Friday, September 25, 2009

Shift your reality and think rich

Mr. Kiyosaki's conversation with Rich Dad about the different "realities" of rich vs. non-rich is very illuminating. Without rehashing the entire story (You can read that in "Retire Young, Retire Rich") I'll just start by... what is greed, and what is generosity?

Your core programming affects almost everything you see, do, and perceive. You see the world through its filter. In other words, your reality is affected by your core programming. And very often, the first thing you need to change is your core programming, which will update your "reality", or as Stephen Covey put it, a "paradigm shift".

== Greed, Generosity, and Paradigm Shift ==

Most people think of greed like Michael Douglas in "Wall Street", whose famous line: "Greed is good" is so simple and so succint, it almosts make you want to adopt socialism (not!). Others have the concept of Uncle Rich in the Disney cartoons, or even... Ebenezer Scrooge, people so stingy they will gladly squeeze their employees in sweat shops just to put an extra dime in their own pocket.

Generosity, on the other hand, is usually thought of as giving things away, esp. money. Give to charities, give to the poor... etc.

So let us consider this... When you work at a job, you "expect" a raise at the end of the year. Correct? Why? WHY do you "deserve" a raise, if you are doing the same job? Are you better at your job? Are you doing more now than before? If you moved onto a more important job, you absolutely deserve a raise for the increase in responsiblity. But why should you expect a raise just because you've stayed at a job for a year?

Yet that is how the current system works... Automatic promotion / raises at end of every year is not only expected, but practically MANDATED by union contracts and whatnot. 

So tell me this: should the idea of expecting MORE pay for same (or less) amount of work be considered greed? Why or why not?

Now THAT is a paradigm shift. Never thought of it that way, did you?

And what exactly *is* generosity? Being generous has nothing to do with rich or poor. But somehow, we think that when the poor give, it's somehow more noble, yet when the rich act generously, MASSIVE amount of people will benefit.

I think it's one of the Christian stories that had a beggar who gave his last loaf of bread, and Jesus praised him for he gave his all.

We middle-class consider ourselves "generous" when we tossed out some old coats, old toys, old books, and other knick-knacks for Goodwill or Salvation Army, or donated an old car to United Way.

Bill and Melinda Gates have given away TENS OF MILLIONS through their foundation, as did George Soros, Warren Buffet, and many more. The Smithsonian was founded by, yes, Mr. Smithson. The ultra-rich can afford to do MUCH MORE good than a few coats or an old clunker or two. You benefit from them even though you don't realize it.

So why do most poor and middle-class see the ultra-rich as "greedy", when they did so much good for the world?

== Saving vs. Making ==

Here is another "reality check" for you... About how the rich and non-rich think very differently. And I don't mean the rich are snobby.

Poor people think money is scarce, therefore they must "save money". And because of their reality, they will STAY poor.

Rich people think money is plentiful, therefore they will "make money". And because of their reality, they will STAY rich.

You're probably thinking, "uh... I dunno about that..." So let's take a closer look at this compare and contrast.
Poor people think money is scarce, and they never have enough. They can't really increase their income much without a fundamemtal change of their reality, so they try to save money, by spending less. They buy stuff only when it's on sale. They buy huge amounts at sale and store them. They clip coupons for saving a few more dollars here and there. While the savings do add up, they still don't have any money, because they don't realize a fundamental truth: they are spending AFTER-TAX DOLLARS.

Remember, you are taxed at everything you do. You are taxed when you earn (income tax), when you spend (sales tax), even when you die (estate tax), and just about everything in between (gasoline tax, cigarette tax...). So the less tax you can NOT pay legally, the better! Right? And there's really no getting away from the sales tax (unless you move to a state that doesn't have one, or buy out of state, but then you pay SHIPPING...), so most of the effort in paying less is going to be in terms of income tax.

Yet there really isn't much tax loopholes for an employee (or for the Cashflow Quadrant fans, the E quadrant) to exploit. After all, they take your money even BEFORE you get your hands on it, through "deductions". Nowadays, employers don't even write checks to pay the IRS. IRS take it straight out of employer's bank account through e-banking, before you even KNOW about it.

For the E quadrant folks, you're probably thinking about deducting your mortgage interest as your PRIMARY "tax savings". However, deducting your mortgage interest is NOT really a tax advantage that you think it is. Deduction is applied to your INCOME, not your taxes. So you actual savings is far less, and depends on your tax bracket. Let's say you're at the 35% bracket. Your mortgage interest (for a nice round number) is $5000, and your income is $100000 (combined). So your taxes is 35000 (35% of 100000), without the deduction. With the deduction, your income is 95000, and 35% of that is, 33250. Your savings in taxes is 1750. In other words, you spent $5000 to save $1750. Sounds like a LOSING deal to me.
If you already have a mortgage, then by all means deduct the interest (and everything else you can legally deduct), but refinancing  (unless you're trying to shorten the terms, or reduce the rate), get a home equity loan, or upgrade to a bigger house for the supposed "deductions" is utterly ridiculous. You're merely shifting the debt around, but it's STILL "bad debt".

Yet most non-rich don't think that way. It simply did not occur to them that their single biggest "asset", their home, is actually a liability.  Or to put it another way, they are in a different REALITY.

The situation is not that much better for the S-quadrant. Feds took out most of the tax benefits for that quadrant a bit back.

The rich thinks differently, when it comes to trimming expenses. The rich realizes that it makes more sense to expand your income, instead of cutting your expenses. For a very simple reason: cutting expenses is self-limiting. You still have to eat, keep a roof over your head, put gas in your car, etc. And it makes most people unhappy if you take away all of their luxuries. They do need to go out to dinner every once in a while, and so on. So while trimming expenses is good, you soon reach a point where you can't go much lower, and the effort spent in squeezing out those last pennies should probably be spent on expanding one's income instead. And what's the point of getting rich without being able to afford some luxuries and be unhappy most of the time?

Or in Rich Dad (tm) advice, "You may become rich by being cheap, but you're still cheap."

[Slight aside, while money will not make you happy, money can buy things and people to do the tedious stuff, so you can spend more time doing the things you love that WILL make you happy. Think about that. ]

The rich also understands that the E quadrant have very little tax savings, but the B and I quadrants have quite a few more, esp. real estate. One of the biggest "paradigm shifts" for a business is a business can deduct expenses and such FIRST, and pay taxes on what's left. That is right, businesses can spend BEFORE-TAX DOLLARS. Employees can only spend AFTER-TAX DOLLARS.

And most companies get tax breaks and incentives from government agencies. For example, did you know that the CA EDD, which tax businesses to fund unemployment stuff, charges new businesses a lesser rate for its first few years? (Though it tracks the owners, so subsequent new companies by same owner don't get the same breaks). Your local agencies should have similar incentives.

In other words, the rich have more legal ways to avoid taxes or reduce taxes, simply by doing things differently.

And the rich can literally "make money" by selling shares of their own company (B quadrant).
The rich can make money with their money by investing. (Remember, I quadrant).

And as Mr. Kiyosaki and Rich Dad have explained before, a house mortgage is a liability, since you have to pay IT every month. It generates EXPENSE, not income.


Money is Scarce

Saves Money

Must work for money

House is an asset


Money is plentiful

Makes money

Money works for money

House is a liability

The point is: the rich, with different priority and education, sees things differently from the rest of us. Thus, one of the prerequisites to be rich is learn how to THINK rich.

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