Note from Stephen: This is a guest post by Marj over at the way of money. I am a huge fan of Marj, Clément, and their blog. Please go check it out and read the archives. The content is excellent and very relevant to readers of The Rat Race Trap.
by Marj Galangco of www.thewayofmoney.com
In order to get out of the rat race, we must be financially literate. Ironically, financial literacy is not even taught in schools, that’s why many of us – including the “highly-educated” ones – actually know very little about money.
The problem is further compounded by financial miseducation. How many of us are taught to study well and go to college, get a JOB and exchange our time for money, save our money, don’t invest because it’s risky, just buy a house and pay the mortgage for the rest of our life?
The fact is that many people who followed this formula are now people in their 60s-70s who are struggling because their pensions or savings are barely enough to provide for their basic needs. Meanwhile, there is a growing number of billionaires/millionaires age between 20s-40s precisely because they did NOT follow the prescribed formula.
In this post, I’ll be discussing the main concepts we must grasp in order to achieve financial freedom. I know finance can be the most boring subject in the world, but luckily for us, we can learn this via the Cashflow® 101 board game.
Cashflow® 101 is created by Robert Kiyosaki, the world-reknowned author of the Rich Dad Poor Dad book series. It’s an educational tool that teaches players the fundamental concepts they need to understand to get out of the rat race and make their money work for them instead of the other way around. The game simulates real-world scenarios, thus allowing the players to practice real world investing without any risks. It’s a brilliant and effective educational tool because Cashflow® 101 allows players to learn about accounting, finance, and investing while having fun at the same time.
Having invested in it 4 years ago, I thought it would be great to play it again and share everything I have learned here. But first, if you’re not already familiar with the game, here’s a quick introductory video:
Video Robert Kiyosaki – The CASHFLOW Game
Briefly, here are the basic mechanics of the game: in order to get out of the Rat Race and onto the Fast Track, you must acquire assets that will generate enough passive income to cover all your expenses. This can be done by purchasing properties, businesses, mutual funds, land, and stocks. As we work our way around the board, we land on different squares:
- “Paycheck” (your monthly paycheck, depending on your profession)
- “Opportunity” – investment opportunities
- “Doodads” – these are liabilities, or expenses that are often unnecessary
- “Market” – opportunities to make (or lose) money from your accumulated assets
Things I learned from playing the Cashflow Board Game
#1: “In order to get out of the rat race, I must learn to think like the Rich”
This is a lesson that we will keep hearing. Our success is going to be determined by our mindset.
I have played the board game with many people, with varying levels of financial literacy. Some of them were open-minded and eager to learn, while others were stuck in their conditioned paradigms. It was easy to tell which players were consciously adopting the mindsets and habits of the rich while playing the game.
On one occasion I heard someone joking (I hope), “you may get out of the Rat Race, but you’re still a rat!”. So let’s look at the difference between the Rich Rat and Poor Rat mentality:
Poor Rat: How can I work harder so I can buy more toys and keep up with the Joneses? What shall I spend on today? I know – shoes! Jewelry! Oh wait my mobile phone is now 3 months old, I need a new one or my friends will think I’m so out of season… Oh no! I dont have money in the bank! I’ll just charge it on my credit cards then…
Rich Rat: If I think like the rich, I’ll be able to recognize the opportunities (they abound all around me and can appear every day) that will make me rich. I must learn how to tell the difference between assets and liabilities: Assets are those that put money in my pocket, while liabilities are things that take money out of my pocket. So by this definition my house, car, vacations, toys, clothes, are all liabilities! (gasp)
It doesn’t mean we shouldn’t spend on doodads, because these liabilities give us the experiences we want out of life. Personally, I prefer to live a rich lifestyle, not one that is limited! I don’t want to constantly scrimp just to save money. I prefer to create the money I need so I can then buy whatever I like.
The key is that if I want something I must learn how to delay gratification, but instead of depriving myself, I can ask a more empowering question: “How can I acquire assets that will then pay for the toys I want?”
Kiyosaki stresses that the Rich buy assets first, liabilities second. The poor normally just buy liabilities. It reminds me of someone I used to know. She bought a coat from Prada even though she already had over £12,000 in debt. I was educating her about her credit card debt and she said, “Assets? What assets? And how do interest rates work anyway?” I am dreading to think where she is now and how much her debt is.
How about you – do you think like Poor Rat, or do you think like Rich Rat?
#2: “Not all debts are equal.”
It is from Kiyosaki that I learned all about ‘good debt’ and ‘bad debt’. Kiyosaki defines good debt as those that makes your rich, bad debt are those that makes you poor.
For example, the house that you live in is a liability if you’re paying the mortgage and it’s not putting money in your pocket. However, if you took out a mortgage to buy a house and then rented it out – and it’s providing a positive cashflow of $500 every month – it’s an asset. It’s very important to know the difference.
The rich have more good debts than bad, and that’s why they are rich.
The poor have more bad debts than good, and that’s why they are poor.
Which type of debts do YOU have more of? Do you have existing bad debts that you can start to slowly pay off? Are you willing to cut back on your doodads in order to get out of your bad debts?
