Summary of “Increase your financial IQ”: In a capitalist world in perpetual change, it’s really important that everyone should develop their financial knowledge. This book will give you the basics to understand how you can make your money work for you in the era of new capitalism and provides you with the necessary skills to develop this invaluable form of intelligence yourself.
By Robert Kiyosaki, 2009, 288 pages
Note: This column is a guest column written by Elodie JUGLA from the Learn to Invest in Real Estate Blog
Review and summary of “Increase Your Financial IQ”:
Robert Kiyosaki’s premise is that the American educational system teaches students very little about financial knowledge.
He believes that this lack of financial education is very serious issue because, as we live in a capitalist world that is constantly on the move, most people are not at all able to make the right decisions for themselves with regard to their money, which can sometimes lead to some very serious consequences (e.g., the “subprime crisis”).
For these two reasons, he believes that it is essential for people to take responsibility for their own financial education, as well as that of their children.
His objective, with Increase Your Financial IQ; is to teach the reader to become more financially astute so that they can understand and process the financial information that is widely available; and then make the right decisions about their money in order to grow their finances. The author is no stranger to the subject, as he has become well known within the area of economic analysis with his first book, Rich Dad, Poor Dad.
Chapter 1: What is Financial Intelligence
Just as intelligence is the ability to solve problems, financial intelligence is the ability to solve money problems. To increase your financial intelligence and get rich, the first thing that you need to do is solve your money problems.
To explain this, the author gives us a comparison between a financial problem and toothache.
If you don’t get your toothache fixed, it will lead to serious consequences. It is the same with money. If, for example, you are short of money, and rather than find a solution to this problem, you begin to live life on credit, you will accumulate debts, and then you will take out a loan to repay these debts, which then puts you in more and more debt until you go bankrupt.
The rules of money have changed
In this chapter Robert Kiyosaki addresses a key point in the book Increase Your Financial IQ. He explains that in 1971, President Nixon caused a profound change in monetary rules when he announced that the value of the dollar would no longer be linked to gold. He changed the status of the dollar from that of money to that of currency. Now, money has a concrete, tangible, reliable, perennial value. On the contrary, a currency only has the value that people wish to give it. It must constantly be in circulation to keep its value. If people no longer wish to accept it, it loses all value.
Why did the government do this, you may ask? Simply because it chose to “cheat” and take advantage of the American people’s lack of financial knowledge rather than resolve their financial problems. The government was in debt. Thanks to this new law, it was able to “print money” to artificially reduce its debts. The consequences didn’t take long to materialize: inflation exploded, Americans lost their ability to buy things, they went into debt, and the government’s financial problems only got worse.
The author explains that this financial bomb, in relation to monetary rules, turned savers into losers and debtors into winners.
Under the rules of old capitalism, it was financially smart to save money and avoid credit. In the era of the new capitalism, it is insane to tie up currency. Instead, borrow today to acquire assets, which will increase in value and generate cash flow, and pay back tomorrow with dollars that will cost less due to inflation.
Robert Kiyosaki completely disapproves of this change in the monetary rules and finds the system totally unfair. He is also saddened to see that most people still trust the state to solve their money problems, for their retirement and for their health. However, he believes as we can’t change the system, and can’t rely on the state to provide us with financial security, we need to learn how this new system works and use it to our advantage to make ourselves rich. And, in order to do so, we need to improve our financial intelligence.
Chapter 2: The 5 Financial IQs
Robert Kiyosaki believes that there are many different aspects of intelligence. In no way does he regard financial intelligence as superior to any other intelligence, but he does think that, as we live in a money-driven world, it is a form of intelligence that will be helpful to all of us to some degree.
Financial intelligence can be broken down into 5 sub-parts that he calls IQ.
- Financial IQ 1: know how to make more money
The more money you make, the higher your IQ 1 will be
- Financial IQ 2: know how to protect your money
The lower the percentage of your income that goes to the government, the higher your IQ 2 will be
- Financial IQ 3: know how to manage your money
The higher the proportion of your income that you manage to keep (savings, investment), the higher your IQ 3 will be
- Financial IQ 4: know how to make your money work
The higher the return on your investments in relation to the capital invested and the less risky your investments, the higher your IQ 4 will be
- Financial IQ 5: know how to increase your financial The more that you can understand, analyse and make sense of financial information, the higher your IQ 5 will be
In this chapter he also comes back to the Cash-Flow Quadrant, a concept already outlined in his book of the same name. Through a simplistic diagram, this quadrant represents the 4 groups of people who operate in the financial world:
- E = employees
- S = self-employed
- O = owners of businesses with 500 or more employees
- I = investors
He explains that those who move, or want to move, into the P and I quadrants are the ones who have the most to gain from the development of their financial intelligence because their income is directly linked to their financial intelligence. Success in the P and I quadrants is measured by money.
