Personal Finance Lessons: Rich Dad Poor Dad
This book should be on your must-read list on personal finance. Robert Kiyosaki, as he was growing up, constantly wrestled with both the ideas of a poor dad and a rich dad. Little Robert enjoyed the perspectives of both, which formed the rich soil for him to think, choose, and develop his own ideas. While I do not believe all concepts in this book are universally applicable, Rich Dad Poor Dad does provide some fundamental personal finance ideas that you can use. Here is a selection of my favourites.
1. Don’t work for money, let money work for you
Financial freedom is not something that is attained overnight. You can build a business that generates money for you even when you’re not physically there. And you can build your assets to have them work for you. We all want to be financially free. Yet, our educational system is set up so differently. A school is a great place where people learn to work for money, pay taxes, and spend their money. However, you don’t learn in school how to invest, manage, and grow your money. With every paycheck, the cycle of working, paying and spending starts all over again and someday you will find yourself trapped in a constant loop, called the “Rat Race”.
We all want to be financially free. Yet, our educational system is set up so differently.
An interesting phenomenon is that the poor and middle class acquire liabilities, while the rich acquire assets. Here, understanding the difference between an asset and a liability is essential. Liabilities reduce your wealth while assets increase your wealth. When you receive money, it must first go to stocks, bonds, notes, real estate, and intellectual property. These are income-producing assets that generate perennial money over time, for example, dividends, interest, rental income, and royalties. Because these generate money instead of diminishing your wealth position, this has priority over paying liabilities such as mortgage payments, loans, credit cards, and utilities.
Robert doesn’t intend to argue that you shouldn’t pay your liabilities, instead, with every paycheck, he pays his asset column first before paying his liabilities to put himself under pressure. This forces him to think of other creative forms of making money to pay his bills. He claims this feeds his money-making mindset.
I believe that it doesn’t matter whether you pay your bills first or lastly — while the former is more responsible and allows you to keep your attention on work, investments, family, personal development, and relations — it is about you building your income-producing assets that generate money over time. Building one or more income streams in addition to your main job while keeping the difference between assets and liabilities in mind, is key to exit the Rat Race.
… the poor and middle class acquire liabilities, while the rich acquire assets … Liabilities reduce your wealth while assets increase your wealth.
2. Train your brain: think ‘How’ instead of ‘Can’t’
Mindset is of utmost importance. If you think you can’t do or attain something, this shuts off your mind and prevents you from generating thoughts and ideas to achieve something in the first place. Similar to you sitting on the couch and you wish to play the piano if you think you can’t do it anyways and therefore you don’t put any effort into it, you won’t be able to play the piano no matter how much time will pass. But when you start practising, you may be bad at first but you will improve with every session. That is the power of practice and this is also the case for your financial brain.
If you want to spark your brain to be active, exercise, and grow stronger financially, you need to replace “can’t achieve it” with “how can I achieve it”. Something as “can’t afford it” needs to be turned into possibilities: “how can I afford it” and “how do I get it”. Just like playing an instrument, it doesn’t matter if your output isn’t that good. What does matter is that you think, try, and learn from your errors. Like everything in life, you grow by making mistakes. This habit of putting effort into thinking about how to attain financial goals trains your brain to become financially stronger over time. Thinking about how to achieve or by what method to afford something trains your mind in finding creative ways to reach your objectives.
You can train your mind like you can train a muscle. If you train it regularly, it will become stronger. Your ideas will become sounder. And you will become better at achieving and getting that something that you want, be it making money, having that nice house, or retiring early.
This habit of putting effort into thinking about how to attain financial goals trains your brain to become financially stronger over time.
3. Financial IQ
Robert argues that financial intelligence consists of four broad areas of expertise: accounting, investing, understanding markets, and the law. Having knowledge of these topics or having specialists around you, will help you on your road to financial freedom.
Financial literacy is the ability to read numbers. And if you want to be rich, you need to be able to read and understand numbers in financial statements. Accounting allows you to identify the strengths and weaknesses of any business. The better you are at understanding accounting and cash management, the better you will be at analysing investments. A strong financial foundation leads to better-calculated investments and in the words of rich dad: “it’s not the numbers, but what the numbers are telling you”.
Investing is the science of making money and therefore essential in building wealth. You can only build a solid collection of assets if you understand the investments you buy into and manage these well. Make sure your money is not resting in the bank, but instead, working hard to make you more money. Don’t be afraid to spend money on financial education such as books and seminars, as these help you develop knowledge and skills to generate more money.
Besides the technical aspects of accounting and investing, you should understand the market and supply and demand, which is emotion-driven. Does an investment make sense based on current market conditions? Furthermore, when you’ve built a sizeable asset portfolio and multiple income streams, knowing the law can be convenient as understanding tax advantages and legal protection provided by a corporation allows you to generate capital faster and keeping more of it.
Investing is the science of making money and therefore essential in building wealth.
Build a strong financial foundation
From a young age, we learn through our educators at home how to earn money. This has a different meaning for every social class and as our educational system does not teach us to invest and grow money, the low and middle class can’t compete with the rich. I believe the majority of people need to get their financial education elsewhere and educating themselves financially while having an open and creative money-making mentality will help to develop and build a strong financial foundation. This groundwork opens up the road to financial freedom and ultimately, we need to buy fewer things that cost us money, and more things that put money in our pockets.