The 7 Basic Rules of Investing

Excerpts from Rich Dad’s Guide to Investing: What the rich invest in, that the poor and middle class do not - By Robert T. Kiyosaki

This is one of my favorite books on learning how to invest like the rich. In this book, Robert lays down seven basic rules of Investing:

1. Basic rule Number One:

Always know what kind of income you are working for. He states three different kinds of income:
  • Earned Income: income generally derived from job or some form of labor. Apart from being the most common form of income, it’s the highest taxed income and the hardest income with which to build wealth.
  • Portfolio Income: income generally derived from paper assets such as stocks, bonds, mutual funds, etc. It’s the most popular form of investment income, simply because paper assets are so much easier to manage and maintain than any others.
  • Passive Income: income generally derived from real estate. It can also be income derived from royalties, from patents or license agreements.

To get more insight on the three types of income, I recommend you read his second book: Rich Dad’s CASHFLOW Quadrant.

2. Basic rule number Two:

Convert earned income into portfolio income or passive income as efficiently as possible.

3. Basic rule number Three:

Keep your earned income secure by purchasing a security you hope converts your earned income into passive income or portfolio income. It is up to the investor to know which securities are assets and which securities are liabilities.

4. Basic rule number Four:

It is the investor that is really the asset or liability and not the investment or security. The inability of an investor not knowing the difference between an asset and liability makes investing risky.

5. Basic rule number Five:

A true investor is prepared for whatever happens. A non-investor tries to predict what and when things will happen. One of the basics of being a good investor is being prepared to profit when the market moves up or if it moves down.

6. Basic rule number Six:

If you are prepared, which means you have education and experience, and you find a good deal, the money will find you or you will find the money. Many times it is not the deal that did not attract the cash but the person controlling the deal did not attract the cash. If you are prepared, you have done your homework, you have some experience and a track record, and you find something is a good investment, then finding the money is not that hard.

7. Basic rule number Seven:

The ability to evaluate risk and reward.

I believe after going through the seven basic rules of investing, you have realized how crucial financial intelligence is when it comes to investing.

Here are some important statements from Robert’s book:

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“Time is your most important asset. If you are not willing to invest your time, then leave your investment capital with people who are following the investment plan of your choice. Many people dream of getting rich but will not pay the price of the investment of their time”

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“So if you want to invest with very low risk and high returns, you have to pay the price. And the price involves study, lots of study. You need to study the basics of business. So to be a rich investor, you also have to either be a good business owner, or know what a business owner knows”

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“Financial literacy is one of the most important basics, especially if you want to be a safe investor, an insider investor, and a rich investor”

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“Financial literacy is definitely an important investor basic at the rich investment level. The other basic is to invest to make money”

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“Investing in the hopes of making more money so you can pay bills or buy a bigger house or a new car is a fool’s investment plan. You invest for one reason: to acquire an asset that converts earned income into passive income or portfolio income. That conversion of one form of income into another form of income is the primary objective of a true investor. And to do that requires a higher degree of financial literacy than balancing a checkbook”

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“The riskiest investor of all is a person who is out of control of his or her personal financial statement. The riskiest of all investors are those who have nothing but liabilities they think are assets, have as much in expenses as they have in income, and whose only source of income is their labor. They are risky because they are often desperate investors”

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“Where you find the best investment opportunities is from understanding accounting, the tax code, business law, and corporate law. And it is in these realms where the real investors shop for the biggest investment bargains”

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