Rich Dad Poor Dad

What’s in It For Me?

What are the fundamentals to building wealth? Robert Kiyosaki has challenged the way millions of people think about money, by using two fictional characters (a rich dad and poor dad) to compare and contrast the differences in how wealthy people manage money versus the middle class. Although this book will not dive into specific investment strategies in great detail, it will change your mindset about money, which is the first step to achieving financial independence. The powerful lessons that the author weaves into his story have made Rich Dad Poor Dad a timeless classic for changing one’s fundamental beliefs about money and achieving financial independence.

The Big Idea

If getting out of the proverbial “rat race” is your objective, Rich Dad Poor Dad has a strategy that can help accomplish that goal. All too often people go through life with the standard formula: work hard, save, borrow, and pay excessive taxes. The book posits that financial illiteracy is the reason why many people find themselves in the rat race to begin with, so financial IQ is more valuable than strictly money itself. And don’t feel bad or intimidated if this describes your financial situation, as highly intelligent professionals such as doctors and lawyers are notorious for financial illiteracy. Fear holds many investors back, and financial IQ has the power to overcome that fear. When it comes to money, most people generally have one basic formula they have learned in school or from their parents: work for money. Rich Dad Poor Dad teaches the importance of making your money work for you by slowly acquiring investments in your asset column, while being mindful of your liabilities. This will make a bit more sense if you read on…

Key Concept #1

Assets vs. Liabilities

“Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.” Rich Dad, Poor Dad, page 44

According to the author, there is one fundamental rule that separates the rich from the poor and middle class.

Rule #1: You must know the difference between an asset and a liability, and buy assets.

The rule sounds deceptively simple on the surface, as most people think assets are anything they own such as a house, car, clothes or furniture. Below are Kiyosaki’s definitions:

An Asset is something that puts money into my pocket

A Liability is something that takes money out of my pocket

We all know that cars are a depreciating asset and therefore fall under the definition of a liability (unless you are a driver for a ride-sharing app like Uber or Lyft). However, most people would be surprised to learn that owning a home is in fact a liability under Kiyosaki’s definition. If you buy a big house, you have a large mortgage payment, higher property taxes, high utility bills and often expensive maintenance and furnishings. Owning a rental property, however, would be an asset, as it puts money in your pocket from having a tenant pay down your mortgage. The author is not saying don’t own your primary residence, but rather suggesting that one should buy a home they can comfortably afford, as there are often numerous underlying expenses to home ownership, making it more difficult to have money left over to invest in cash flowing assets. Hence, the popular phrase “house rich, cash poor.”

Key Concept #2

Pay Yourself First: The Power of Self-Discipline

“I would venture to say that personal self-disciple is the number-one delineating factor between the rich, poor, and the middle class.” Rich Dad, Poor, Dad, page 153

The pay yourself first concept has been repeated through the personal finance community, from books such as The Richest Man in Babylon to the Automatic Millionaire. While millions of copies of these books have been sold, few follow the advice. Simply put, paying yourself first suggests that your income should go directly into investing, and then be used for expenses. A perfect example is an employee that automatically contributes 10% of pay to a 401(k), which has the added effect of reducing taxable income. To successfully pay yourself first, don’t get into large debt positions that you have to pay for, keep your expenses low, and build up assets first.

Key Concept #3

Mind Your Own Business

“Financial struggle is often the result of people working all their lives for someone else.” Rich Dad, Poor Dad, page 73

The book makes the argument that school prepares students to enter the workforce to work for money, but not to think like business owners. Most employees only focus on their income statements, meaning how much money they earn and when they will get their next raise. The rich focus on their assets, and use their income to buy assets. The author is NOT suggesting everyone quit their W-2 jobs and become entrepreneurs. Instead, Kiyosaki is suggesting maintain your daytime job, but keep expenses low, reduce liabilities, and diligently build a base of solid assets. Once a dollar goes into your asset column, never let it come out and think of it as your employee because it will be working hard for you over time with the power of compound interest and appreciation. The book specifically discusses income generating real estate and stocks of small companies as investments for building out your asset column.

Understanding the tax advantages and protections provided by a corporation can be extremely valuable, as individuals can apply a similar concept to protect their assets in a limited liability company (LLC). In addition to providing legal protection, an LLC can mimic the order of income and expenses just like a corporation. For example, employees earn and get taxed, trying to live off what is left over, while a corporation earns, spends, and is taxed on anything left over. This subtle difference can have a dramatic impact on building wealth over time.

Key Concept #4

Importance of Financial Intelligence

If there was one significant message reiterated throughout the book, it is the importance of financial intelligence, which anyone can acquire. Our culture “has encouraged us to learn a profession so we can work for money, but failed to teach us how to have money work for us.” (p.145).

Financial intelligence is made up of four main technical skills:

Accounting: the financial literacy and ability to understand financial statements which allow you to identify the strengths and weaknesses of any business.

Investing: the “science of making money”

Understanding markets: the fundamental or economic aspects of an investment, such as science of supply and demand, combined with the technical aspects of the market, which are emotion-driven.

The law: understanding the tax advantages and protections provided by a corporation.

Key Concept #5

The Key to Financial Freedom

Simply put, the journey to financial freedom is accomplished by a person’s ability to convert earned income into passive and/or portfolio income. In accounting terms, there are three different types of income:

Ordinary earned (example: income from your W-2 job)
Portfolio (example: income from your stock portfolio)
Passive (example: income from real estate rental properties or passive ownership of a small business)

Taxes are highest on earned income. The least-taxed income is passive income. Not surprisingly, the government taxes the income you work hard for (W-2 income) more than the income your money works hard for. Hence, minimizing taxes and maximizing investments in portfolio and passive income is the basic premise for Kiyosaki’s financial independence formula.

Apply It

The book makes the compelling argument that fear of losing money (i.e. risk aversion) is a major deterrent to becoming wealthy. Many people let their emotions get in the way of effectively managing money. Are you investing appropriately for your goals?

Have you considered making rental real estate or other cash flow producing assets a component of your investment strategy? Instead of thinking of all the headaches commonly associated with being a landlord (fixing toilets, dealing with bad tenants, etc), find a property where the numbers still make sense with outsourcing those tasks to a property manager.

Developing financial IQ is a key message from the book. On your commute, try listening to one of the numerous podcasts discussing investing and achieving financial independence.