Chapter 3: Financial IQ 1 to make more money
Robert Kiyosaki’s first piece of advice in regards to IQ 1 is to work, not for money; but to learn how to make more money. With reference to his own experience, he explains that, at the start of his career; he deliberately chose a job with a much lower salary than he could have had elsewhere; just to enable him learn how to sell. With this on-the-job experience, he was then ready to start his first company.
His second piece of advice is: “You can quit when you win but never when you lose”. The process is more important than the goal. When you are faced with challenges, don’t give up because that’s when you learn how to solve problems and increase your IQ 1.
His third piece of advice is that once you have overcome a challenge, move on to the next one. Job security is the worst enemy of IQ 1. It is the experience that you gain when you solve the more complex challenges that you really gain knowledge from.
Solve your own money problems, but also solve other people’s problems, that is the ultimate secret to make more money. He points out that this can be backed up by the fact that the more major problems a company solves, the more successful it becomes.
Chapter 4: Financial IQ 2 to protect your money
Robert Kiyosaki believes that the world is full of predators who want your money.
IQ 2 allows you to keep most of what you earn and give as little as possible to these “predators”.
For Robert Kiyosaki, the first “predator” is of course the government. He is not against taxes per se, and he is well aware of the importance of public service. But he believes that bureaucrats, rather than sort out the problems that exist, which should be their primary role; can only do two things when faced with a new problem:
- Continually increase taxes
- Continually borrow, and thus add more and more to the debt.
So rather than do their job and solve problems, they make them even worse.
So, dejected by this hopeless scenario; he has made it his mission to always pay them as little money as possible. And he finds the State totally incompetent and has no confidence in it to manage his future financial security (retirement, health…).
He puts the blame on:
- Bankers who, in exchange for 5% interest, use your savings to give out loans at 20%.
- Brokers and financial advisors, who are actually just salespeople with no real experience or competence in investment, who have not understood that the rules of money have changed and who charge a very high price for antiquated and risky advice.
- Spouses who steal your money in the event of a divorce
In short, this chapter can be summarized as follows:
- Don’t trust anyone
- Protect your money and use expert lawyers, accountants and tax specialists
- Learn to manage your money rather than put it in the trust of “fake experts”
Chapter 5: Financial IQ 3 to Manage Your Money
In this chapter, he returns to the notion of personal financial balance sheet; already extensively discussed in his first book “Rich Father, Poor Father”. He explains how, even if you start from nothing; one can attain a budgetary surplus (=wealth) if you can focus what you spend on the acquisition of assets; assets that will then generate additional income.
Lesson n°1: a budget surplus is not possible to achieve if you spend.
The advice he gives with regards to management of one’s money is to always and no matter what, pay yourself first and make the acquisition of assets a priority (savings, investments, but also courses, sports clubs and donations to good causes). He doesn’t believe that you should live below your means and; instead, recommends, even when things are hard; that you continue to maintain your lifestyle; and expenditure on assets and to use your IQ 1 to earn more money.
Lesson 2: The expense column is a crystal ball
We can easily predict the financial future of any individual purely through a look at what their expenses are. A person who spends most of their money on assets: savings, investments, courses, coaches, gyms … will inevitably become richer than someone who spends most of their money on consumer goods or other materialistic liabilities (car…)
Lesson #3: Assets pay for liabilities
Robert Kiyosaki is not averse to the acquisition of materialistic liabilities to make yourself happy. However, he recommends that you only do it with money generated beforehand by an asset. For example, I want to buy this nice car (passive) which will cost me X€ when I buy it + X€ each month in maintenance, so I need X€. So, to do this, I need to purchase a rental property (asset) and I will only pay for this car when this new asset generates enough income to cover these costs. From this perspective, if we choose to buy liabilities, we become richer because we develop our IQs 1, 3 and 4 and increase our asset base.
