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Lessons from ‘Rich Dad – Poor

Dad’ book series by Robert


Kiyosaki
Venkatesh Jayaraman

@VenkateshJayar2

4/10/2018 1
Background of this Presentation
• “Rich Dad, Poor Dad” authored by Robert Kiyosaki is one book that I accidently happened to
read.
• Robert Kiyosaki is a Japanese American, a successful investor in Real Estate.
• One must definitely read all his books, to enrich themselves with financial literacy.
• However there is much repetition of contents across his books.
• This presentation is summary of important aspects from the books and quotes of Robert
Kiyosaki.
• This presentation cannot be treated as a replacement for reading his books.

Books Authored by Robert Kiyosaki

What Not to Expect?

This is not ‘How to get rich’ kind of book. Financial illiteracy is root cause of many a set backs in life. This book would help in Financial
Literacy and there by helping you to create a own financial plan and path.

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THE NEW WORLD
DEFINITIONS FROM THESE
BOOKS
• The New World Definitions
• Asset, Liability, Rich and Poor
• Wealth
• Cash Flow
• ROI

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The New World Definitions
Before proceeding further, please sit back and think for a while and put your understanding for the below terms. Keep it
as simple as possible in one line.

➢ What is meant by a Asset? ➢ What is meant by Cash flow?

➢ What is meant by a Liability? ➢ What is ROI?

➢ What is meaning or rich person?

➢ What is meaning of poor person?

➢ What is meant by wealth? Were you able to


➢ Is Rich and Wealthy the same terms? Or are they answer these?
different?

▪ If different what is the difference?

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Asset, Liability, Rich and Poor
ASSET AND LIABILITY:

Terms Definition
Asset Anything* that puts money in your pocket.
Liability Anything* that takes money from your pocket.

➢ Anything refers to shares or gold or house or property or even a business. For a taxi driver, his taxi is a Asset as it
puts money in his pocket.
➢ Every one has both assets and liabilities.

RICH AND POOR:

Terms Definition
Rich person If a person was to sell all his assets, settle the liabilities and still had some money left with him,
then he is rich.
Poor Person If a person after selling all his assets and still unable to settle his liabilities, then he is poor.

So on liquidation, a rich person has money in hand and poor person still has money owed to some one.

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Wealth
WEALTH:

Wealth is defined in terms of time and not money.! It is a bit tricky to understand. Let us see a example.

Wealth is a person’s ability to survive so many number of days forward—or, if one stopped working today, how many months could
you survive?

There is a person who is rich by Rs.10000. We call him rich by Rs.10000 because after selling all his assets and settling his liabilities he
has 10000 in hand. Consider his monthly expense is 2500. Then this person is wealth is for 4 months (=10000/2500)

Another person is rich by Rs.50000. His monthly expense is 25000. Then he is wealth is for only 2 months (=50000/25000).

Thus one can see that the concept of wealth is unique to every individual. It depends on two values. (1) The amount by which he is rich
(Surplus of assets over liabilities) and (2) Monthly expenses. Both these values vary between individuals.

DIFFERENCE BETWEEN RICH AND WEALTH:


➢ Rich is measured in terms of money and wealth is measured in
terms of time.
➢ So there is a difference between telling someone was a rich
person or a wealthy person.

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Cash Flow & ROI
CASH FLOW
➢ The money in and out of your account.
➢ A person’s salary is cash flowing in and all his expenses is cash flowing out.
➢ This cash flow is the key concept around these books.
➢ Creating more cash flows is key to create wealth

ROI:
ROI stands for Return On Investment. If Rs.100 is invested and if you can take our Rs.20 consistently every year, then
your ROI is 20%.

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ROI
ROI (Contd.):

The definition seen in the previous slide is conventional definition. Well from now, ROI stands for a Return On
Information. This means that more information you have (1) More chance to identify opportunities, (2) Higher returns
on those opportunities and (3) lower the risk in such opportunities.

