Rich Dad Poor Dad is the second book I would heavily recommend in your arsenal when pursuing FIRE. In his book, Kiyosaki tells the emotional story of his upbringing by his ‘poor’ biological father, head of education who lost his career after campaigning unsuccessfully for a political position against his own boss. Throughout his life, his ‘poor’ dad would forbid conversations around the house regarding money and died a very poor man with numerous financial difficulties.
On the lighter note, his best friend’s dad was a business owner and openly spoke about money. Kiyosaki would learn from this man, who went on to become his mentor and ‘rich’ dad. Although his ‘rich’ dad did not have an university education, he more than compensated for this by being an excellent entrepreneur. He lived a very comfortable life and went on to pass his good fortune to the ones he loved.
Which man do you want to be?
If there was one thing that crucially resonated with me in his book, it was Kiyosaki’s Cashflow Quadrant:
|Self-employee or Specialist||Investor|
Most individuals are either employees or self-employed. Regardless of whether you work for the public sector like the NHS or a private company like HSBC, if you receive a payslip at the end of the month then you’re an employee. If you’re a contractor or own small business such as a Chinese takeaway then you’re self-employed.
Both groups live on the left side of the cashflow quadrant and are poor for various reasons. For one, they sell time for money and work hard for money. Money doesn’t work hard for them.
Another reason why employees and the self-employed are poor is that income tax is treated very unfavourably in the UK. For example, if you earn more than a modest £43,000 you’re subject to 40% tax. The next tax increase to 45% occurs when you earn more than £150,000 which is odd. A scaled system would be a lot fairer and this is the reason why anyone who gets paid a salary or per hour will always be poor.
Become a business-owner and/or investor
If you own a large business or create a business model in which you don’t need to be physically present then you’re considered a business owner. Alternatively, having a portfolio of investments (stocks and shares, rental property or peer-to-peer lending) makes you an investor.
Business owners and investors are on the right side of the quadrant and will consequently find themselves far more financially secure.
Large business owners like Richard Branson get paid whilst they eat, sleep or ****! The true pinnacle of passive income. Likewise, Warren Buffett’s descendants will mostly likely never need to work unless something goes horribly wrong. The amount of money that is working for their family is so vast that it alone can earn more than any human selling their time by the hour ever could.
The rules governing business owners and investors are much more lenient, and should give you all the incentive you need to live and stay on the right side of the cashflow quadrant.
Firstly, business owners and investors get taxed much more favourably in return for the ‘extra’ risk they choose to take. Starting a business and investing will always entail some risk but being an employee or self-employed is risky too. Companies don’t owe us anything – people retire, people get replaced.
I’m not an accountant or financial adviser but I know of at least one business and one investor advantage relevant to the UK from the top of my head. Business owners only pay corporation tax of 20% on their profits, after deducting costs such as wages, expenses and interest on debt. This will drop even lower to 17% by 2020 to encourage the economy and reward those who take on risk. Why pay 42% tax when you earn £43,000 when there are huge businesses with vast profits totalling millions only paying 20%? The irony is that people would laugh at us if we suggested deducting our fixed monthly expenses before paying tax. Rent, bills, petrol and mortgage interest. Then comes VAT, TV tax and council tax.
Dividends for investors used to be even more lucrative but even nowadays, the tax free dividend allowance allows anyone to earn a huge £5,000 annually before paying tax.
To give you an idea of what this means, a typical UK All Share Index Tracker pays an annual dividend of approximately 3% after fees. You’ll need to invest £166,670 to actually earn enough before you need to pay tax. Remember that any capital growth should be covered, at least partially, by the capital gains allowance.
This is the reason why we should all aspire to become great business owners and investors. Before you can help the people you love, you must be able to help yourself.
P.S. I learned everything I know about finance from this book, this book and that one, amongst many others. For a more extensive list, don’t hesitate to drop me a line at firstname.lastname@example.org. If you prefer learning through listening use this link to earn a free audiobook of your choice by signing up to their 30-day free trial. Simply cancel with the click of a button if you decide later on that the service isn’t for you, no questions asked.