Lesson #4: Spend it to get rich
A business that finds itself in financial difficulty tends to cut back on its expenditure when, in fact; it needs to increase its expenditure on its marketing and advertising in order to revive its sales. Someone who is financially challenged needs to do the same when, in order to get out of it, they need to increase their expenditure on assets and take on good debt. If you take out a loan to buy an asset, it is a “good debt”, as opposed to a loan to finance a liability, which is a very “bad debt”.
Chapter 6: Financial IQ 4 to make your money grow
This chapter discusses two key concepts related to the subject of investments:
- The control
- Financial leverage
Robert Kiyosaki returns to his initial observation: we are in the era of the new capitalism where the acquisition of assets with borrowed money is financially smarter than to save. The problem, he explains, is that because people are not financially literate, they are unable to invest properly on their own and are, unfortunately, dependent on obsolete advice from the government and “fake experts” who encourage them to invest their money in diversified investment funds. Not only are their returns derisory and their money depreciates due to inflation, but, even worse, in the event of a crash, they become helpless spectators to their total lack of financial security.
This is why, once again, in order to secure and increase the value of your money, it is essential, in the opinion of the author, to develop your financial intelligence, and in particular your IQ 4, in order to know how to exercise control over your investments and how to make the best use of the power of financial leverage.
To explain this, he again refers to his own experience, this time as a real estate investor. He explains that, in the context of a rental property investment, the return is not linked, as with the stock market or in a purchase-resale transaction, to the speculative value of the property in the future; it is linked to your ability to increase your income (rents) and to reduce your expenses (monthly loan payments, work, taxes, miscellaneous expenses…). It is through your knowledge and your expertise that you increase your return and decrease your risks if you are able to minimize the impact of market fluctuations on your investments. This gives you total control over your investment.
The author explains that control must be maintained over the 4 columns of the investment’s financial statement:
The investor must find a way to get the highest possible rents. This can be done with increases in rents that were below market; or make the property attractive with the addition of amenities and improvements. They must also make sure to avoid any rental shortfalls with the use of a careful selection of tenants and to take out insurance to cover unpaid rents.
The investor should seek to reduce all expenses. They need to buy below the market price, to negotiate the internal work and other expenses, to have access to a good accountant to reduce the taxes… A badly managed property can be transformed into very good investment if you are able to improve the way it is managed.
Robert Kiyosaki has no expectation for a rise in the market to guarantee him an increase in the value of his assets. It is his skills and his ability to increase rents, lower expenses; and reduce his monthly loan payments that make his assets increase in value.
The investor must always make sure that they have the best possible deal in terms of finances and renegotiate them regularly (rates, monthly payments, etc.)
So, we can clearly see that control is applied at all levels of the financial situation; and that it is this control, and nothing else; that makes it possible to increase the return and decrease the risks.
So, a high return does not necessarily mean a high risk. If you have control and are aware of how to manage it, you can combine “high return” with “low risk”.
The importance of control is the reason why Robert Kiyosaki; when asked if a business is a good investment, usually answers “I don’t know. Are you a good investor?”
It is for this very reason that Warren Buffet, considered by some to be the most successful investor in the world, as well as one of the richest men in the world, says this: “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing”.
The other big advantage of this type of investment is that it offers the chance to use the power of financial leverage (credit) to get richer faster and with other people’s money, this is what he calls “do more with less”. So, it’s the bank that will finance the purchase of the property and the tenants who have the responsibility to repay the loan to the bank, so both of them work in unison to rapidly increase your personal wealth. In relation to this, Robert Kiyosaki once again makes the point of the importance to build your knowledge of IQ 4 before you use financial leverage. Indeed, financial leverage should only be used if you are able to exercise total control over your investments, otherwise it can backfire with destructive consequences.
In this chapter, Robert Kiyosaki identifies three types of investors:
Those who invest for capital gain: Capital gain is when you invest at a certain price and hope to sell for more. The stock market or if you buy and sell real estate are examples of investments based on the speculation of a capital gain and chance plays an important role. Robert Kiyosaki doesn’t believe in this approach to investment for various reasons:
- The risk is high because you don’t have enough control
- It’s a high rate of tax
- For the author, it is not a question of real investments but rather of a trade where one exchanges one’s time for money (quadrant T)
Those who invest for cash flow: Cash flow is an investment to ensure an income (=yield). Savings is an example of an investment based on cash flow. The problem with this type of investment is that the return is too low, compared to inflation, to be of any real value. Moreover, the risk is far from zero because, in the event of a crash, the money may be worthless.
