I was reading a review of Robert Kiyosaki’s new book, Increase Your Financial IQ, on Patrick’s blog.

The book holds no great interest for me … although, Robert Kiyosaki’s Financial IQ # 1 did:

It simply says: “Financial IQ #1 – Make More Money” …

… which is perhaps the only real ‘secret’ to getting rich – which is strange, since it seems so self-evident … but, that’s the subject for another post.

But, I was interested in Patrick’s summary of what he liked / didn’t like about the book:

Like.Kiyosaki is a contrarian, which at times is a good thing. He believes more people should work for themselves to create wealth and alternative income streams instead of relying on trading your time for a paycheck. This is contrary to what many people believe – go to school, get a good job, and save. Not everyone should run their own business, in my opinion, but everyone can do little things to increase their income.

Didn’t like.Kiyosaki is extremely harsh on the stock markets, which in itself is not a bad thing. But it is a bad thing when you make incorrect blanket statements about them. Case in point: “You can train a monkey to save money and invest in mutual funds. That is why the returns on those investment vehicles are historically low.

Now, I happen to agree with all of the above …

Rich people make their money in businesses and keep their money in real-estate … pure and simple.

It’s what Robert Kiyosaki did (his business was writing books and making/selling ‘Cashflow’ games; his wife looked after the real-estate investing side of the “Kiyosaki Family Business”) … and, it’s what I did …

… and, according to the new book about the wealthy – Get Rich, Stay Rich, Pass It On (think of it as The Millionaire Next Doorfor the new millennium) – it’s the way that the 5,000 rich families that they interviewed got – and keep – their money through the generations.

[AJC: Before you rush out an buy this book, wait to read my upcoming review … the stats are great … the conclusions that the authors draw from the stats are downright dangerous!]

I recently reminded my Grandmother (95 and still kicking) of a story that she told me when I was very young … one of those simple stories that can define you … it certainly defined the way I think about saving v spending.

She said that when she first emigrated from Europe, and she and my Grandfather had re-established themselves as poor but hard-working immigrants, they had a dilemma …

My Grandmother wanted to use their savings to buy a house so that they could have a stable environment in which to bring up my mother (an only child) in their adopted homeland.

My Grandfather wanted to use their savings to start a business. 

He eventually ‘won’ the debate by saying something that I will never forget:

You can always buy a house from a business … but, you will never buy a business from a house

You can argue whether this is true – after all the 20% Rule encourages you to use your home equity to invest – but, would you have the intestinal fortitude to put yourself deeper in debt to buy or start a business?

Or, would it be better to delay buying that house and pay for it later using the profits of the business?

I for one like the business route: anybody can start a business, just try it part time and limit your financial risk … if it takes off, fine … if not, try again …

Businesses do one thing really well: produce free cash! But, free cash-flow is useless, except for three purposes:

1. Reinvesting in the business to make it grow even faster

2. Increased lifestyle for the owner

3. To fund property acquisitions (build up for a deposit) and/or running costs (cover paying mortgages if the rent doesn’t).

Since I borrowed so heavily from Patrick’s post, I thought that I should let him have the last word on this:

I will guess you like all three of them, but number 1 has the largest benefit while you are growing your business. Do that for a while until you reach the point when your ROI experiences diminishing returns, then use the money for 2 and 3. As long as you increase 2 at a lower rate than the rate your free cash increases, you should be OK.

Right on the money, Patrick … right on the money!

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