Chapter Three - LESSON 3

Chapter Three - LESSON 3: MIND YOUR - OWN BUSINESS

The rich focus on their asset columns while everyone else focuses on their income statements.

In 1974, Ray Kroc, the founder of McDonald’s, was asked to speak to the MBA class at the University of Texas at Austin. A friend of mine was a student in that MBA class. After apowerful and inspiring talk, the class adjourned and the students asked Ray if he would jointhem at their favorite hangout to have a few beers. Ray graciously accepted.

“What business am I in?” Ray asked, once the group had all their beers in hand.

“Everyone laughed,” my friend said. “Most of the MBA students thought Ray was just fooling around.”

No one answered, so Ray asked again, “What business do you think I’m in?”

The students laughed again, and finally one brave soul yelled out, “Ray, who in the worlddoesn’t know that you’re in the hamburger business?”

Ray chuckled. “That’s what I thought you would say.” He paused and then quickly added,

“Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”

As my friend tells the story, Ray spent a good amount of time explaining his viewpoint. In his business plan, Ray knew that the primary business focus was to sell hamburger franchises, but what he never lost sight of was the location of each franchise. He knew that the land and its location were the most significant factors in the success of each franchise. Basically, the person who bought the franchise was also buying the real estate under the franchise for Ray Kroc’s organization.

Today, McDonald’s is the largest single owner of real estate in the world, owning evenmore than the Catholic church. McDonald’s owns some of the most valuable intersections and street corners in America and around the globe.

My friend considers this as one of the most important lessons in his life. Today he owns carwashes, but his business is the real estate under those car washes.

The previous chapter presented diagrams illustrating that most people work for everyone butthemselves. They work first for the owners of the company, then for the government throughtaxes, and finally for the bank that owns their mortgage.

When I was a young boy, we did not have a McDonald’s nearby. Yet my rich dad wasresponsible for teaching Mike and me the same lesson that Ray Kroc talked about at the University of Texas. It is secret number three of the rich. That secret is: Mind your ownbusiness. Financial struggle is often directly the result of people working all their lives forsomeone else. Many people will simply have nothing at the end of their working days toshow for their efforts.

Our current educational system focuses on preparing today’s youth to get good jobs bydeveloping scholastic skills. Their lives will revolve around their wages or, as describedearlier, their income column. Many will study further to become engineers, scientists, cooks,police officers, artists, writers, and so on. These professional skills allow them to enter theworkforce and work for money.

But there is a big difference between your profession and your business. Often I ask people, “What is your business?” And they will say, “Oh, I’m a banker.” Then I ask them if they ownthe bank. And they usually respond, “No, I work there.” In that instance, they have confusedtheir profession with their business. Their profession may be a banker, but they still needtheir own business.

A problem with school is that you often become what you study. So if you study cooking, youbecome a chef. If you study the law, you become an attorney, and a study of auto mechanicsmakes you a mechanic. The mistake in becoming what you study is that too many peopleforget to mind their own business. They spend their lives minding someone else’s businessand making that person rich.

To become financially secure, a person needs to mind their own business. Your businessrevolves around your asset column, not your income column. As stated earlier, the number-one rule is to know the difference between an asset and a liability, and to buy assets. Therich focus on their asset columns, while everyone else focuses on their income statements.

That is why we hear so often: “I need a raise.” “If only I had a promotion.” “I am going backto school to get more training so I can get a better job.” “I am going to work overtime.” “Maybe I can get a second job.”

In some circles, these are sensible ideas. But you are still not minding your own business. These ideas all still focus on the income column and will only help a person become morefinancially secure if the additional money is used to purchase income-generating assets.

The primary reason the majority of the poor and middle class are fiscally conservative—which means, “I can’t afford to take risks”—  is that they have no financial foundation. Theyhave to cling to their jobs and play it safe.

When downsizing became the “in” thing to do, millions of workers found out their largestso-called asset, their home, was eating them alive. Their “asset” was costing them moneyevery month. Their car, another “asset,” was eating them alive. The golf clubs in the garagethat cost $1,000 were not worth $1,000 anymore. Without job security, they had nothing to fall back on. What they thought were assets could not help them survive in a time of financial crisis.

I assume most of us have filled out a credit application to buy a house or a car. It’s alwaysinteresting to look at the “net-worth” section because of what accepted banking andaccounting practices allow a person to count as assets.

One day when I wanted a loan, my financial position did not look too good. So I added mynew golf clubs, my art collection, books, electronics, Armani suits, wristwatches, shoes, andother personal effects to boost the number in the asset column.

But I was turned down because I had too much investment real estate. The loan committee didn’t like that I made so much money from rent. They wanted to know why I did not have a normal job with a salary. They did not question the Armani suits, golf clubs, or art collection. Life is sometimes tough when you do not fit the standard profile.

I cringe every time I hear someone say to me that their net worth is a million dollars or $100,000 dollars or whatever. One of the main reasons net worth is not accurate is simplybecause, the moment you begin selling your assets, you are taxed for any gains.

So many people have put themselves in deep financial trouble when they run short ofincome. To raise cash, they sell their assets. But their personal assets can generally be soldfor only a fraction of the value that is listed on their personal balance sheet. Or if there is a gain on the sale of the assets, they are taxed on the gain. So again, the government takes its share, thus reducing the amount available to help them out of debt. That is why I say someone’s net worth is often “worth less” than they think.

