6 basic rules of investing

Regardless of how old and young you are, learning the basics of anything is important.

  1. Types of income

Three kinds of income

Ordinary earned income, this is the highest -taxed income ; therefore, it is the hardest to build wealth with.

Portfolio income: generally derived from paper assets such as bonds, stocks and mutual funds.

Passive income: generally derived from real estate, royalties and distributions. It is the lowest – taxed income, and with many tax benefits, and it’s the easiest income to build wealth with.

If you are going to begin investing, take a look of what kind of income your investments will generate. Rich Dad said “If you want to be rich, work for passive income”

2. Education

Most people try to predict what and when things will happen. But a true investor is prepared for anything to happen whether the economy goes up or down. Rich dad said, “If you are not prepared with education and experience, a good opportunity will pass you by.”

Reach out to people in the industry and pick their brains. We all had to start somewhere; we had to ask help from mentors too. If they’re good people, and they have the time, they’ll be happy to talk with you on getting get started.

Next is the crux of getting financially educated: Take action. Your education will never truly take hold unless you apply what you’ve learned.

Get out there and look at the deals. Make offers. Sign that contract. Only then will your education be truly underway.

 

3. Cash flow

Most people start their life out by making ordinary earned income as an employee. The path to building wealth starts by converting your earned income into the other types of income as efficiently as possible.

Save a portion of your earned income from your job (pay yourself first), get educated on a specific investment vehicle, then put that money into an investment.
“That, in a nutshell,” said rich dad, “is all an investor is supposed to do. It’s as basic as it can get.”

4. Risk management

Many people think investing is risky. Laziness is risky

To mitigate the risk of an investment, you must get educated. Talk with mentors, do the research, make the calls, and view the properties. Most importantly, you need to take a “test drive” on a small investment and actually learn what makes up a good investment or not.

5. Raise capital

One of my big concerns as a beginning investor was how I would raise money. Most people will say, “It takes money to make money.” I hate hearing that. It couldn’t be further from the truth. Saying that shuts down your creative brain and your ambition to get out and create your future.

Rich dad said, “If you are prepared, which means you have education and experience, and you find a good deal, you will find the money.”
If you have the team, systems, and the right deal, you’ll be able to raise the money you need. You will be hard-pressed to find an investor who will invest with you based on a deal you haven’t found yet. Talk is cheap. Do the work and find a good deal. You’d be surprised how many people are looking for a solid deal to invest in.
So, don’t shut down your creative brain and your ambition by saying, “It takes money to make money.” That’s the biggest load of crap.
It takes finding the right deal to make money.

6. Evaluate

As you get into being an investor, you must quickly learn to evaluate risk and reward. Rich dad used the example of a nephew building a burger stand.
“If you had a nephew with an idea for a burger stand and he needed $25,000, would that be a good investment?”
“No,” I answered. “There is too much risk for too little reward.”
“Very good,” said rich dad, “but what if I told you that this nephew has been working for a major burger chain for the past 15 years, has been a vice-president of every important aspect in the business, and is ready to go out on his own and build a worldwide burger chain? And what if you could buy 5 percent of the company with $25,000? Would that be of interest to you?”
“Yes,” I said. “Definitely because there is more reward for the same amount of risk.”
Whether it is an investment in the stock of a company or purchase of real estate, I always analyze the financial statements. I can determine how profitable a business is by looking at its financial statements and calculating financial ratios.
For a real estate investment, I calculate what the cash-on-cash return will be, based on the amount of cash I need to spend for the down payment.

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