Page 130 - Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money

1. Capital gains. Another reason so many people think investing is risky is
because they invest for capital gains. In most cases, investing for capital

gains is gambling, or speculation. When a person says, “I’m buying this
stock, mutual fund, or piece of real estate,” he or she is investing for capital
gains, an increase in the price of the asset. For example, if I had purchased
the $17 million apartment house hoping I could sell it for $25 million, then

I would be investing for capital gains. As many of you know, investing for
capital gains means a tax increase in some countries.

2. Cash flow. Investing for cash flow is a lot less risky. Investing for cash
flow is investing for income. If I put savings in the bank and receive 5
percent in interest, I am investing for cash flow. While interest is low-risk,
the problem with savings is the return is low, taxes can be high, and the

dollar keeps losing value. When I purchased the 300-unit apartment house, I
was investing for cash flow. The difference is I was investing for cash flow
using my banker’s money for a higher return on investment and paying less
in taxes. That is a better use of leverage.

What Are You Investing For?

Most financial advisors recommend that a person invest in growth funds
when he or she is young. Investing for growth is investing for capital gains.
They advise older investors to then shift their growth funds into income

funds or annuities. In other words, invest for cash flow when you are older.
They believe cash flow is less risky and more certain.

Three Types of Investors

When it comes to capital gains or cash flow, there are three general types of

investors. They are:

1. Those who invest only for capital gains. In the world of stocks these
people are called traders, and in the real estate market they are called