➢ The Industrial age starts roughly in 1492.


➢ 500 years later in 1989 signals the end of the Industrial Age and the start of the Information Age.

Whatever worked for Industrial age will not give the same result in Information age. As a example...

➢ Giving your loyalty and best efforts to your employer was one form of investment.
➢ In return, via contract, the employee is rewarded with a pension for life.
➢ This was a form of investment popular in the industrial age that is now almost obsolete in the Information age.
➢ But these days, one can be fired with 1-3 month notice.
➢ In the industrial age people worked for one or two company till they retired. In this information age, one may not
even have a job till their retirement if he does not possess the updated skills and information.

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ROI (Contd…)
ROI (Contd.): Difference between Industrial and
Information Age
We aren’t properly prepared to handle the differences between the Industrial Age Information Age
industrial age and the information age. In the information age we Seniority Paid for results Free agent, Virtual companies
all need to become more self-sufficient, grow up and take personal One job Many professions
responsibility for our retirement and at the same time taking care Work until retirement Retire early
of the milestones that are stacked on the way to retirement.
Punch a time clock Work when interested in
working
The information age offers more opportunities in the form of Schools Seminars
financial reward than ever before. Individuals with the required
Degrees and Certificates Core talents
financial skills and knowledge will be able to identify and seize
Old knowledge New ideas
those opportunities.
Company retirement plan Self directed portfolio
Before moving on to the next topic, let us sum up by seeing the Government No such concept
retirement/Medical plan
differences between the Industrial and Information age.
Work at company Work at home
Employees with seniority Employees with seniority and
doing same work is seen as doing the same work is seen
experts and paid more as burden

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THREE TYPES OF INCOME
• Three types of Income
• Passive Income
• Portfolio Income

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Three types of Income
There are three types are income

1. Earned income
2. Portfolio income
3. Passive income

Income Detail
Earned Earned income is what you get from your work/profession. This income comes in the form
Income of a paycheck. It could take other forms like bonus, commissions, or tips. This is nothing
but earned money.
Portfolio Portfolio income is generally income from paper assets such as stocks, bonds, and mutual
Income funds. The money from dividend or profits made from purchase/sale of shares all belong
to this income.
Passive Passive income is generally income from real estate or interest from fixed deposits. It can
Income also be royalty income from patents or for use of your intellectual property such as songs,
books etc.
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Three types of Income
How all these three income gets linked?
(A high level view of how these three incomes are linked)

One earns by working. This is the earned income. After spending (Expenses) whatever is left goes as saving.

Earnings Expenses Savings

➢ The saved money is put in bank and gets some interest. This interest is the passive income.
➢ But it should happen continuously to build a good base for passive income.
➢ To look at a example. One earns 10000/year and after spending manages to save 1000/year. This 1000 when put in
bank earns 100 (@ 10%) as interest. This 100 is the passive income.
➢ So for one year, the earned income to passive income equation looks as below

Earned Income Passive income


10000 1000 * 10% = 100.

Passive income can come in the form of house rent, if the savings were used to buy a house and has been let out.

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Three types of Income
How all these three income gets linked? Year Earned Savings Passive
Income Income
➢ Projecting the equation for the next 4 years… 1 10000 1000 100
➢ When passive income becomes equal or greater than earned income
2 10000 2000 200
the person becomes financially independent.
➢ In this example when will passive income > expenses? 3 10000 3000 300
4 10000 4000 400

Passive income increases at the rate of 100/year. It take one 90 years (mathematically) i.e. Rs. 9000 (Expenses per
year)/Rs.100 (Passive income per year) = 90 years. Which in reality is a impossibility, nor is it feasible or practical. This
apart several challenges as below.

➢ Increasing expenses / Unplanned expenses


➢ Fixed salaries
➢ Inconsistent interest rates. I have assumed 10% which first of all is not available. It could be 6% one year, it could be
4% one year and so on.

