Today we are going to start with the Chapter #2 - Importance of Financial Education, which is the part of our series of 7 Chapters That Can Make You Rich & Wealthy. As we discussed about the emotions of fear and greed in Previous Chapter Don't Work For Money and the way to get out of those fear is Financial Education, so without wasting your time let's move ahead.
Why Financial Education?
Well it's a very nice question that Why Financial Education? This question reminds me one of the story that Robert T. Kiyosaki shared in his book Rich Dad Poor Dad, and the story goes like this...
The Richest Businessmen
In 1923 a group of our greatest leaders and richest businessmen held a meeting at the Edgewater Beach hotel in Chicago. Among them were Charles Schwab, head of the largest independent steel company; Samuel Insull, president of the World's largest utility; Howard Hopson, head of the largest gas company; Ivar Kreuger, president of International Match Co., one of the world's largest company at that time; Leon Frazier, president of the Bank of International Settlements; Richard Whitney, president of the New York Stock Exchange; Arthur Cotton and Jesse Livermore, two of the biggest stock speculators; and Albert Fall, a member of President Harding's cabinet. Twenty-five years later, nine of these titans ended their life as follows: Schwab died penniless after living for five years on borrowed money. Insull died broke in a foreign land, and Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall were released from prison, and Fraser and Livermore committed suicide.
Well you may think that what actually happened to these men? Well it was all the Great Depression of 1929 market crash, as Robert T. Kiyosaki explains further...
If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer despite tough changes. If they think money will solve problems, they will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.
So, you may earn a lot of money from lottery or your business and infact from your incentives at your job but without Financial Education or Financial Intelligence, Do you think that you can keep that money for long time and convert them into your wealth? I don't think so because most of the people are in so much joy after receiving the bulk cash that they want to get everything they desire and spends all the money...That is what known as Financial Illiteracy!
Let's start with...
Assets Vs Liabilities
Most of you who are from Commerce stream must know the above terms, The Assets and The Liabilities but you all must have studied about them for Business Accounting, Do you know what they actually means in your real life?
All you need to know is the difference between an Asset and Liability and then Buy Assets, this is the only rule to become rich and wealthy, Yes you heard it right! :)
You must be thinking that if this is the only rule then Why not everyone become rich and wealthy? My friend, that's because everyone doesn't know the difference between an Asset and a Liability.
Got Confused? ohh don't worry let me explain it more clearly...
Do you know what most of the people think their Home Actually is? Is it an Asset? Right? I'am sorry to tell you the truth about the home that they bought by giving a downpayment and rest amount that is the mortgage which means a liability, so their home with downpayment is not their asset it's a liability to them.
How?
Because, An Asset puts money into your pocket and a Liability takes out money from your pocket or you can even write it down like this,
Asset = Income
Liability = Expenses
So, coming back to that Home which has been bought on Mortgage, The people who do the same and thinks that finally they bought their own home and are living forever in an illusion that their Home is their own and biggest asset, What they don't know is the fact that their Home Mortgage is their Liability untill or unless they pay it off, So till then most of their monthly income will turn into expenses of their Home Mortgage EMI (As we discussed above LIABILITY = EXPENSES)
Do you still think that a Home bought by giving a Downpayment is your biggest asset or a Car purchased on a Loan is your asset?
If you still think so, Let's start with...
The Cash Flow Pattern
I hope the below cash flow pattern will explain you the actual difference between an Asset and a Liability.
Cash Flow Pattern of an Asset goes like this...
(Image Courtesy: RichDad.com)
As Robert T. Kiyosaki in his book Rich Dad Poor Dad, explains above diagram like this...
The top part of the diagram is an Income Statement, often called a Profit-and-Loss Statement. It measures income and expenses: money in and money out. The lower part of the diagram is a Balance Sheet. It’s called that because it’s supposed to balance assets against liabilities. Many financial novices do not know the relationship between the Income Statement and the Balance Sheet, and it is vital to understand that relationship.
And, The Cash Flow of a Liability goes like this...
(Image Courtesy: RichDad.com)
So, this is what the actual difference between an asset and a liability, as an Asset puts money in my pocket and the Liabilities take out money from my pocket. If you want to be rich and wealthy just spend on buying assets instead of liabilities.
Bottom Line
If you want to become rich and wealthy just read and re-read this chapter untill you get the clear nuances of each concept that are required to your path of financial education, so this was few concepts that can make you clear why financial education is important to become rich and wealthy.
Do you know why rich gets richer? and Poor and Middle Class keeps on struggle all their life? That's because rich spend their life buying assets that generate them more and more income all their life, where as Poor and Middle Class spend their life in buying liabilities and they get more and more in debt to pay off their expenses and all the time they think that doing hard work and more money will solve all their problems.
So, my friends here our second chapter comes to an end but this is not all over we have a lot to discuss about Financial Education and How to Become Rich and Wealthy in our upcoming chapters so don't forget to sign up for my newsletter service so that you can recieve the next chapter directly in your inbox, if you have any query then feel free to comment below or you can write me at contact@gurpreetsaluja.com
Must Read For More Insights:
Rich Dad Poor Dad by Robert T. Kiyosaki
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