#3. “I can be anywhere, have any income level, be of any (legal) age and still get out of the rat race if I’m willing to act and establish sources of passive income”
At the start of the game each player is given a profession, which then dictates their monthly income and expenses level. We all started with jobs – today, Clément and I played the game. I started as a teacher and Clément as a janitor. My monthly salary was $3,300 and my expenses $2,190, leaving a cashflow of $1,110.
Clément earned $1,600 a month as a Janitor but he got out of the rat race first, onto the fast track, bought his “dream” house and continued to win the game (I could have carried on regardless, working on getting myself out of the rat race, but since it there was only two of us we decided to pack up).
Clément won because he did 2 key things:
- He invested in lucrative deals – stocks that had positive potential ROIs, 10 acres of raw land which produced a 3000% ROI, a 3bed/2bed house which he rented out, etc.
- As soon as he was able to, he got rid of all his bad debts, thereby reducing his monthly expenses, which then increased his monthly cashflow.
Think of how you too can start doing these things. As Clément demonstrated, it doesn’t matter at what stage you are in your life or what you do for a living. As long as you have the financial education, you can get out of the rat race.
Are you actively seeking investments? Have you educated yourself enough to be able to spot lucrative investments?
#4: “I must be smart with my investments.”
From time to time, the game presented investment opportunities that clearly stated either a negative or a very small ROI. I personally did not invest in them, but I have seen other players do so in the past. We see this happen in real life as well, don’t we? Some people buy a business or a property without first doing ther due dilligence or calculating their potential returns.
A fundamental lesson I learned was that I have to make my money work for me, not the other way around, and that I must learn to adjust my strategies as the market changes.
But let me identify why I think I lost the game. Some of the events that got me stuck in the rat race as a school teacher were:
- I made a couple of fundamental miscalculations on my balance sheet.
- My dice landed on several doodads, some of which really crippled me – like the home theatre and a boat.
- My dice landed on “New baby – Congratulations!” three times, which increased my expenses by $540 a month (I didn’t even know who their father was!).
- I got “downsized” twice – I had to pay a month’s worth of expenses and lose my next 2 turns 🙁
- At one point, my ONLY source of passive income was a 3bed/2bath house which I rented out. My tenant did a runner on me and I had to compensate for some losses.
- I wasn’t able to buy lucrative investments because my doodads increased my expenses, which then led to a negative cashflow.
- I didn’t invest in certain opportunities because I didn’t want to take the risks involved.
From these, I learned the following:
- While I rarely make such mistakes, it shows us that being financially illiterate is a truly expensive type of ignorance! But how many of us are investing in our continuing financial education? How many of us know how to invest? How many of us can read a balance sheet? How many of us are financially illiterate?
- A boat, for Christ’s sake! I had to pay $4,000 and take out a loan of $17,000 just to be able to obtain these liabilities. While I personally will not do such a thing, you can imagine that there are real people out there who would. I had to pay the bank $340 a month just to repay this loan! Hey if I’m a school teacher and I’m behaving like this, no wonder financial literacy isn’t taught in schools!
If you’re in the habit of spending on liabilities, take heed. From now on, learn to ask yourself this question whenever you are contemplating to buy something: “Is this an asset, or is this a liablity?” If it’s a liability, change your strategy and think of ways how you could obtain an asset first that will pay for the liability you want to have. Trust me – it’s so much more rewarding to acquire your doodad when you know it’s being paid for by an asset!
- No, I’m not advocating looking at your kids as liabilities now – c’mon I’m not that bad… I’m just saying they could have at least mentioned to me who the father was.
- Oh well. Shit happens. And when it does (and it most likely will), it’s best to have financial cushions. So the question is, do you have any? I didn’t, so I got stuck in the Rat Race. Don’t make the same mistake.
- This shows us that we must establish multiple sources of passive income. These days, we can’t just rely on one or two anymore.
- My doodads prevented me from being able to afford lucrative investment deals that came up. I may look good in my boat and be able to brag about my home theatre but by God they’re not just bleeding me dry, they’re robbing me of any hope to stop the bleeding!
- (I had three kids to feed and the father wasn’t even mentioned so can you really blame me for being afraid of taking risks? heh) Seriously though, in the real world we all have our own barriers to investing, don’t we? We’re either too old or too young; we’re either too clever or too dumb; we use our children as excuses to NOT do something instead of using our children as our most compelling reasons to aim for even greater and higher goals! The fact remains that the more excuses we come up with, the more opportunities we will miss. Remember that in life, it’s the missed opportunities that make up our deepest regrets, and rarely the ones that we actually took advantage of.
Many of us may be in the Rat Race, but we won’t be there for long if we learn how to:
- Adopt the mindset of the Rich and become financially literate.
- Differentiate between assets and liabilities – and acquire the things that make us rich.
- Be able to delay gratification and know how to buy the right things at the right time.
- Know the difference between good debts and bad debts, and acquire the type that creates wealth.
- Educate ourselves about the many ways of establishing passive income streams.
- Invest our time, energy, health and money in the right investments at the right time, using the right strategies.
So there you go. These are the basics you need to know to start getting out of the Rat Race. Now, if you excuse me, I must go and play again and I’ll try to win this time…
The Cashflow 101 game is available in board game and electronic formats. You can get them here.