So you see there are lot of assumptions.

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Passive Income
Below are some of the examples of passive income.

• Rent from property


• Interest from bank deposits

Passive income, gives money to us without much effort from our end. There could however be one time effort of buying
a property or investing a bulk amount in bank which generates interest every year.

We saw in the previous slide, that it could take years to increase passive income to match the earned income. The
portfolio income come is a bridge between the two. To accelerate the process you divert the savings from earned income
to shares and get a faster and higher return (Something better than bank) and then channelize the gained money to
passive income.

Passive Income Passive Income can be achieved by some strong conviction to save and channelizing the saving to Bank and earn
interest. Not a rocket science! All is needed is some self discipline. But this approach could take years to achieve
Financial Nirvana
Portfolio Portfolio Income can be achieved with only with a knowledge on Investment or a marketable idea or Business
Income Model. So mere conviction is save would not suffice. The saved money should be channelized through proper
investment giving high returns. For this one should invest time to gain knowledge

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Portfolio Income
How all these three income gets linked?

➢ What is missing in this scene is the portfolio income. We saw in previous slide that by merely making savings in bank
is not sufficient to create a necessary passive income to meet ones expense leading to financial nirvana.
➢ A person must get higher return rates say 20%-25%. Only at this rate of return, can one see his savings creating a
passive income growing at very high rate to outgrow his monthly expenses in 10-15 years time i.e. 38 – 40 years of
age.
➢ One has to invest his savings in paper assets which gives higher returns.
➢ Available options: Stocks, bonds, mutual funds or any business (Which is within competency and having a risk free
model. This is more important)
➢ The returns form these assets is the portfolio income.

➢ But remember that any of these instruments can give Negative returns as well, if investments is not made in proper bonds,
stocks of mutual funds.
➢ This avenue has risks and investors must be able to handle the risks.
➢ Diversification of assets invested can help to reduce the risk. Also called as Portfolio allocation which is a right mix of Stocks,
Bonds, Real Estate etc.
➢ Here is where the investing skills come to work, which help you to identify sure shot stocks, bonds or mutual funds that would
give Positive returns and better than bank rate. ONE MUST ACQUIRE THE REQUIRED KNOWLEDGE AND SKILLS
BEFORE ENTERING THESE INSTRUMENTS

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FOUR QUADRANTS FOR
PEOPLE
• Four People Quadrants
• Earning Capacity
• Tax Implications
• Personal Timings
• Perspective and Mindset
• Retired Life
• Left Quadrant
• Right Quadrant

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Four People Quadrants
Categorize people by the means of which they earn money

1. Employed,
2. Self employed
3. Business
4. Investor

People Details
Employee If a person works in a company for his earning is a employee. Like you and me.
Self Employed If a person make money out of skill and not attached with any company is self employed. Like
yourself, dentist etc.
Business If a person runs a company and giving job to many employed and self-employed people is a
employer
Investor A person invests in different companies or properties and gets returns from the invested
amount.

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Four People Quadrants
Try to figure how these parameters would look like for these people in four quadrants.

In real terms Employer Self Employed Business Investor


Earning Capacity ? ? ? ?

Tax implication ? ? ? ?

Personal timing ? ? ? ?

Mindset ? ? ? ?

Retired life ? ? ? ?

Inflation ? ? ? ?

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Earning Capacity
People Capacity limitations
Employee - Limited capacity. One can work maximum 8-10 hours. Even with Over Time it could be
capped to some 55 hrs/week.
- Even if the employee is ready work more hours to earn more, one cannot. The labour
legislations prevent the employees from having extended working time from their
employees.
Self - Limited capacity. But better than a person who is a employee.
Employed - He could choose to work even 16 hrs/day and earn more. It is the individual choice to
have lesser rest hours and work more to earn more.
Business - Unlimited capacity. They make use of Other People Time (OPT).
- Can expand business as possible and employ more properly qualified people and make
more profits.
Investor - Unlimited capacity. They make use of Other People Money (OPM).