Those who invest for both capital gain and cash flow: this is illustrated by the example of rental property investment. This is the best type of investment for a few reasons:
- You are not subject to market fluctuations (since the value of the asset is not based on the market but on the return), which greatly reduces the risks
- You have control
- And you can use the power of leverage
Robert Kiyosaki also gives some tips on how to become a good investor in this chapter:
- Find the right partners, surround yourself with capable people
- Get the best finance possible and adjust the rate, the deferment of maturity, the duration of the loan
- Put good management in place (= control)
- Start small and progress slowly
- Aim high
Chapter 7: Financial IQ 5 to Improve Your Financial Reports
In this chapter, Robert Kiyosaki recounts another period of his life when he was in the Vietnam War. He was in the army at the time and his job, among other things; was to collect and process top-secret information. This exposure made him aware of the importance of information; and especially of the importance to know exactly how to handle it. Information, when properly analyzed and given meaning, is the greatest asset of all.
We live in the information age. Information is synonymous with wealth.
The main advantage of the current information age is that it is valuable, accessible, free and abundant. The main disadvantage is that it is valuable, accessible, free and abundant.
In other words, “too much information kills information” and to know how to use all of this information correctly, you have to develop your IQ 5.
To deal with information overload, we must first learn to classify information:
- Is the information relevant? i.e. currently relevant or already outdated
- Is the information credible? What is the source of this information?
- Is the information valuable? You have to develop your IQ 5 in order to have access to this privileged information
- Can the information be correlated with other information? This is what allows us to define trends
- Is the information reliable? We must be aware of possible scams to manipulate a situation
- Is information a fact or an opinion? A fact is a physically verifiable fact. An opinion is an idea that may or may not be supported by a fact
With regard to this, the author advises that decisions should always be made on the basis of fact rather than opinion. To follow the advice of a financial advisor “expert” and invest your money in a diversified mutual fund portfolio is a typical example of a poor financial decision, which is based solely on opinion. If you invest in the purchase of a house because a real estate promised that the neighborhood would soon increase in value, would also be another example.
Most investors invest for capital gain; so their decisions are inevitably based purely on opinions of what will happen in the future (speculation). Conversely, investors who invest for cash flow rely primarily on facts (yield calculations; level of rental demand, demographics, condition of the property; neighborhood climate, etc.), but, at the same time, take opinions; and thoughts into consideration with an informed and open-minded attitude.
In this chapter, the author also discusses the concept of trends (which are opinions based on facts). With the ability to analyze information, you can identify cycles and trends and then be able to anticipate the rise or fall of the market.
Chapter 8: Financial Integrity
What the author means by “financial integrity” is the integrity, i.e. comprehensive knowledge; of financial intelligence, which means to know how to use the 5 financial IQs.
To determine a person’s financial integrity, you need only look at their personal financial statement (income, expenses, assets, liabilities). And that’s what banks do when they analyze our loan applications. They check our overall level of financial intelligence in order to assess the risk they take on if they choose to finance us. Unfortunately, most people are unaware of the importance, and even the definition, of a personal financial statement. Without this knowledge the results they receive will not be helpful.
Robert Kiyosaki explains that it is crucial to strive for financial integrity because to only possess a good IQ 1 and 2, for example, is not enough to become rich or financially secure. Only financial integrity will allow you to reach these two objectives. To alleviate this problem, he insists on the importance for everyone to train to develop the IQ that they lack the most at the present time.
Throughout this chapter, he also discusses his total lack of trust in the State to ensure the safety and prosperity of American citizens. Financial integrity is, in his opinion, just as important at government level.
Unfortunately, as he has said before, there is absolutely no fiscal integrity on the part of government, because rather than solve the problems, they just cause more inflation, raise taxes and add to the current debt. Robert Kiyosaki believes that there is a good chance that the pension and health care systems will collapse and that our survival will depend on our ability to take charge of our own financial integrity through financial education.
Chapter 9: Develop Your Financial Genius
In this chapter, the author explains how to effectively build up your financial intelligence:
Lesson #1: Develop your intrapersonal intelligence and learn to master your subconscious
In this section the author turns to the notion of multiple intelligences (Howard Gardner’s concept).
