Here's Chapter 2
Here's Chapter 3
Chapter Four
LESSON 4: THE HISTORY OF
TAXES AND THE POWER
OF CORPORATIONS
79
My rich dad just played the game smart,
and he did it through corporations—
the biggest secret of the rich.
I remember in school being told the story of Robin Hood and
his Merry Men. My teacher thought it was a wonderful story of a
romantic hero who robbed from the rich and gave to the poor. My rich
dad did not see Robin Hood as a hero. He called Robin Hood a crook.
Robin Hood may be long gone, but his followers live on. I often
still hear people say, “Why don’t the rich pay for it?” or “The rich
should pay more in taxes and give it to the poor.”
It is this Robin Hood fantasy, or taking from the rich to give to
the poor, that has caused the most pain for the poor and the middle
class. The reason the middle class is so heavily taxed is because of the
Robin Hood ideal. The reality is that the rich are not taxed. It’s the
middle class, especially the educated upper-income middle class, who
pays for the poor.
Again, to understand fully how things happen, we need to look
at the history of taxes. Although my highly educated dad was an
expert on the history of education, my rich dad fashioned himself as
an expert on the history of taxes.
Chapter Four: Lesson 4
80
Rich dad explained to Mike and me that originally, in England
and America, there were no taxes. Occasionally, there were temporary
taxes levied in order to pay for wars. The king or the president would
put the word out and ask everyone to “chip in.” Taxes were levied in
Britain for the fight against Napoleon from 1799 to 1816, and in
America to pay for the Civil War from 1861 to 1865.
In 1874, England made income tax a permanent levy on its citizens.
In 1913, an income tax became permanent in the United States with
the adoption of the 16th Amendment to the U.S. Constitution. At one
time, Americans were anti-tax. It had been the tax on tea that led to the
famous Tea Party in Boston Harbor, an incident that helped ignite the
Revolutionary War. It took approximately 50 years in both England and
the United States to sell the idea of a regular income tax.
What these historical dates fail to reveal is that both of these taxes
were initially levied against only the rich. It was this point that rich dad
wanted Mike and me to understand. He explained that the idea of taxes
was made popular, and accepted by the majority, by telling the poor and
the middle class that taxes were created only to punish the rich. This is
how the masses voted for the law, and it became constitutionally legal.
Although it was intended to punish the rich, in reality it wound up
punishing the very people who voted for it, the poor and middle class.
“Once government got a taste of money, its appetite grew,” said rich
dad. “Your dad and I are exactly opposite. He’s a government bureaucrat,
and I am a capitalist. We get paid, and our success is measured on
opposite behaviors. He gets paid to spend money and hire people. The
more he spends and the more people he hires, the larger his organization
becomes. In the government, a large organization is a respected
organization. On the other hand, within my organization, the fewer
people I hire and the less money I spend, the more I am respected by my
investors. That’s why I don’t like government people. They have different
objectives than most business people. As the government grows, more
and more tax dollars are needed to support it.”
My educated dad sincerely believed that government should help
people. He loved John F. Kennedy and especially the idea of the Peace
Rich Dad Poor Dad
81
Corps. He loved the idea so much that both he and my mom worked
for the Peace Corps, training volunteers to go to Malaysia, Thailand,
and the Philippines. He always strived for additional grants and budget
increases so he could hire more people, both in his job with the
Education Department and in the Peace Corps.
From the time I was about 10 years old, I would hear from my rich
dad that government workers were a pack of lazy thieves, and from
my poor dad I would hear how the
rich were greedy crooks who should be
made to pay more taxes. Both sides had
valid points. It was difficult to go to
work for one of the biggest capitalists in
town and come home to a father who
was a prominent government leader. It was not easy to know which dad
to believe.
Yet when you study the history of taxes, an interesting perspective
emerges. As I said, the passage of taxes was only possible because the
masses believed in the Robin Hood theory of economics: Take from the
rich, and give to everyone else. The problem was that the government’s
appetite for money was so great that taxes soon needed to be levied on
the middle class, and from there it kept trickling down.
However, the rich saw an opportunity because they don’t play by
the same set of rules. The rich knew about corporations, which became
popular in the days of sailing ships. The rich created the corporation
as a vehicle to limit their risk to the assets of each voyage. The rich put
their money into a corporation to finance the voyage. The corporation
would then hire a crew to sail to the New World to look for treasure. If
the ship was lost, the crew lost their lives, but the loss to the rich would
be limited only to the money they invested for that particular voyage.