Start minding your own business. Keep your daytime job, but start buying real assets, notliabilities or personal effects that have no real value once you get them home. A new carloses nearly 25 percent of the price you pay for it the moment you drive it off the lot. It is nota true asset even if your banker lets you list it as one. My $400 new titanium driver wasworth $150 the moment I teed off.

Keep expenses low, reduce liabilities, and diligently build a base of solid assets. For youngpeople who have not yet left home, it is important for parents to teach them the differencebetween an asset and a liability. Get them to start building a solid asset column before theyleave home, get married, buy a house, have kids, and get stuck in a risky financial position,clinging to a job, and buying everything on credit. I see so many young couples who getmarried and trap themselves into a lifestyle that will not let them get out of debt for most oftheir working years.

For many people, just as the last child leaves home, the parents realize they have notadequately prepared for retirement and they begin to scramble to put some money away. Then their own parents become ill and they find themselves with new responsibilities.

So what kind of assets am I suggesting that you or your children acquire? In my world, real assets fall into the following categories:

1.  Businesses that do not require my presence:  I own them, but they are managed or run by other people. If I have to work there, it’s not a business. It becomes my job.

2.  Stocks

3.  Bonds

4.  Income-generating real estate

5.  Notes (IOUs)

6.  Royalties from intellectual property such as music, scripts, and patents

8.  Anything else that has value, produces income or appreciates, and has a ready market

As a young boy, my educated dad encouraged me to find a safe job. But my rich dadencouraged me to begin acquiring assets that I loved. “If you don’t love it, you won’t takecare of it.” I collect real estate simply because I love buildings and land. I love shopping forthem, and I could look at them all day long. When problems arise, the problems aren’t sobad that it changes my love for real estate. For people who hate real estate, they shouldn’tbuy it.

I also love stocks of small companies, especially start-ups, because I am an entrepreneur,not a corporate person. In my early years, I worked in large organizations, such as Standard Oil of California, the U.S. Marine Corps, and Xerox Corp. I enjoyed my time with thoseorganizations and have fond memories, but I know deep down I am not a company man. Ilike starting companies, not running them. So my stock buys are usually of small companies. Sometimes I even start the company and take it public. Fortunes are made in new stockissues, and I love the game. Many people are afraid of small-cap companies and call themrisky, and they are. But that risk is diminished if you love what the investment is, understandit, and know the game. With small companies, my investment strategy is to be out of the stockin a year. On the other hand, my real estate strategy is to start small and keep trading up forbigger properties and, therefore, delay paying taxes on the gain. This allows the value toincrease dramatically. I generally hold real estate less than seven years.

For years, even while I was with the Marine Corps and Xerox, I did what my rich dadrecommended. I kept my day job, but I still minded my own business. I was active in myasset column trading real estate and small stocks. Rich dad always stressed the importanceof financial literacy. The better I was at understanding the accounting and cash management,the better I would be at analyzing investments and eventually starting and building my own company.

I don’t encourage anyone to start a company unless they really want to. Knowing what Iknow about running a company, I wouldn’t wish that task on anyone. There are times whenpeople can’t find employment and starting a company seems like the best solution. But the odds are against success: Nine out of ten companies fail in five years. Of those that survive the first five years, nine out of every ten of those eventually fail as well. So only if you really have the desire to own your own company do I recommend it. Otherwise, keep your day job and mind your own business.

When I say mind your own business, I mean to build and keep your asset column strong. Once a dollar goes into it, never let it come out. Think of it this way: Once a dollar goes intoyour asset column, it becomes your employee. The best thing about money is that it works 24hours a day and can work for generations. Keep your day job, be a great hardworkingemployee, but keep building that asset column.

As your cash flow grows, you can indulge in some luxuries. An important distinction is thatrich people buy luxuries last, while the poor and middle class tend to buy luxuries first. Thepoor and the middle class often buy luxury items like big houses, diamonds, furs, jewelry, orboats because they want to look rich. They look rich, but in reality they just get deeper in

debt on credit. The old-money people, the long-term rich, build their asset column first. Then the income generated from the asset column buys their luxuries. The poor and middle class buy luxuries with their own sweat, blood, and children’s inheritance.

A true luxury is a reward for investing in and developing a real asset. For example, when mywife Kim and I had extra money coming from our apartment houses, she went out and boughther Mercedes. It didn’t take any extra work or risk on her part because the apartment housebought the car. She did, however, have to wait four years while the real estate investmentportfolio grew and began generating enough extra cash flow to pay for the car. But theluxury, the Mercedes, was a true reward because she proved she knew how to grow herasset column. That car now means a lot more to her than simply another pretty car. It meansshe used her financial intelligence to afford it.

Instead, most people impulsively go out and buy a new car, or some other luxury, on credit. They may feel bored and just want a new toy. Buying a luxury on credit often causes aperson to eventually resent that luxury because the debt becomes a financial burden.

After you’ve taken the time and invested in and built your own business, you are now readyto learn the biggest secret of the rich—the secret that puts the rich way ahead of the pack.