Gardner believes that there are 7 forms of intelligence:
- Linguistic (ability with language and languages)
- Logical-mathematical (ability to understand logical and abstract concepts)
- Musical (ability to understand and reproduce musical language)
- Corporeal-kinesthetic (dexterity in the use of the body and its movements)
- Visuo-spatial (ease to find and move in a given space)
- Interpersonal (ability to interact with others)
- Intrapersonal (ability to control emotions and manage risk)
Only the first two are acknowledged by the traditional educational system. However, Kiyosaki points out that the most important one for the development of one’s financial intelligence is the seventh: intrapersonal intelligence; and that it must therefore be nurtured in order to succeed in the financial field. This form of intelligence is connected to a very powerful part of our brain: the subconscious mind. And if your subconscious mind is governed by fear, as is often the case; you will never act because you will prefer to avoid any risk. So, Kiyosaki believes it is crucial that you work on your “unconscious limiting thoughts” in order to develop your intrapersonal intelligence and be able to act without the fear to be paralyzed by your subconscious.
Lesson #2: To change your life, change your environment and your perception of yourself
The author then raises the issue of “mirror neurons” or the influence of our environment on ourselves; and of ourselves on our environment. Our brain is programmed to mimic what we see in others and to conform to the image that they have of us.
Based on this observation, the author encourages us to:
- Surround ourselves with people we want to be like (to change your life, change your environment)
- Change our perception of ourselves (if I think I am a loser, others will think I am a loser)
- Develop the ability to think objectively
Lesson #3: The best way to learn is if you do it
In another paragraph, Robert Kiyosaki discusses the concept to learn with reference to the “learning pyramid” below:
He explains that the best way to learn is if you actually do it, and then copy it. That’s why he developed the game “CASH-FLOW” to help people learn how to develop their financial intelligence through simulation and games.
Chapter 10: Develop Your Financial IQ, Some Practical Applications
This chapter basically focuses on the promotion of its commercial offers:
- Training sessions
- Coaching sessions
The most important thing to remember that it is when we teach ourselves; that we will be able to progress towards financial independence.
At the end of Increase Your Financial IQ, he also stresses the importance of courage and the need to take action in our lives. The entrepreneurs, the investors, the rich people are those who dare, those who act.
Finally, he talks about the importance to know how accept and welcome “feedback” in order to evolve and adapt to the market and the environment.
Conclusion on “Increase Your Financial IQ”:
Increasing Your Financial IQ opened my eyes to how important it is to have basic financial knowledge to be able to operate; and move forward in this capitalist world; but also the huge deficiencies of our educational system in this field, as well as those of the Government and the risks that face us. But more importantly, it gave me a better understanding of how money works and caused me to be genuinely interested in the whole subject of finances and investments, two things I can honestly say that used to bore me to death. When I read Increase Your Financial IQ it made me realize that the management of money and investments could be a passion that I could learn to enjoy, as well as a continuous opportunity to improve my intelligence at every level of the game.
It is very difficult for me to give a mark out of ten for the book Increase Your Financial IQ (see below) because:
- On the one hand, the content is far from perfect, the book isn’t particularly well structured, the contents are often clearly “too much”, and more than anything else, I don’t think it really lives up to the promise of “Increase Your Financial IQ”: It is difficult to come up with a coherent method (I found it difficult to precis this book from the contents that I read and come up with a decent summary of the author’s ideas:)
- But I do find that Increasing Your Financial IQ is superb and very useful book in relation to money and that it encourages you to read more. Personally, it created a real interest for me in relation to this issue and I think it could influence other people in a similar way.
So in spite of all its weaknesses, I think this book achieves its main objective.
- The main message of Increase Your Financial IQ is very strong and clearly addresses a gap
- Clear explanations of how new money works
- An alternative way to look at money management
- The ability to popularize and make a complex and difficult subject seem attractive
- Does not deliver, in my opinion, a real clear method to develop one’s financial intelligence
- The writing is a bit disjointed and lacks structure for this type of subject
- Very repetitive (even if it’s done on purpose in order to get the message across; it’s a bit over the top)
- Some parts where he describes his own experiences are a bit long
- The tone is sometimes too conservative and demagogic, similar to a “Donald Trump tone” (he actually wrote the preface to the book:))
- It only really references the American system
My rating :
Have you read “Rich Dad’s Increase Your Financial IQ”? How do you rate it?