My rich dad did not see
Robin Hood as a hero.
He called Robin Hood
a crook.
Chapter Four: Lesson 4
82
The diagram that follows shows how the corporate structure sits
outside your personal income statement and balance sheet.
Assets
PERSONAL
INCOME STATEMENT
PERSONAL BALANCE SHEET
Income
Expenses
CORPORATION
INCOME STATEMENT
Liabilities
Income
Expenses
Rich Dad Poor Dad
83
It is the knowledge of the legal corporate structure that really gives
the rich a vast advantage over the poor and the middle class. Having two
fathers teaching me, one a socialist and the other a capitalist, I quickly
began to realize that the philosophy of the capitalist made more financial
sense to me. It seemed to me that the socialists ultimately penalized
themselves due to their lack of financial education. No matter what the
“take-from-the-rich” crowd came up with, the rich always found a way to
outsmart them. That is how taxes were eventually levied on the middle
class. The rich outsmarted the intellectuals solely because they understood
the power of money, a subject not taught in schools.
How did the rich outsmart the intellectuals? Once the “take-fromthe-
rich” tax was passed, cash started flowing into government coffers.
Initially, people were happy. Money was handed out to government
workers and the rich. It went to government workers in the form of
jobs and pensions, and it went to the rich via their factories receiving
government contracts. The government received a large pool of money,
but the problem was the fiscal management of that money. The
government ideal is to avoid having excess money. If you fail to spend
your allotted funds, you risk losing it in the next budget. You would
certainly not be recognized for being efficient. Business people, on the
other hand, are rewarded for having excess money and are applauded for
their efficiency. As this cycle of growing government spending continued,
the demand for money increased, and the “tax-the-rich” idea was adjusted
to include lower-income levels, down to the very people who voted it in,
the poor and the middle class.
True capitalists used their financial knowledge to simply find an
escape. They headed back to the protection of a corporation. But
what many people who have never formed a corporation don’t know
is that a corporation is not really a thing. A corporation is merely a
file folder with some legal documents in it, sitting in some attorney’s
office and registered with a state government agency. It’s not a big
building or a factory or a group of people. A corporation is merely a
legal document that creates a legal body without a soul. Using it, the
wealth of the rich was once again protected. It was popular because
the income-tax rate of a corporation is less than the individual
Chapter Four: Lesson 4
84
income-tax rates. In addition, certain expenses could be paid by a
corporation with pre-tax dollars.
This war between the haves and have-nots has raged for hundreds
of years. The battle is waged whenever and wherever laws are made, and
it will go on forever. The problem is that the people who lose are the
uninformed: the ones who get up every day and diligently go to work
and pay taxes. If they only understood the way the rich play
the game, they could play it too. Then they would be on their way
to their own financial independence. This is why I cringe every time
I hear a parent advise their children to go to school so they can find
a safe, secure job. An employee with a safe, secure job, without financial
aptitude, has no escape.
Average Americans today work four to five months for the
government just to cover their taxes. In my opinion, that is simply too
long. The harder you work, the more you pay the government. That is
why I believe that the idea of “take-from-the-rich” backfired on the very
people who voted it in.
Every time people try to punish the rich, the rich don’t simply
comply. They react. They have the money, power, and intent to change
things. They don’t just sit there and voluntarily pay more taxes. Instead,
they search for ways to minimize their tax burden. They hire smart
attorneys and accountants, and persuade politicians to change laws or
create legal loopholes. They use their resources to effect change.
The Tax Code of the United States also allows other ways to reduce
taxes. Most of these vehicles are available to anyone, but it is the rich
who find them because they are minding their own business. For
example, “1031” is jargon for Section 1031 of the Internal Revenue
Code which allows a seller to delay paying taxes on a piece of real estate
that is sold for a capital gain through an exchange for a more expensive
piece of real estate. Real estate is one investment vehicle that has a great
tax advantage. As long as you keep trading up in value, you will not be
taxed on the gains until you liquidate. People who don’t take advantage
of these legal tax savings are missing a great opportunity to build their
asset columns.