Refer next slide for details of OPT and OPM

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Earning Capacity (Contd...)
Other People Time (OPT)

➢ Employers have employees, and there by use OPT. This is unlimited.


➢ If one can get more orders, he can even pull some temporary contract labors for that one delivery and
earn more money.
➢ If there is demand for 1 lakh units and if he supplies only 50K, now he can use more people and generate
another 50K units and profit by then.
➢ Success for business people simply means expanding the system and hiring more people.
➢ In other words, you work less, earn more and enjoy more free time.

Other People Money (OPM)

➢ For the investor category person, money is needed to make investment.


➢ There is limits to the extend that one can put form their pocket.
➢ So how they get the Other People Money? They don’t directly borrow from you or me.
➢ They borrow from banks.

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Earning Capacity (Contd...)
Other People Money (OPM)

➢ Consider this cycle….Banks collect FD and give 8% interest to you. Banks have to earn atleast 10% return
to survive. Banks give this money to investor groups for 10-12% interest. The investor because of their
skillful investment can make even 15% with this money. In the cycle all are benefitted. The investors
indirectly use the saving money of you and me for their investment. Hence the term Other People
Money.
➢ A question could come, that investors stand with a huge debt. True. There is a difference between good
and bad loan.
➢ Bad Loan - These are meant to meet our basic needs like home and car. These do not give any return and one
has to pay from their earnings.
➢ Good Loan - But the loans taken by investors are used to increase their financial prospects.
➢ How they gain? The take some 1 crore loan with EMI of say 90,000 p.m. Their investment of 1 crore
generates a return of 100,000 p.m. So they pay of the EMI of 90K and pocket the rest of 10K every month.
At the end of loan period the investment becomes their own… and they start getting 100,000 p.m.

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Tax Implications
People Tax Implications
Employee - The more the employee earn, more the tax. E.g. Upto 5 Lakh earning it is 10% tax. Above
10 Lakh earning it is 30% tax. Tax is calculated on earnings.
- Tax is deducted paid to Government even before paying out to the Employee. That is what
you see the Tax deducted in your Payslip, which was paid even before your salary was paid.
- Tax is calculated on Gross earning (not on net). i.e. The expenses or the interest cost for
loan are not deducted for tax calculation. However in India, home loan up to 2 lakhs can be
deducted from being taxed. So even if all earnings should be paid as interest to a car loan,
still he has to pay tax on his earnings.
Self - Same tax slab as Employee. Tax is calculated on revenue.
Employed - Tax is paid after generating the revenue. The self-employed makes necessary calculations
and pays the tax every quarter or half year.
- Tax is calculated on Gross earning (not on net). However some expenses (i.e. Expense on
some creams needed by dentist) incurred on performing the job role can be removed from
tax calculation

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Tax Implications (Contd...)
People Tax Implications
Business - No slab in Corporate taxes. It is a flat rate. Currently 25% in India. Tax is calculated on
profit generated.
- Tax is paid after generating the profits every quarter. The employer has a accountant or a
separate department to handle this calculations and make the tax payments.
- Tax is calculated on Net. i.e. All the expenses and interest are deducted to arrive at profits. It
is on this profit that 25% tax is calculated. This is the major difference with a employee.
Investor - Variable tax regimes. No tax for dividend/long term gains, 15% of short term gain made and
rent from houses are taxed as the employee earning slab. Tax is on short term gains and rent.
- Tax is paid every quarter or half year by declaring the long term/short term gains and the
rent received.
- No concept of Net or gross applicable in calculation.

