Leverage

The most important word in business world is cash flow. RK explained this in his first four books: Rich Dad Poor Dad, Cash Flow Quadrant, Guide to Investing, and Rich Kid Smart Kid. The second most important word is leverage. RK’s fifth book, Retire Young Retire Rich is all about leverage. For him, the use of leverage distinguishes those who become rich from those who do not.

There are many forms of leverage, says RK. Debt is one form. People who do not know anything about financial literacy think that all debt is bad. They do not know how to distinguish good debt from bad debt. RK claims that he was deep in good debt, which made him rich and financially free.

In his fifth book, RK discussed three important forms of leverage that people who want to retire young must learn to use. These are your mind, your plan, and your actions. The most important tools to maximize the leverage of your mind are the words you use. Your life depends on the words you use. Your use of disempowering words will make your life poor and miserable. On the other hand, your use of empowering words will make your life rich and successful. RK claims that saying to yourself, “I can’t do that,” “I can’t afford that,” “I’ll never be rich,” “Investing is risky,” “I will not be successful,” and other similar words are examples of disempowering words. By saying words like these, you are using your mind against yourself. Borrowing the idea of his dad without a college degree, RK said that your mind could either be your most powerful asset or liability. Therefore, guard your thoughts and your words. They could either build or ruin your life.

The second form of leverage is your plan. In his third book, RK explained that investing was a plan. While explaining this form of leverage, I find one timely observation very disturbing. Most people do not see the relevance of this observation to their finances and their future. This observation calls for the need to utilize the leverage of your plan. This observation has something to do with the ripple effect to global economic situation of 75 million American baby boomers retiring this 2010. Though RK describes the situation in America; personally, I consider it irresponsibility to think that our country will not be affected and as a result, to do nothing about it. You need to plan.

The third form of leverage is your actions. RK recommends that an appropriate action for those aspiring to retire young is to spend your time not in working for money but in applying the skill of putting money to work for you. You can only do this by spending your time acquiring assets: real estate, paper assets, and businesses.