Rich Dad Poor Dad
85
The poor and middle class don’t have the same resources. They sit
there and let the government’s needles enter their arm and allow the
blood donation to begin. Today, I am constantly shocked at the number
of people who pay more taxes, or take fewer deductions, simply because
they are afraid of the government. I have friends who have had their
businesses shut down and destroyed, only to find out it was a mistake
on the part of the government. I realize all that. But the price of working
from January to May is a high price to pay for that intimidation. My
poor dad never fought back. My rich dad didn’t either. He just played the
game smarter, and he did it through corporations—the biggest secret of
the rich.
You may remember the first lesson I learned from my rich dad.
I was a little boy of 9 who had to sit and wait for him to choose to talk
to me. I sat in his office waiting for him to get to me. He was ignoring
me on purpose. He wanted me to recognize his power and to desire to
have that power for myself one day. During all the years I studied and
learned from him, he always reminded me that knowledge is power.
And with money comes great power
that requires the right knowledge to
keep it and make it multiply. Without
that knowledge, the world pushes you
around. Rich dad constantly reminded
Mike and me that the biggest bully was
not the boss or the supervisor, but the
tax man. The tax man will always take
more if you let him. The first lesson of having money work for you, as
opposed to you working for money, is all about power. If you work for
money, you give the power to your employer. If money works for you,
you keep the power and control it.
Once we had this knowledge of the power of money working
for us, he wanted us to be financially smart and not let anyone or
anything push us around. If you’re ignorant, it’s easy to be bullied.
If you know what you’re talking about, you have a fighting chance.
That is why he paid so much for smart tax accountants and attorneys.
It was less expensive to pay them than to pay the government. His
If you work for money,
you give the power to
you employer.
If money works for you,
you keep the power and
control it.
Chapter Four: Lesson 4
86
best lesson to me was: “Be smart and you won’t be pushed around as
much.” He knew the law because he was a law-abiding citizen and
because it was expensive to not know the law. “If you know you’re
right, you’re not afraid of fighting back.” Even if you are taking on
Robin Hood and his band of Merry Men.
My highly educated dad always encouraged me to land a good job
with a strong corporation. He spoke of the virtues of “working your
way up the corporate ladder.” He didn’t understand that, by relying
solely on a paycheck from a corporate employer, I would be a docile
cow ready for milking.
When I told my rich dad of my father’s advice, he only chuckled.
“Why not own the ladder?” was all he said.
As a young boy, I did not understand what rich dad meant by
owning my own corporation. It was an idea that seemed impossible
and intimidating. Although I was excited by the idea, my inexperience
wouldn’t let me envision the possibility that grown-ups would someday
work for a company I would own.
The point is that, if not for my rich
dad, I would have probably followed
my educated dad’s advice. It was merely
the occasional reminder of my rich
dad that kept the idea of owning my
own corporation alive and kept me
on a different path. By the time I was
15 or 16, I knew I wasn’t going to
continue down the path my educated
dad recommended. I didn’t know how I was going to do it, but I was
determined not to head in the direction most of my classmates were
heading. That decision changed my life.
It was not until my mid-twenties that my rich dad’s advice began
to make more sense to me. I was just out of the Marine Corps and
working for Xerox. I was making a lot of money, but every time I
looked at my paycheck, I was disappointed. The deductions were so
large and, the more I worked, the greater they became. As I became
Each dollar
in my asset column
was a great employee,
working hard to make
more employees
and buy the boss
a new Porsche.
Rich Dad Poor Dad
87
more successful, my bosses talked about promotions and raises. It was
flattering, but I could hear my rich dad asking in my ear: “Who are
you working for? Who are you making rich?”
In 1974, while still an employee for Xerox, I formed my first
corporation and began minding my own business. There were already
a few assets in my asset column, but now I was determined to focus
on making it bigger. Those paychecks, with all the deductions, made
all the years of my rich dad’s advice make total sense. I could see the
future if I followed my educated dad’s advice.
Many employers feel that advising their workers to mind their
own business is bad for business. But for me, focusing on my own
business and developing assets made me a better employee because
I now had a purpose. I came in early and worked diligently, amassing
as much money as possible so I could invest in real estate. Hawaii
was just set to boom, and there were fortunes to be made. The more
I realized that we were in the beginning stages of a boom, the more
Xerox machines I sold. The more I sold, the more money I made
and, of course, the more deductions came out of my paycheck. It was
inspiring. I wanted out of the employee trap so badly that I worked
even harder so I could invest more. By 1978, I was consistently one
of the top five sales people at the company. I badly wanted out of the
Rat Race.
