partner + getting a passive income of let’s say, considering 20% margins on exports, Rs. 10,000 for every two months i.e. 60,000 Rs. a year … this way he increased his wealth by 60%...
Above mentioned scenario is just one of the ways .. There can be thousands if not millions of ways to double your investments if only you have the GUTS and the determination to GET RICH.
P.S. Something about real estate and stocks:
First some words about real estate in Pakistan:
In Pakistan the amount of rent received is far less than the mortgage payments which means even if you buy a property and rent it out your interest and principal payments of mortgage is at-least 3 times higher than your rent so buying a property in a period of 15.68% inflation and interest of 13.5% it’s a big NO.
Second something about shares:
And for investing in shares (preferably ordinary) you need to at least invest for the long term say (5 years or more) to actually get exponential gains and dividends.
Biz Guru