Rat Race Escape Plan by Andy Tanner Tanner Training LLC is providing this training and any related materials (including newsletters, blog posts and other communications) for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or transactions are for illustrative purposes only and may not represent specific trades or transactions that we have conducted. In fact, we may use examples that are different or the opposite of transactions we have conducted or positions we hold. This training is also not intended as a solicitation for any future relationship, business or otherwise, between the students or participants and the trainer. No express or implied warranties are being made with respect to these services and products. All investing and trading in the securities markets involves risk. Any decision to place trades in the financial markets, including trading in stock or options, is a personal decision that should only be made after thorough research, including a personal risk and financial assessment, and the engagement of professional assistance to the extent you believe necessary. RAT RACE ESCAPE PLAN • ANDY TANNER 2 About Andy Tanner Andy is a renowned paper assets expert and successful business owner and investor known for his ability to teach key techniques for stock options investing. He serves as a coach to Rich Dad’s Stock Success System trainers and as the Rich Dad Advisor for Paper Assets. As a highly sought after educator, Andy has taught tens of thousands of investors and entrepreneurs around the world. Students love Andy’s ability to make investing concepts simple and understandable. He often speaks to students at the request of Robert Kiyosaki, showing how paper assets can fit into the Rich Dad system of investing. Andy was also key in helping develop and launch Rich Dad’s Stock Success System, which teaches investors advanced technical trading techniques to profit from bull and bear markets. He is the author of two books: 401(k)aos exposes the hidden pitfalls of the popular 401(k) investing plan, and Stock Market Cash Flow, a Rich Dad Advisor book on how the average investor can use the stock market to generate regular cash flow and not just buy and hold capital gains. Andy has also created an online investing course called The 4 Pillars of Investing. Investors who want to look over his shoulder as he invests with his own mentors each week will enjoy Andy’s Mentor Club. RAT RACE ESCAPE PLAN • ANDY TANNER 3 What Is The Rat Race? You’ve probably heard the term Rat Race before. People will reference it when they say things such as, “I’m stuck in the Rat Race,” or “I hope that someday I can get out of this Rat Race.” But what does this term really mean? For most of us, the Rat Race is a situation in which one day we wake up and feel as if we’re trapped by our circumstances. It’s a frustrating, hard-to-break lifestyle that usually forces us to stay in jobs we don’t always enjoy due to the multitude of financial obligations hanging over us: the mortgage, rent, medical bills, filling the car up with gas, braces for the kids, day care, groceries, and so much more. Even those with seemingly good-paying jobs often feel very close to poverty when they’re caught in the Rat Race. I’m always surprised at how many people I speak to are just a paycheck or two away from financial ruin. As a result, they tend to stick with the same jobs for fear of being poor. That’s how I describe the Rat Race with words. Now let’s look at what being stuck in the Rat Race looks like with typical financial numbers. The place to begin is with a personal income statement and balance sheet. This is where we can see the money flowing into and out of someone’s life. It’s an illuminating (and sometimes painful) method of identifying the real financial situation someone is facing. Once we find the problem, it’s so much easier to find a solution. For our example, let’s say that every month your expenses total $5,000. This is the amount of money you need to pay to cover the cost of your lifestyle. So the first thing we need to figure out is this: how will you come up with $5,000 every month? RAT RACE ESCAPE PLAN • ANDY TANNER 5 Active Income vs. Passive Income Most people solve this problem of paying their monthly bills by getting a job. This is something we call active income. In other words, we actively exchange our work for money. It doesn’t matter if the work is manual labor or more skilled brain work. With a job, you are relying on someone else to keep you employed so the money continues to flow into your bank account. If the job ends, so does your money. And when the money ends, you have no way to pay those monthly bills. Thus, the Rat Race begins. When we think of retirement, most people imagine the day when they no longer need to go to that job anymore. It usually occurs somewhere around the age of 65. By that time, hopefully enough money has been saved to carry them through the retirement years. For many people, retirement may never come. The nature of their own personal Rat Race has somehow kept them from acquiring enough money to cover their expenses for their remaining days. On the other hand, you can also cover that $5,000 total of monthly expenses with something called passive income. For our discussion here, I want to focus on the type of passive income we can generate by purchasing something called an asset. So instead of working to create cash, we want to explore what it looks like when we purchase an asset that creates ongoing cash for us — every month, every year, for as long as it fits our desires. In the coming chapters we’ll explore this in more detail. When we buy an asset, we place it in the Asset column of our balance sheet. These assets can include real estate, a business, commodities such as gold or oil wells, and paper assets such as stocks. RAT RACE ESCAPE PLAN • ANDY TANNER 7 There are two basic ways you can benefit from an asset: 1. VALUE APPRECIATION. When you buy an asset for $10 and then over time the value increases to $100, you have an opportunity to profit. This kind of value appreciation is called capital gain investing. A very common example of this is putting money into a retirement account. Every time you put a chunk of your paycheck in there, you are hoping and praying that it will grow over time enough to pay for your retirement years. 2. CASH FLOW. You can also leverage an asset to provide you with regular cash flow. For example, you can buy a house and then rent it to provide you with money every month. This is the idea behind buying assets that can become money machines to work for you. To get out of the Rat Race, we need to find a way to cover our monthly expenses without the need for active income. When our passive income is greater than our expenses, that’s when we can say that we are out of the Rat Race. This is what financial freedom is all about. RAT RACE ESCAPE PLAN • ANDY TANNER 8 The Forces Keeping You In The Rat Race If all someone needs to do is buy the right kinds of assets, then why aren’t more people doing it? What are the forces that seem to be pushing on us to keep us in the Rat Race? FORCE #1: EDUCATION Let’s back up a few years to see how these ideas are so deeply ingrained into our minds. In school we are taught to follow the rules. We are shown a model of life like this: go to school, get a good job and work hard, have a pleasant retirement, and live happily ever after. In that scenario, education pushes us into the Rat Race. Additionally, when we follow these rules, we are never taught how to move to the other side. We aren’t given the tools or knowledge to get out of the Rat Race. That’s why most people can never escape — they don’t know how. This affects people in all walks of life: laborers, desk job employees, and even doctors and lawyers. It’s not about how many monthly bills you have or how much money you make; it’s about how much passive income you can generate. FORCE #2: FEAR Another force that keeps so many of us from getting out of the Rat Race is fear. The most common source of fear comes when we don’t understand something. When you hear a strange noise in the night, the natural reaction is to be a little scared. Then, when you discover it’s just the cat walking around, you understand what’s happening and the fear is gone. The same thing occurs when people think about getting out of the Rat Race. If we don’t understand how it can happen for us, or that it’s not that difficult, then of course we will feel a little scared of that unknown. For people who have jobs, the biggest fear is losing that job. When the job is gone, the flow of cash to pay the bills is also gone. To minimize that risk, we are taught various methods of finding and keeping a good job: learn new skills, be better than the other guy, suck up to the boss, and all those other strategies. Yet we never really control our risk, because as an employee someone else will always have the power to fire us. RAT RACE ESCAPE PLAN • ANDY TANNER 10