In less than three years, I was making more in my real estate
holding corporation than I was making at Xerox. And the money
I was making in my asset column in my own corporation was
money working for me, not me pounding on doors selling copiers.
My rich dad’s advice made much more sense. Soon the cash flow
from my properties was so strong that my company bought me my
first Porsche. My fellow Xerox salespeople thought I was spending
my commissions. I wasn’t. I was investing my commissions in assets.
My money was working hard to make more money. Each dollar
in my asset column was a great employee, working hard to make
more employees and buy the boss a new Porsche with before-tax
dollars. I began to work harder for Xerox. The plan was working,
Chapter Four: Lesson 4
88
and my Porsche was the proof. By using the lessons I learned from my
rich dad, I was able to get out of the proverbial Rat Race at an early
age. It was made possible because of the strong financial knowledge I
had acquired through rich dad’s lessons.
Without this financial knowledge, which I call financial intelligence
or financial IQ, my road to financial independence would have been
much more difficult. I now teach others in the hope that I may share
my knowledge with them.
I remind people that financial IQ is made up of knowledge from
four broad areas of expertise:
1. Accounting
Accounting is financial literacy or the ability to read numbers.
This is a vital skill if you want to build an empire. The more
money you are responsible for, the more accuracy is required,
or the house comes tumbling down. This is the left-brain
side, or the details. Financial literacy is the ability to read and
understand financial statements which allows you to identify
the strengths and weaknesses of any business.
2. Investing
Investing is the science of “money making money.” This
involves strategies and formulas which use the creative
right-brain side.
3. Understanding markets
Understanding markets is the science of supply and demand.
You need to know the technical aspects of the market, which are
emotion-driven, in addition to the fundamental or economic
aspects of an investment. Does an investment make sense or does
it not make sense based on current market conditions?
4. The law
A corporation wrapped around the technical skills of
accounting, investing, and markets can contribute to explosive
growth. A person who understands the tax advantages and
protections provided by a corporation can get rich so much
Rich Dad Poor Dad
89
faster than someone who is an employee or a small-business
sole proprietor. It’s like the difference between someone walking
and someone flying. The difference is profound when it comes
to long-term wealth.
• Tax advantages
A corporation can do many things that an employee cannot,
like pay expenses before paying taxes. That is a whole area of
expertise that is very exciting. Employees earn and get taxed,
and they try to live on what is left. A corporation earns,
spends everything it can, and is taxed on anything that is
left. It’s one of the biggest legal tax loopholes that the rich
use. They’re easy to set up and are not expensive if you own
investments that are producing good cashflow. For example,
by owning your own corporation, your vacations can be
board meetings in Hawaii. Car payments, insurance, repairs,
and health-club memberships are company expenses. Most
restaurant meals are partial expenses, and on and on. But it’s
done legally with pre-tax dollars.
• Protection from lawsuits
We live in a litigious society. Everybody wants a piece of
your action. The rich hide much of their wealth using
vehicles such as corporations and trusts to protect their
assets from creditors. When someone sues a wealthy
individual, they are often met with layers of legal protection
and often find that the wealthy person actually owns
nothing. They control everything, but own nothing. The
poor and middle class try to own everything and lose it to
the government or to fellow citizens who like to sue the
rich. They learned it from the Robin Hood story: Take
from the rich, and give it to the poor.
Chapter Four: Lesson 4
90
It is not the purpose of this book to go into the specifics of owning
a corporation. But I will say that if you own any kind of legitimate assets,
I would consider finding out more about the benefits and protection
offered by a corporation as soon as possible. There are many books
written on the subject that will detail the benefits and even walk you
through the steps necessary to set up a corporation. Garret Sutton’s
books on corporations provide wonderful insight into the power of
personal corporations.
Financial IQ is actually the synergy of many skills and talents.
I would say it is the combination of the four technical skills listed
above that make up basic financial intelligence. If you aspire to great
wealth, it is the combination of these skills that will greatly amplify
your financial intelligence.
In summary:
Business Owners Employees Who Work
with Corporations for Corporations
1. Earn 1. Earn
2. Spend 2. Pay Taxes
3. Pay Taxes 3. Spend
As part of your overall financial strategy, I recommend that
you learn about the protection that legal entities can provide for
businesses and assets.
