4 money lessons from Monopoly

I was first introduced to Monopoly when I was about four years old. The game started with everyone happy; by the end, even at that young age I knew some family members weren't going to be speaking to each other for the next few days. I feel like everyone has a similar story about playing Monopoly. However, the core learnings from the game are significant. 

In fact, these same learnings formed part of the reason I gravitated towards real estate so early in life. Monopoly reflects the real world in more ways than you know - the main one being those with assets become rich, and the rich get richer. But the game shares more secrets as well... 

1. Whoever owns assets, obtains real wealth 

In Monopoly, when you complete a full circuit of the board, you earn $200. I think of this as similar to a salary in the real world. At this point, you are at a crossroads at which you can either continue to play the game and save your salary, or you can invest it and buy assets.  

Remember, if you don't own assets (especially those that are scarce) then you will struggle in the long term - in Monopoly and in real life. On average, Australian real estate has grown annually by 7.8%. Let's say that 5% is more reasonable. At 5% growth on a leveraged asset such as real estate, your cash-on-cash return will far outperform the interest earned on savings over the long term, even if that money is put into a high interest savings account.

In real-life real estate, we have the benefit of earning wealth in two ways: capital growth and cash flow. The 5% annual growth is only on the value of the property. If chosen well, you should also get about 3% to 5% rental growth, too. 

2. The bank can't go bankrupt 

This is legitimately a rule in Monopoly. We grow up being taught that the banks are important institutions and that saving money is vital and the key to financial wealth. I call bull!  

Don't get me wrong, saving money is a key part of the process, but the importance is greatly outweighed here. The other important factor is that money is the oil for your machine - and it's the machine that will get you to financial freedom. Having oil alone won't get you to your destination. Think about driving to work: the oil (or petrol) on its own is useless, but when put into the car, you can leverage the machine and get to your destination. 

In the real world, the purchasing power of our dollar has been dropping over the long term. Over the past 70 years, for example, Australia has seen average annual inflation rates of 4.88%. Inflation means cash continues to lose its purchasing power. By saving your money, you are effectively investing your money in its own value. That's the same money that has lost over 90% of its value.  

3. Cash flow management and emergency buffers are important 

Monopoly teaches the importance of managing cash flow. In real life, strategies such as effective budgeting, saving and managing expenses are critical for financial success.  

Let's say you decide you want to buy every property you land on in the board game, and when presented with the opportunity to develop houses and hotels, you take it. You will find yourself being asset rich but cash poor. The importance of having an emergency fund in this situation, however, can't be overlooked. 

Similar to the board game, if you have no cash to pay rent, utility bills or taxes, you will be forced to liquidate your assets. Sure, in the real world you have access to credit in the form of quick loans, credit cards and buy now pay later facilities, but the principle is the same.  

The key to financial freedom is to maintain a healthy emergency fund because life is unpredictable. Your family could be hit with a health concern or an unpredictable event that stops you from working immediately. As a rough guide, perhaps allocate enough funds to cover all your essential expenses for six months.  

4. Leverage is powerful 

One of the lesser-known rules in Monopoly is that the bank can lend you money on a mortgage security to enable you to raise the funds to purchase property. In this case, you arrange a mortgage on an unimproved property you own at an interest rate of 10%. This interest must be repaid, along with the full amount borrowed, before you can lift the mortgage and start improving the land (adding houses and hotels). 

In the real world, real estate investing is truly effective when you can leverage the bank's money to accumulate wealth. This is one of the biggest advantages of investing in real estate versus other traditional assets. Sure, you can leverage to buy stocks, but it's not as popular for good reason (interest rates are higher, and banks won't let you borrow as high a percentage of the total value of the underlying asset.)

This is an edited extract from Retire Filthy Rich with Real Estate (Wiley $32.95), republished with permission and available at all leading retailers.