Rich Dad's Increase Your Financial IQ

1. Financial intelligence is the key to wealth creation

Ultimately, it is not real estate, stocks, mutual funds, businesses, or money that makes a person rich. It is information, knowledge, wisdom, and know-how, a.k.a. financial intelligence, that makes one wealthy.

Financial intelligence trumps assets. It's not what you own, but what you know that truly makes you rich. This concept challenges the common belief that accumulating assets alone leads to wealth. Instead, it emphasizes the importance of developing the skills and knowledge to manage and grow those assets effectively.

Financial intelligence encompasses:

• Understanding how money works
• Recognizing opportunities
• Managing risks
• Making informed financial decisions

By focusing on increasing your financial intelligence, you can:

• Maximize returns on investments
• Minimize losses
• Adapt to changing economic conditions
• Create sustainable wealth over time

2. The rules of money changed in 1971 and 1974

In 1971, President Nixon took us off the gold standard. This was a poor economic policy that changed the rules of money.

Understanding these changes is crucial. The shift from the gold standard to fiat currency in 1971 and the introduction of the 401(k) in 1974 fundamentally altered the financial landscape. These changes have far-reaching implications for how we save, invest, and plan for retirement.

Key impacts of these changes:

• Increased currency volatility
• Greater potential for inflation
• Shift of retirement responsibility from employers to individuals
• Need for more active financial management by individuals

To navigate this new financial reality:

• Stay informed about economic policies and their effects
• Be proactive in managing your finances
• Consider alternative investment strategies beyond traditional savings

3. Develop the five financial IQs to increase your financial intelligence

There are five basic financial IQs. They are: Financial IQ #1: Making more money. Financial IQ #2: Protecting your money. Financial IQ #3: Budgeting your money. Financial IQ #4: Leveraging your money. Financial IQ #5: Improving your financial information.

Mastering these IQs is essential. Each financial IQ represents a critical aspect of financial management and wealth creation. By developing all five, you create a comprehensive approach to your finances that can lead to greater success and security.

Brief overview of each IQ:

1. Making more money: Increasing income through various means
2. Protecting your money: Safeguarding wealth from taxes, inflation, and loss
3. Budgeting your money: Allocating resources effectively
4. Leveraging your money: Using debt and other people's money wisely
5. Improving your financial information: Continuously educating yourself

Developing these IQs requires:

• Consistent effort and learning
• Practical application of knowledge
• Regular assessment and improvement of skills

4. Make more money by solving bigger problems

Simply put, there are trillions of ways to make more money because there are trillions of, if not infinite, problems to solve.

Problem-solving is the path to wealth. This perspective shifts the focus from merely seeking money to creating value by addressing significant challenges. It encourages entrepreneurial thinking and innovation as means to financial success.

Strategies for making more money through problem-solving:

• Identify pressing issues in your industry or community
• Develop innovative solutions to these problems
• Scale your solutions to reach a wider audience

Benefits of this approach:

• Creates sustainable income streams
• Provides personal fulfillment
• Contributes positively to society
• Often leads to exponential rather than linear growth

5. Protect your money from financial predators

Protecting your money from financial predators is important. As most of us know, the world is filled with people and organizations waiting for the opportunity to help themselves to your money.

Vigilance is crucial for wealth preservation. Financial predators come in many forms, from excessive taxes to unscrupulous advisors. Understanding and guarding against these threats is essential for maintaining and growing your wealth over time.

Common financial predators:

• High taxes
• Inflation
• Fraudulent investment schemes
• Hidden fees in financial products
• Unethical financial advisors

Strategies for protection:

• Educate yourself on tax laws and strategies
• Diversify investments to hedge against inflation
• Thoroughly research all investment opportunities
• Read the fine print on financial agreements
• Work with reputable, fiduciary financial advisors

6. Budget for a surplus, not a deficit

Most people use their budget as a plan to become poor or middle class rather than a plan to become rich. Most people operate their lives on a budget deficit rather than a budget surplus.