LESSON 4: THE HISTORY OF
TAXES AND THE POWER
OF CORPORATIONS
79
My rich dad just played the game smart,
and he did it through corporations—
the biggest secret of the rich.
I remember in school being told the story of Robin Hood and
his Merry Men. My teacher thought it was a wonderful story of a
romantic hero who robbed from the rich and gave to the poor. My rich
dad did not see Robin Hood as a hero. He called Robin Hood a crook.
Robin Hood may be long gone, but his followers live on. I often
still hear people say, “Why don’t the rich pay for it?” or “The rich
should pay more in taxes and give it to the poor.”
It is this Robin Hood fantasy, or taking from the rich to give to
the poor, that has caused the most pain for the poor and the middle
class. The reason the middle class is so heavily taxed is because of the
Robin Hood ideal. The reality is that the rich are not taxed. It’s the
middle class, especially the educated upper-income middle class, who
pays for the poor.
Again, to understand fully how things happen, we need to look
at the history of taxes. Although my highly educated dad was an
expert on the history of education, my rich dad fashioned himself as
an expert on the history of taxes.
Chapter Four: Lesson 4
80
Rich dad explained to Mike and me that originally, in England
and America, there were no taxes. Occasionally, there were temporary
taxes levied in order to pay for wars. The king or the president would
put the word out and ask everyone to “chip in.” Taxes were levied in
Britain for the fight against Napoleon from 1799 to 1816, and in
America to pay for the Civil War from 1861 to 1865.
In 1874, England made income tax a permanent levy on its citizens.
In 1913, an income tax became permanent in the United States with
the adoption of the 16th Amendment to the U.S. Constitution. At one
time, Americans were anti-tax. It had been the tax on tea that led to the
famous Tea Party in Boston Harbor, an incident that helped ignite the
Revolutionary War. It took approximately 50 years in both England and
the United States to sell the idea of a regular income tax.
What these historical dates fail to reveal is that both of these taxes
were initially levied against only the rich. It was this point that rich dad
wanted Mike and me to understand. He explained that the idea of taxes
was made popular, and accepted by the majority, by telling the poor and
the middle class that taxes were created only to punish the rich. This is
how the masses voted for the law, and it became constitutionally legal.
Although it was intended to punish the rich, in reality it wound up
punishing the very people who voted for it, the poor and middle class.
“Once government got a taste of money, its appetite grew,” said rich
dad. “Your dad and I are exactly opposite. He’s a government bureaucrat,
and I am a capitalist. We get paid, and our success is measured on
opposite behaviors. He gets paid to spend money and hire people. The
more he spends and the more people he hires, the larger his organization
becomes. In the government, a large organization is a respected
organization. On the other hand, within my organization, the fewer
people I hire and the less money I spend, the more I am respected by my
investors. That’s why I don’t like government people. They have different
objectives than most business people. As the government grows, more
and more tax dollars are needed to support it.”
My educated dad sincerely believed that government should help
people. He loved John F. Kennedy and especially the idea of the Peace
Rich Dad Poor Dad
81
Corps. He loved the idea so much that both he and my mom worked
for the Peace Corps, training volunteers to go to Malaysia, Thailand,
and the Philippines. He always strived for additional grants and budget
increases so he could hire more people, both in his job with the
Education Department and in the Peace Corps.
From the time I was about 10 years old, I would hear from my rich
dad that government workers were a pack of lazy thieves, and from
my poor dad I would hear how the
rich were greedy crooks who should be
made to pay more taxes. Both sides had
valid points. It was difficult to go to
work for one of the biggest capitalists in
town and come home to a father who
was a prominent government leader. It was not easy to know which dad
to believe.
Yet when you study the history of taxes, an interesting perspective
emerges. As I said, the passage of taxes was only possible because the
masses believed in the Robin Hood theory of economics: Take from the
rich, and give to everyone else. The problem was that the government’s
appetite for money was so great that taxes soon needed to be levied on
the middle class, and from there it kept trickling down.
However, the rich saw an opportunity because they don’t play by
the same set of rules. The rich knew about corporations, which became
popular in the days of sailing ships. The rich created the corporation
as a vehicle to limit their risk to the assets of each voyage. The rich put
their money into a corporation to finance the voyage. The corporation
would then hire a crew to sail to the New World to look for treasure. If
the ship was lost, the crew lost their lives, but the loss to the rich would
be limited only to the money they invested for that particular voyage.
