One of my all time favorite books on personal finance is Rich Dad Poor Dad. I can honestly say that it was the catalyst for changing my perception on finance, wealth, and even accounting basics such as an asset and liability. This book written by Robert tells of a story of his two Dads: his biological father (Poor Dad) and his best friend’s father (Rich Dad). These two dads had a stark contrast when it came to dealing with finances which is evident all throughout the book.
Robert Kiyosaki talks about key principles that will change your life forever:
1) Why the Rich get Richer
One of the early lessons taught by Robert’s Rich Dad is that the Rich have money work for them, while the poor and middle works for money. The key difference is their understanding of assets and liabilities. Poor Dad would encourage Robert to take the traditional path of go to college, get a good education, get a job and if you save throughout, one day you can retire and live on the beach. Rich Dad, however, had a different perspective and encouraged his son and Robert to both educate themselves financially, create assets/businesses that create cash flow as early as possible.
Rich Dad explains to Robert that the poor and middle class struggle financially because as they work harder to increase their income, their expenses also increase. They work to make their business owners wealthy, pay the government taxes, and pay off student loans and mortgage debts. The Rich on the other hand, use their income to pay themselves first, buy assets/investments that create cash flow and repeat the cycle to generate even more income each month. They are taking full advantage of what Einstein dubbed the “eighth wonder of the world”, compound interest.
A story in the book tells of young Robert and his best friend working hard to make their “income” and buys comic books to read. After working weeks for limited pay, Robert and his friend end up buying used comic books and create a reading library business for other kids to pay and enjoy. This allows Robert and his friend to realize that they have created a cash flowing business, where they are not working harder, but smarter for more income.
2) Importance of Financial Literacy
There is so much information out there that sometimes the danger is what we may think we know, that just isn't true. This may be the case of people assuming that their primary house is an asset. As Rich Dad explains, “An asset puts money in your pocket, a liability takes money out of your pocket.” As your mortgage has principal, interest, property tax, insurance payments going out each month and not creating cash flow, by definition, it is a liability. Further, it comes at an opportunity cost where you are not able to invest the money into a new business or rental property that creates cash flow and enhances the velocity of your portfolio’s growth.
Robert mentions that the amount of money you make is not as important as how you spend (and keep). Imagine this, who makes more money, a Nurse with a modest but comfortable living arrangement who makes $100K a year with no debt, and is able to invest 20% of her income, and keeps over $40K after taxes. Compared to a Doctor at the same hospital who makes $300K a year, but has student loans of $250K, a mortgage payment of $10K a month, drives an expensive car to “keep up with the joneses”, you get the idea. Most people mistakenly view wealth in terms of net worth or assets minus liabilities, true wealth is measured in the number of days you could continue to live your lifestyle should you have to stop working today.
3) Getting Started
The most important idea shared in the book for me was getting started. A lot of people are provided with the same information, and one person may be enlightened to take action, and the other will sit on the information for years. A favorite quote of mine is “action without knowledge is dangerous, but knowledge without action is useless.” Robert points out a couple reasons why someone may be hesitant to take action:
Fear: The fear of losing money and making a fool of yourself may be a reason for you not taking action. However, to those people I ask, what happens if you don’t take action and it's too late? It's not surprising to hear according to Northwestern Mutual's 2018 study that surveyed 2,003 adults, that 21% of Americans have nothing saved up for retirement, a third has less than $5,000, and that 33% of baby boomers have $25,000 or less in retirement savings. Additionally, 78% of Americans say they are extremely concerned they will not have enough money for retirement and another 66% believe they will outlive their retirement savings.
In this day and age, the promises of work hard and save to retirement or “accumulation mindset” that was conveyed to our parent’s generation just does not seem to apply anymore. More often I see retirees re-entering the workforce and taking minimum wage jobs to support their lifestyle.
Cynics: There will always be skeptics and people who like to criticize rather than be a doer. Cynicism typically comes from lack of knowledge and excuses. People might tell you investing is real estate is dangerous, “look at the crash of 2008, I heard my friend gets 3am calls to fix toilets, etc.” If you educate yourself, you can take cautionary steps to mitigate the risk of your portfolio crashing as it did in 2008 (i.e. not over-leveraging, maintaining reserves, buying 20% below market, etc.) you can’t prevent a recession, but people who held on during the tough times, made 3x greater returns coming out of the recession. Further, if you don’t want to be a plumber and fix toilets, hire a competent property manager that will take care of your property. It will be well worth the expense and allow you to truly scale your business.
Laziness: There may be people who don’t take action simply because they prefer to status quo and would rather avoid their future problems than face it head on. As I have discussed in the previous book review “Automatic Millionaire” the key is to take small steps, actions that automate your progress towards wealth building and financial freedom. It’s not about money, but freedom, and buying back your time instead of working 3-40 years hoping that your retirement nest egg will be large enough to support you, you are taking action now to take your future into your own hands, taking back the control from wall street.
Robert offers a couple tips to getting started
Find your why: This will be your reason behind why you do the things you do, and it will be a key factor in keeping you motivated and the fuel to your fire. When you set out to create a future that is greater than your past, and pair it with hard work and consistency, you will achieve great success.
Master a formula (then move onto the next step): You may have heard the term “jack of all trades, master of none”. Similarly Robert explains that you want to master a formula (i.e. Malcolm Gladwell’s 10,000 hour rule or Dean Graziosi's working on your strengths) and stay focused before you start additional ventures
Pay yourself first: This idea is repeated in many different personal finance books: Richest Man in Babylon, Automatic Millionaire, and I will teach you to be rich. The idea is that you are paying yourself (and hopefully investing it) before any taxman (IRS), landlord, credit card company, or other expense vendors get their hands on your money.
Circle of 5: You may have heard the phrase, “you are the average of the 5 people you spend the most time with.” This rule of thumb seems to apply whether it's a good or bad group of 5. If you want to learn to be financially free, hang around other people who have done it, or are on track to do so. If there are people in your life who are always complaining, not taking action, or in a state of helplessness, you might soon find yourself on the same boat.
In conclusion, Rich Dad Poor Dad has been a hit among millions of readers who seek to achieve financial independence, grow their wealth, and break free from the status quo. Although there has been controversy amongst critics who question the existence of Robert’s Rich Dad, the way that he has made his fortune, etc. There is no denying that it is a thought provoking and mind-set shifting book. I highly encourage people to take a day or two to read this book so that you can find out for yourself.
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