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Personal Timings
People Personal timings and other aspects
Employee - Personal times are limited. Whatever is left after sleep, travel to work and time at office.
- The employees always runs behind the carrots. Though appears to be peaceful… There is
insecure feeling. Planned expenditure is a problem. One really cannot live a life of their
own by getting things. One actually have to live within their means.
- Cannot plan for future. All your focus is on past (settling loans) and present (getting
needs fulfilled). The future aspects comes only from Pension and PF for most people.
Self - Personal times are limited. Because people tend to work more. Whatever is left after
Employed sleep, travel to work and working times.
- One has to to keep himself working continuously to keep getting work. Even a absence of
1 week could cost a lot. If a barber is sick and does not open the shop for 1 week, none of
them would be waiting for hair cut. They search the next shop. He may lose customers and
seen as unreliable.

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Personal Timings (Contd…)
People Personal timings and other aspects
Business - Less work for this person.
- There are people for all works. He only needs to pull strings, make some decisions.
- Focus on growth plans. So there is lot of flexibility in working times as well the available
time for his personal works.
- Even if off for 1 week, the company will still be running, except for some daily stand up
phone calls with a few key people.
Investor - This person may be working always. He sees opportunity every where. He goes for a jogging,
he sees a flat for sale… he comes back make a call to see if a deal can be made.. If yes, then he
moves to a bank and lawyer for processing…. Started with jogging but ends up with a deal.
- But with all this, he enjoys the works. A investors would normally find investing as a part of
life or hobby and mostly would be enjoying it.
- He focus on getting more and more returns from different deals.

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Perspective and Mindset
People Perspective and Mindset
Employee - Job security, pay rise, bonus, higher pay checks is the focus.
- Learn new skills or attain knowledge needed to cope with changing technology or get
promotions.
- Look for job with the above attributes with some good Business (Employer).

Mindset: Which company will give me a secure job with a good pay check and a year on year
good hike?
Self - Pay rate/hour, having continuous stream of work is the focus.
Employed - Need to sharpen his skills and experience for satisfying customers and gain more new
customer.
- He serves the other categories (Employee or business or Investor) for his living.

Mindset: With increased skill, I can charge more /hour or get more customer.

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Perspective and Mindset (Contd…)
People Perspective and Mindset
Business - Profit Margin, Market share, sales and growth of business is the focus.
- Expand to new markets, geographies, new products to grow and keep competition at bay.
- Searches and hires the best available employees or self-employed with he necessary skill
sets in his business to meet their targets.

Mindset: I should hire a good Vice president for the XXX operation… The Marketing head for
East zone is not doing well, Cost reduction in YYY plant or product.
Investor - Analyse good going business, bonds or properties (which give good rent/lease) is the focus.
- Constantly monitor the existing investment to avoid any surprising downfalls. Constantly
acquire good going business and properties.
- Hire employees or self-employed people at a small scale to help in logistics. He could have 5-
10 people who would broker the deal in getting new properties or business.

Mindset: Achieve higher than bank returns, increasing rate of return. Comparing expected
return of two business/properties before finalizing.
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Retired Life
People Retired life
Employee - Retirement at 60 or 65 (Changes from country to country)
- Survive with pension benefits, PF money, house rent and interest from savings.
- Need to spend cautiously as they have to run rest of their lives with the above four sources
of money.
Self - No retirement. One can continue to earn as long as he can manage to work. One may
Employed work even up to 70.
- No pension or PF benefits. Once decided to sit back, he has to manage from house rent or
interest from savings.
- Ofcourse, there is now PPF schemes available for the self employed.
- Need to spend cautiously as they have to run rest of their lives with these above sources of
money.

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Retired Life (Contd…)
People Retired life
Business - No retirement. Once can wish to work any number of years he is comfortable.
- A successful person would have amazed huge wealth by then. Which can keep him
comfortable in the coming years.
- Business is where process is set and can run with minimal interference from this person. So
they continue to get profits. He may pass on the baton to his next generation.
Investor - No retirement. Once can wish to work any number of years he is comfortable.
- A successful person would have amazed huge wealth by then. Which can keep him
comfortable in the coming years.
- Infact, this person will find investing very interesting like jogging or walking. At his age, his
experience would have matured a lot he may pass on the baton to his next generation.
- People have seen the enormous success. People want to follow him. He may be a guide or
mentor to the junior family members or in their community.

