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The Basic Rules of Investing from Rich Dad’s Guide to

The book “Rich Dad’s Guide to Investing” mentioned the basic rules of investing which is the interesting topic that most of the beginning investors should take notes and understand.

“Since the objective of the rich is to have your money work for you so you don’t have to work, why not start where you want to wind up.”

The rich dad’s explanation is that the reason why he encouraged Mike and Robert to play golf since they were 10 years old is that golf is the game you can play all your life even when you get older not like football, basketball, or baseball.

“Football is a game you can play for only a few years. So why not start with the game you will end with?”

If you end up playing golf anyway, you do not have to spend your time playing the game that you can only play for a short period of time. Instead, why not focusing and keep improving your skill in playing golf. You will also master playing golf while others are just getting started playing the game at the same age as yours.

Photo by Mick De Paola on Unsplash

Anyway, this is just getting started. Here is the list of the basic rules that can make you understand better about investing. We will get to the explanation in each section:

“Investment rule number one is to always know what kind of income you are working for.”

Basically, there are three kinds of income:

  1. Earned Income: generated from a paycheck.
  2. Portfolio Income: Income generally derived from paper assets such as stocks, bonds, mutual funds, etc.
  3. Passive Income: Income generally derived from real estate, royalties from patents or license agreements.

So the idea here is to identify which of these kinds of income you are working for so that you can continue to rule number two. You would prefer working hard for Portfolio Income and Passive Income than generate your income from Earned Income.

“Investment basic rule number two is to convert earned income into portfolio income or passive income as efficiently as possible.”

“And that, in a nutshell, is all an investor is supposed to do.’’

Now that you know what kind of income you’re generating from, you may want to convert your earned income into portfolio income or passive income to reach better financial independence for investment.

But how? What happens if I lose the money? And it’s not going as planned? Well… we’ll go to that in the basic rule number three. And watch out for the negative thoughts.

“Investment basic rule number three, is to keep your earned income secure by purchasing a security you hope converts your earned into portfolio income or passive income.”

Now you may need to get a better understanding of assets and liabilities. The point here is: not all securities are assets. They can be assets or liabilities. In fact, they can change from being an asset to a liability. For example, you bought a hundred shares of stock paying $20 per share. Next month, you sold 50 shares for $30 per share. Those shares were assets because they make income for you. But then in the next following month, you sold the remaining 50 shares for only $10 per share. In this situation, those shares were liabilities since they make you lost the profit.

It is the investor not knowing the difference between an asset or liability that makes investing risky.

“And why I say investor basic rule number four is, it is the investor that is really the asset or the liability.”

Photo by Tierra Mallorca on Unsplash

You often hear people say, ‘Investing is risky.’ but actually, it’s the investor who is risky because the investor doesn’t really know which is an asset and which is a liability. Of course, one property can be an asset or a liability but you need to keep in mind that you have to understand about the property that will it become the asset or liability. In fact, a good investor loves to follow behind a risky investor because that is where the real investment bargains are found.

“And that is why you love to listen to investors who are crying the blue about their investment losses, you want to find out what they did wrong and see if you can find a bargain.”

“So is there an investor basic rule number five?”

“Yes, there is. Investor basic rule number five is that a true investor is prepared for whatever happens. A non-investor tries to predict what and when things will happen.”

Photo by M. B. M. on Unsplash

The good news is that there are more and more opportunities every day but first, you need to make a decision and choose to play the game. A good investor is always ready for any situation happening ahead of them. If you’re prepared, there is a deal of a lifetime being presented to you every day of your life.

And what does he mean by “Don’t predict”? Well, there are many people who are presented with many good opportunities of investment but instead, they sent out their negative vibe and begin to predict the disasters that will occur. That’s why people often predict themselves right out of opportunities, instead of being prepared. So from now on, don’t worry too much about the obstacles that we don’t know will happen or not and instead, always be prepared!

“What if I find a deal and I don’t have any money?”

“That is investment basic rule number six. If you are prepared, which means you have education and experience, and you find a good deal, the money will find you or you will find the money.”

Photo by Michael Longmire on Unsplash

In real estate, people often say the key to success is location, location, location. But in reality, the key is always people, people, people. Why is that? you asked! because most of the best deal had gone wrong because the wrong people were in charge. It’s like having a world-ranked race car with a bad driver. No matter how good the car is, no one would bet on it with an average driver on the wheel.

“And what is number seven?”

“It is the ability to evaluate risk and reward.”

A good investor needs to know the balance of the risk and reward to see if the reward is worth taking the risk. To evaluate risk and reward, is to be aware whether the deal that you’re making is high-risk deal or vice-versa. If it is not worth it, then don’t take the deal. But again, if the investor doesn’t have the adequate skills, that would only make the investment at higher risk.

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