Cash Flow versus Capital Gains

By Robert Kiyosaki

My rich dad said financial IQ was very important for your success in the real world and financial IQ entails more than just earning or creating money, which is what most people focus on. You have to learn to manage money, leverage it, protect it, and exit it. Improving your financial IQ and financial intelligence goes back to words of vocabulary. You have to know the difference between assets and liabilities.

The next two very important words that increase your financial IQ are cash flow and capital gains. You need to know the difference between cash flow and capital gains. One of the reasons I was able to retire at age 47, and my wife, Kim, at age 37, was simply because we had enough cash flow coming in, primarily from our real estate investments, whether we worked or not. Every month we had a cash flow. It wasn't much - about $10,000 a month coming in but only about $3,000 a month going out.

Investing... or Gambling?
Capital gains are a different type of leverage. Capital gains are when you buy a stock for a dollar and it goes up to $10, so you make $9 a share. That's capital gains. Or you can buy a house for $100,000 and it goes to $150,000.

You sell it and make $50,000.One of the reasons people do not become financially free is because the majority of people are focusing on capital gains. You can look at the reasons so many people lost:
- millions of people losing trillions of dollars between 2000 and 2003
- in the stock market because everyone was playing the capital gains game. That's gambling.

There's nothing wrong with capital gains. I would like to have my properties go up in value. I would like to have my stocks go up in value, but I don't play at this game that much. My primary focus, like that of most people who are successful investors, is looking for cash flow, not capital gains.

Cash Flow AND Capital Gains
When somebody says they bought Microsoft at $25 a share and now it's $35, they get all excited because they are focusing on capital gains. The CASHFLOW;® games teach you the difference between capital gains and cash flow, but more importantly, how to use both. In other words, one of the reasons I'm successful, financially, and financially free is that I use both capital gains and cash flow. The reason so many people are not successful is that they're generally focusing on only one of these two - and the majority are focusing on capital gains. They're hoping the price of their stock or their real estate will go up in value. That's capital gains and, to me, that's speculation, not investing. And that's a very important lesson to learn if you want to learn how to leverage your money after you've learned how to manage it well.