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Inflation
People Perspective and Mindset
Employee - Most affected. The pay hike from employers may not keep up with the inflation rates.
and Self Thus their buying power decreases
Employed - The interest from savings and FD are just equal or barely about the inflation rates.
Employer - Based on the business model, these people can pass on the cost (Increased price due to
inflation) to their clients.
- Thus their profit margin remains intact.
- This however may not be possible in a highly competitive industry, where the prices
cannot be increased at will… It matches closely the bench mark of competing industries.
- So it is more a case to case situation, where employers are shielded from inflation
Investors - The investment proposal of investors target unusual rates i.e. 25% - 30% etc.
- This would be 3 – 4 times the inflation rate prevailing in the country.
- So by all means they are way ahead and protected well from the inflation effects.

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Left Quadrant
We now put these 4 category of people in four quadrants and call by these letters.

E- Employee; S - Self Employed; B – Business; I – Investor

E and S on the left of the figure and B and I on the right of the figure. With this quadrant we have new interpretations
as below.

• The left side of quadrant focus more on security. They work for other people and earn money. They earn, control
their spending and save for future. They don’t invest. Because of the insecure feeling, they see investing as risky. Their
dominated feeling is saving is for future needs.

E B
School education can take one People What education or knowledge
successfully to E and S Quadrant will take you to B and I
quadrant. quadrant

S I

Adapted from book of Robert Kiyosaki

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Right Quadrant
• The right side of quadrant focus more on independence and freedom. They use for other people effort or their money
for their growth. The earn, spend whatever they want and invest. They save only to the extend considering them as
safety nets or avail taxation benefits. The profit from business or returns from investments takes care of their future for
the years to come. Hence they are more secure.

The right quadrant uses the


People save for future. This saved money of left
saving goes to bank. quadrant to invest and
grow.

E B
School education can take one What education or knowledge
successfully to E and S People will take you to B and I
quadrant. Quadrant quadrant

S I

Adapted from book of Robert Kiyosaki

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FIVE LEVELS OF INVESTORS

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Five levels of Investors
Level 1 – The Zero Financial Intelligence Level
➢ People in this level spend more than what they earn.
➢ They may be rich, but are heavily loaded with debt.
➢ Spend their entire life to clear their debts.

Level 2 – The Savers but ultimate losers


➢ These people strive a lot to save by sacrificing many of their needs.
➢ Money thus saved goes to bank as deposit.
➢ The interest so earned is taxed and added to it is invisible holding hand – Inflation
➢ The post tax return after considering the inflation reduces the buying power of the person.

Level 3 – I am too busy


➢ This is the investor that is too busy to learn about investing.
➢ Many investors at this level are highly educated people who are simply too busy with their careers,
family, other interests, and vacations.
➢ Hence they turn their money to some financial consultant or mutual funds to manage them.

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Five levels of Investors
Level 4 – I am a professional
➢ This is the do-it-yourself investor.
➢ Many retirees become Level-4 investors once their working days are over.

Level 5 – The Capitalist level


➢ This is the richest-people-in-the-world level.
➢ The Level-5 investor, a capitalist, is a business owner from the B quadrant investing in the I quadrant.

The major difference between level 4 and level 5 is as below.


o Level 4 uses their money for investing.
o Level 5 uses Other People Money for investing by borrowing:
o Borrow some amount for a EMI of 3000
o Invest in business or assets that give a monthly income > 3000
o The difference between EMIL and Monthly income forms a stream of passive income

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Many contents could be conflicting your current beliefs and knowledge. But this is the concept that
the author tries to drive.

Feedbacks are Welcome. Please do share any deviation of contents with respect to the original idea of
the author to my Email j.venkatesh6@gmail.com

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