Prioritize wealth creation in your budget. Instead of focusing solely on cutting expenses, aim to create a surplus that can be invested and grown. This shift in mindset from scarcity to abundance can dramatically alter your financial trajectory.

Steps to budget for a surplus:

1. Pay yourself first (savings and investments)
2. Cover essential expenses
3. Allocate remaining funds strategically

Benefits of budgeting for a surplus:

• Creates a habit of wealth accumulation
• Provides capital for investments and opportunities
• Reduces financial stress and increases security
• Allows for gradual lifestyle improvements without debt

7. Use leverage and control to build wealth

Leverage can work in two ways. Leverage can make you rich and leverage can make you poor. This is why leverage requires financial intelligence and financial controls.

Leverage amplifies financial decisions. When used wisely, leverage can significantly accelerate wealth creation. However, it also magnifies mistakes, making financial intelligence and control critical when employing leverage strategies.

Types of leverage:

• Financial (using other people's money)
• Intellectual (using knowledge and systems)
• Time (outsourcing and automation)

Keys to successful leverage:

• Thorough understanding of the investment or business
• Robust risk management strategies
• Maintaining control over key aspects of the investment
• Continuous monitoring and adjustment

8. Improve your financial information for better decision-making

In Vietnam, I learned to respect the power of information. I became acutely aware of information's power to kill, as well as to save lives.

Quality information is a critical asset. In the financial world, having access to accurate, timely, and relevant information can be the difference between success and failure. Continuously improving the quality and breadth of your financial information leads to better decision-making.

Strategies for improving financial information:

• Diversify information sources
• Learn to distinguish between facts and opinions
• Understand market trends and economic indicators
• Network with successful investors and entrepreneurs
• Stay updated on changes in tax laws and regulations

Benefits of superior financial information:

• Identifies opportunities earlier
• Helps avoid pitfalls and minimize risks
• Provides a competitive advantage in investments and business

9. Cultivate financial integrity for long-term success

If a person is out of financial integrity—as shown by excessive debt, not budgeting well, spending more than he or she earns, foreclosures, and bankruptcies—the banker will probably not want this person as a client. It is a matter of professional integrity.

Integrity is fundamental to financial success. Financial integrity goes beyond honesty; it encompasses a holistic approach to managing money that aligns with long-term financial health and goals. It involves consistency between financial knowledge, actions, and outcomes.

Components of financial integrity:

• Living within or below your means
• Honoring financial commitments
• Maintaining accurate financial records
• Making informed and ethical financial decisions
• Continuously improving financial knowledge and skills

Benefits of financial integrity:

• Builds trust with financial institutions and partners
• Creates a stable foundation for wealth growth
• Reduces financial stress and uncertainty
• Positions you for better financial opportunities

10. Develop your financial genius using all parts of your brain

As an entrepreneurial educator, I did a lot of research on the different parts of the brain. Boiling it all down to overly simplified terms, we have three basic parts to our brain, pictured below.

Holistic brain engagement enhances financial success. Recognizing and utilizing all parts of your brain—left, right, and subconscious—can lead to more creative problem-solving, better decision-making, and ultimately, greater financial success.

Roles of different brain parts in finance:

• Left brain: Analytical thinking, logic, calculation
• Right brain: Creativity, intuition, big-picture thinking
• Subconscious: Emotional control, instincts, habits

Strategies for developing financial genius:

• Practice analytical skills through budgeting and financial analysis
• Engage creativity in problem-solving and opportunity identification
• Work on emotional intelligence to control fear and greed in financial decisions
• Use visualization and affirmation techniques to program the subconscious for success

By integrating all aspects of your brain, you can:

• Make more balanced financial decisions
• Overcome emotional barriers to wealth
• Identify unique opportunities others might miss
• Develop a more resilient and adaptive financial mindset

Last updated: September 25, 2024