My poor dad always said to me, "Work hard at school so you can get good grades. When you get good grades, you will be able to get a good job. Then you become a good hardworking man." While Mike and I were in high school, rich dad would snicker at that idea. He used to say, "Your dad is a good hardworking man but he will never get rich if he continues to think that way. If you boys listen to me, you will work hard for portfolio income and passive in- come if you want to become rich." Back then, I did not fully understand what either man was saying or what the difference in philosophies was all about. At age 25,1 was beginning to understand a little better. My dad at age 52 was starting all over again, focused only on earned income, something he had thought was the right thing to do all his life. My rich dad was rich and enjoying life simply be- cause he had lots of all three types of income. I knew now which type of income I was going to work hard for and it was not earned income. Basic Rule Number Two "Investment basic rule number two," said rich dad, "is to convert earned income into portfolio income or passive in- come as efficiently as possible." Rich dad then drew this dia- gram on his yellow legal tablet: 132 Rich Dad's Guide to Investing EARNED MgBEr income HMBI PASSIVE PORTFOLIO 'And that, in a nutshell, is all an investor is supposed to do," rich dad summarized with a smile. "That is about as basic as it can get." "But how do I do it?" I asked. "How do I get the money if I don't already have the money? What happens if I lose the money?" I kept asking. "How, how, how?" said rich dad. "You sound like an Indian Chief from an old movie." "But those are real questions," I whined. "I know they are real questions. But for now, I just want you to understand the basics. Later, I'll go into the how. OK? And watch out for the negative thoughts. Look, risk is always part of investing, as it is with life. People who are too negative and avoid risk back themselves out of most opportunities be- cause of their negativity and fear of risk. Got it?" I nodded. "I got it. Start with the basics." Basic Rule Number Three "Investment basic rule number three," said rich dad, nod- ding to my last statement, "is to keep your earned income se- cure by purchasing a security you hope converts your earned income into passive income or portfolio income." "Secure in a security?" I asked. "I'm confused. What hap- pened to assets and liabilities?" "Good question," said rich dad. "I'm now expanding your The Basic Rules of Investing 133 vocabulary. It is time for you to go beyond the simple under- standing of assets and liabilities-an understanding that most people never achieve, I might add. But the point I am making here is that all securities are not necessarily assets, as many people think they are." "You mean a stock or piece of real estate is a security, but it may not be an asset?" I asked. "That is correct.