My rich dad did not see
Robin Hood as a hero.
He called Robin Hood
a crook.
Chapter Four: Lesson 4
82
The diagram that follows shows how the corporate structure sits
outside your personal income statement and balance sheet.
Assets
PERSONAL
INCOME STATEMENT
PERSONAL BALANCE SHEET
Income
Expenses
CORPORATION
INCOME STATEMENT
Liabilities
Income
Expenses
Rich Dad Poor Dad
83
It is the knowledge of the legal corporate structure that really gives
the rich a vast advantage over the poor and the middle class. Having two
fathers teaching me, one a socialist and the other a capitalist, I quickly
began to realize that the philosophy of the capitalist made more financial
sense to me. It seemed to me that the socialists ultimately penalized
themselves due to their lack of financial education. No matter what the
“take-from-the-rich” crowd came up with, the rich always found a way to
outsmart them. That is how taxes were eventually levied on the middle
class. The rich outsmarted the intellectuals solely because they understood
the power of money, a subject not taught in schools.
How did the rich outsmart the intellectuals? Once the “take-fromthe-
rich” tax was passed, cash started flowing into government coffers.
Initially, people were happy. Money was handed out to government
workers and the rich. It went to government workers in the form of
jobs and pensions, and it went to the rich via their factories receiving
government contracts. The government received a large pool of money,
but the problem was the fiscal management of that money. The
government ideal is to avoid having excess money. If you fail to spend
your allotted funds, you risk losing it in the next budget. You would
certainly not be recognized for being efficient. Business people, on the
other hand, are rewarded for having excess money and are applauded for
their efficiency. As this cycle of growing government spending continued,
the demand for money increased, and the “tax-the-rich” idea was adjusted
to include lower-income levels, down to the very people who voted it in,
the poor and the middle class.
True capitalists used their financial knowledge to simply find an
escape. They headed back to the protection of a corporation. But
what many people who have never formed a corporation don’t know
is that a corporation is not really a thing. A corporation is merely a
file folder with some legal documents in it, sitting in some attorney’s
office and registered with a state government agency. It’s not a big
building or a factory or a group of people. A corporation is merely a
legal document that creates a legal body without a soul. Using it, the
wealth of the rich was once again protected. It was popular because
the income-tax rate of a corporation is less than the individual
Chapter Four: Lesson 4
84
income-tax rates. In addition, certain expenses could be paid by a
corporation with pre-tax dollars.
This war between the haves and have-nots has raged for hundreds
of years. The battle is waged whenever and wherever laws are made, and
it will go on forever. The problem is that the people who lose are the
uninformed: the ones who get up every day and diligently go to work
and pay taxes. If they only understood the way the rich play
the game, they could play it too. Then they would be on their way
to their own financial independence. This is why I cringe every time
I hear a parent advise their children to go to school so they can find
a safe, secure job. An employee with a safe, secure job, without financial
aptitude, has no escape.
Average Americans today work four to five months for the
government just to cover their taxes. In my opinion, that is simply too
long. The harder you work, the more you pay the government. That is
why I believe that the idea of “take-from-the-rich” backfired on the very
people who voted it in.
Every time people try to punish the rich, the rich don’t simply
comply. They react. They have the money, power, and intent to change
things. They don’t just sit there and voluntarily pay more taxes. Instead,
they search for ways to minimize their tax burden. They hire smart
attorneys and accountants, and persuade politicians to change laws or
create legal loopholes. They use their resources to effect change.
The Tax Code of the United States also allows other ways to reduce
taxes. Most of these vehicles are available to anyone, but it is the rich
who find them because they are minding their own business. For
example, “1031” is jargon for Section 1031 of the Internal Revenue
Code which allows a seller to delay paying taxes on a piece of real estate
that is sold for a capital gain through an exchange for a more expensive
piece of real estate. Real estate is one investment vehicle that has a great
tax advantage. As long as you keep trading up in value, you will not be
taxed on the gains until you liquidate. People who don’t take advantage
of these legal tax savings are missing a great opportunity to build their
asset columns.
