Page 36 - Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money

than a person who earns $30,000 and is able to live well on $25,000 and
invest $5,000. Being able to live well and still invest no matter how much

you make requires a high level of financial intelligence. Having a surplus is
something you have to actively budget for. Budgeting for a surplus is
something we will look at in detail later on.

Financial IQ #4: Leveraging your money. After a person budgets a
surplus, the next financial challenge is to leverage their surplus of money.
Most people save their financial surplus in a bank. This was a smart idea

before 1971—before the U.S. dollar became a currency. Also, after 1974,
workers needed to save for their own retirement. Millions of workers did
not know what to invest in, so they invested their financial surplus in a
well-diversified portfolio of mutual funds, hoping this would leverage their

money.
While savings and a diversified mutual fund portfolio are a form of
leverage, there are better ways to leverage your money. If a person is
truthful, he or she has to admit it doesn’t require much financial intelligence

to save money and invest in mutual funds. You can train a monkey to save
money and invest in mutual funds. That is why the returns on those
investment vehicles are historically low.
Financial IQ #4 is measured in return on investment. For example, a

person who earns 50 percent on his or her money has a higher financial IQ
#4 than someone who earns 5 percent. And someone who earns 50 percent
tax-free on his or her money has a higher financial IQ than a person who
earns 5 percent and pays 35 percent in taxes on that 5 percent return.

One more point. Many people think that higher returns on investment
require higher degrees of risk. That is not true. Later in this book, I will
explain how I achieve exceptional returns, and pay very little, if anything,
in taxes, all with very low risk. To me, having a well-diversified mutual

fund portfolio and savings in the bank is a lot riskier than what I do. It is all
a matter of financial intelligence.

Financial IQ #5: Improving your financial information. There is a bit of
wisdom that goes, “You need to learn to walk before you can run.” This is