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Saturday, August 05, 2006

The savvy investor

You can't invest your money wisely-and become rich-without first understanding and then applying sound financial concepts.

By Millet M. Enriquez

When author Robert Kiyosaki discussed how ordinary people could achieve financial freedom by understanding how money works in his Rich Dad, Poor Dad book series, he quickly gained a following. Kiyosaki, a Japanese-American investor and businessman, is also the inventor of the board game Cashflow 101, which teaches the financial strategies that allowed him to get rich and retire at age 47. Bellum Tan, a Singapore-based businessman and advocate of Kiyosaki's business strategies, was recently in Manila for a series of seminars to discuss how he, too, became a savvy investor after taking his cue from the best-selling author.

Tan, a level-five investor in Kiyosaki's Rich Dad Cashflow Quadrant, dabbles in real estate and capital venture financing. He says most people don't invest because they don't understand financial concepts: "They don't like to deal with figures." What they don't realize is that a good grasp of financial concepts can help them make sound investment decisions and ultimately achieve financial freedom.

In Cashflow Quadrant, Kiyosaki describes seven levels of investors, beginning with the big spenders on level zero and climbing up to the savvy investors on level six. Each level characterizes an investor's attitude toward money and spending, with those on level zero having nothing to invest and the borrowers on level two having debt attached to everything they own: they're either slaves to their credit cards or use borrowed money to spend or invest. (On the other hand, the savers on level two often prefer low-risk and low-return investments, and believe in paying in cash for fear of being in debt.)

Investors in level three (divided into smart investors, cynics and gamblers) are intelligent people with solid education and resources to invest, but lack financial literacy to understand how investing could work for them.

Long-term investors fall under level four: they understand the fundamentals of finance and are actively involved in investment decisions. The sophisticated investors on level five have a track record of failures and successes, but pack enough wisdom and drive to keep investing. Capitalists on level six become excellent businessmen using other people's money, talent, and time to get rich.

What separates the rich from the poor is their ability to acquire assets that generate money for themselves. If you can't tell the difference between asset and liability, you may be setting yourself up for a life of financial trouble and ending up like half the adult population on level zero: people who have nothing to invest because they spend more money than they earn. Tan says you should work your way up to at least level four and gain a working knowledge of financial concepts (income statement, balance sheets and cash flows, etc.) in order to make the shift.

In his book, Kiyosaki also introduces a quadrant showing four types of people and how they make money. On the left quadrant is the employee who works hard for his or her salary, and the self-employed who works for himself or herself. On the right side are the business owner, who generates money from his or her ventures, and the investor, whose earnings come from the money he or she has invested. To amass wealth, it is necessary to shift from the left quadrant to the right by coming up with an investment plan that rivals that of the rich.

Going into business is a good way to start making money as it serves as training ground for applying the fundamentals of finance. (You may also seek advice from competent financial planners or attend seminars to bone up on financial concepts.) Once you've acquired enough financial knowledge and money, you may move on to higher levels of investment such as real estate and stocks. The risks may be high, but the returns could very well allow you to retire earlier than you expected.

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