Rich Dad Poor Dad
85
The poor and middle class don’t have the same resources. They sit
there and let the government’s needles enter their arm and allow the
blood donation to begin. Today, I am constantly shocked at the number
of people who pay more taxes, or take fewer deductions, simply because
they are afraid of the government. I have friends who have had their
businesses shut down and destroyed, only to find out it was a mistake
on the part of the government. I realize all that. But the price of working
from January to May is a high price to pay for that intimidation. My
poor dad never fought back. My rich dad didn’t either. He just played the
game smarter, and he did it through corporations—the biggest secret of
the rich.
You may remember the first lesson I learned from my rich dad.
I was a little boy of 9 who had to sit and wait for him to choose to talk
to me. I sat in his office waiting for him to get to me. He was ignoring
me on purpose. He wanted me to recognize his power and to desire to
have that power for myself one day. During all the years I studied and
learned from him, he always reminded me that knowledge is power.
And with money comes great power
that requires the right knowledge to
keep it and make it multiply. Without
that knowledge, the world pushes you
around. Rich dad constantly reminded
Mike and me that the biggest bully was
not the boss or the supervisor, but the
tax man. The tax man will always take
more if you let him. The first lesson of having money work for you, as
opposed to you working for money, is all about power. If you work for
money, you give the power to your employer. If money works for you,
you keep the power and control it.
Once we had this knowledge of the power of money working
for us, he wanted us to be financially smart and not let anyone or
anything push us around. If you’re ignorant, it’s easy to be bullied.
If you know what you’re talking about, you have a fighting chance.
That is why he paid so much for smart tax accountants and attorneys.
It was less expensive to pay them than to pay the government. His
If you work for money,
you give the power to
you employer.
If money works for you,
you keep the power and
control it.
Chapter Four: Lesson 4
86
best lesson to me was: “Be smart and you won’t be pushed around as
much.” He knew the law because he was a law-abiding citizen and
because it was expensive to not know the law. “If you know you’re
right, you’re not afraid of fighting back.” Even if you are taking on
Robin Hood and his band of Merry Men.
My highly educated dad always encouraged me to land a good job
with a strong corporation. He spoke of the virtues of “working your
way up the corporate ladder.” He didn’t understand that, by relying
solely on a paycheck from a corporate employer, I would be a docile
cow ready for milking.
When I told my rich dad of my father’s advice, he only chuckled.
“Why not own the ladder?” was all he said.
As a young boy, I did not understand what rich dad meant by
owning my own corporation. It was an idea that seemed impossible
and intimidating. Although I was excited by the idea, my inexperience
wouldn’t let me envision the possibility that grown-ups would someday
work for a company I would own.
The point is that, if not for my rich
dad, I would have probably followed
my educated dad’s advice. It was merely
the occasional reminder of my rich
dad that kept the idea of owning my
own corporation alive and kept me
on a different path. By the time I was
15 or 16, I knew I wasn’t going to
continue down the path my educated
dad recommended. I didn’t know how I was going to do it, but I was
determined not to head in the direction most of my classmates were
heading. That decision changed my life.
It was not until my mid-twenties that my rich dad’s advice began
to make more sense to me. I was just out of the Marine Corps and
working for Xerox. I was making a lot of money, but every time I
looked at my paycheck, I was disappointed. The deductions were so
large and, the more I worked, the greater they became. As I became
Each dollar
in my asset column
was a great employee,
working hard to make
more employees
and buy the boss
a new Porsche.
Rich Dad Poor Dad
87
more successful, my bosses talked about promotions and raises. It was
flattering, but I could hear my rich dad asking in my ear: “Who are
you working for? Who are you making rich?”
In 1974, while still an employee for Xerox, I formed my first
corporation and began minding my own business. There were already
a few assets in my asset column, but now I was determined to focus
on making it bigger. Those paychecks, with all the deductions, made
all the years of my rich dad’s advice make total sense. I could see the
future if I followed my educated dad’s advice.
Many employers feel that advising their workers to mind their
own business is bad for business. But for me, focusing on my own
business and developing assets made me a better employee because
I now had a purpose. I came in early and worked diligently, amassing
as much money as possible so I could invest in real estate. Hawaii
was just set to boom, and there were fortunes to be made. The more
I realized that we were in the beginning stages of a boom, the more
Xerox machines I sold. The more I sold, the more money I made
and, of course, the more deductions came out of my paycheck. It was
inspiring. I wanted out of the employee trap so badly that I worked
even harder so I could invest more. By 1978, I was consistently one
of the top five sales people at the company. I badly wanted out of the
Rat Race.
In less than three years, I was making more in my real estate
holding corporation than I was making at Xerox. And the money
I was making in my asset column in my own corporation was
money working for me, not me pounding on doors selling copiers.
My rich dad’s advice made much more sense. Soon the cash flow
from my properties was so strong that my company bought me my
first Porsche. My fellow Xerox salespeople thought I was spending
my commissions. I wasn’t. I was investing my commissions in assets.
My money was working hard to make more money. Each dollar
in my asset column was a great employee, working hard to make
more employees and buy the boss a new Porsche with before-tax
dollars. I began to work harder for Xerox. The plan was working,
Chapter Four: Lesson 4
88
and my Porsche was the proof. By using the lessons I learned from my
rich dad, I was able to get out of the proverbial Rat Race at an early
age. It was made possible because of the strong financial knowledge I
had acquired through rich dad’s lessons.
Without this financial knowledge, which I call financial intelligence
or financial IQ, my road to financial independence would have been
much more difficult. I now teach others in the hope that I may share
my knowledge with them.
I remind people that financial IQ is made up of knowledge from
four broad areas of expertise:
1. Accounting
Accounting is financial literacy or the ability to read numbers.
This is a vital skill if you want to build an empire. The more
money you are responsible for, the more accuracy is required,
or the house comes tumbling down. This is the left-brain
side, or the details. Financial literacy is the ability to read and
understand financial statements which allows you to identify
the strengths and weaknesses of any business.
2. Investing
Investing is the science of “money making money.” This
involves strategies and formulas which use the creative
right-brain side.
3. Understanding markets
Understanding markets is the science of supply and demand.
You need to know the technical aspects of the market, which are
emotion-driven, in addition to the fundamental or economic
aspects of an investment. Does an investment make sense or does
it not make sense based on current market conditions?
4. The law
A corporation wrapped around the technical skills of
accounting, investing, and markets can contribute to explosive
growth. A person who understands the tax advantages and
protections provided by a corporation can get rich so much
Rich Dad Poor Dad
89
faster than someone who is an employee or a small-business
sole proprietor. It’s like the difference between someone walking
and someone flying. The difference is profound when it comes
to long-term wealth.
• Tax advantages
A corporation can do many things that an employee cannot,
like pay expenses before paying taxes. That is a whole area of
expertise that is very exciting. Employees earn and get taxed,
and they try to live on what is left. A corporation earns,
spends everything it can, and is taxed on anything that is
left. It’s one of the biggest legal tax loopholes that the rich
use. They’re easy to set up and are not expensive if you own
investments that are producing good cashflow. For example,
by owning your own corporation, your vacations can be
board meetings in Hawaii. Car payments, insurance, repairs,
and health-club memberships are company expenses. Most
restaurant meals are partial expenses, and on and on. But it’s
done legally with pre-tax dollars.
• Protection from lawsuits
We live in a litigious society. Everybody wants a piece of
your action. The rich hide much of their wealth using
vehicles such as corporations and trusts to protect their
assets from creditors. When someone sues a wealthy
individual, they are often met with layers of legal protection
and often find that the wealthy person actually owns
nothing. They control everything, but own nothing. The
poor and middle class try to own everything and lose it to
the government or to fellow citizens who like to sue the
rich. They learned it from the Robin Hood story: Take
from the rich, and give it to the poor.
Chapter Four: Lesson 4
90
It is not the purpose of this book to go into the specifics of owning
a corporation. But I will say that if you own any kind of legitimate assets,
I would consider finding out more about the benefits and protection
offered by a corporation as soon as possible. There are many books
written on the subject that will detail the benefits and even walk you
through the steps necessary to set up a corporation. Garret Sutton’s
books on corporations provide wonderful insight into the power of
personal corporations.
Financial IQ is actually the synergy of many skills and talents.
I would say it is the combination of the four technical skills listed
above that make up basic financial intelligence. If you aspire to great
wealth, it is the combination of these skills that will greatly amplify
your financial intelligence.
In summary:
Business Owners Employees Who Work
with Corporations for Corporations
1. Earn 1. Earn
2. Spend 2. Pay Taxes
3. Pay Taxes 3. Spend
As part of your overall financial strategy, I recommend that
you learn about the protection that legal entities can provide for
businesses and assets.
Continue to Chapter 5
Comments
Post a Comment