Rich Dad Poor Dad was a self-published book produced in 1997 by Robert Kiyosaki and became one of the best-selling books of all time. It has sold over 30 million copies worldwide and has become essential reading for anyone who wants to understand personal finance. This blog is about understanding how to build wealth and assets to produce a better life over the longer term. Rich dad, poor dad philosophy has had a profound impact on the way I think and the development of this blog. It remains in my top 3 gifted books of all time. If you have not read the book, I can't recommend highly enough that you get a copy and read it.
Who was Rich Dad, and who was Poor Dad?
One of the most powerful things about this book is not only that it changes perspectives in the personal finance arena, but it improves financial literacy through storytelling. As a junior doctor walking through an airport, I was unaware that I was financially illiterate. So I picked this book up, and the storytelling and how it could contradict conventional wisdom had me hooked.
Robert Kiyosaki had just returned from the war in Vietnam and was looking for the next opportunity. His poor dad was his real father, and he was brought up to work hard at school, get good qualifications and climb the employee corporate ladder. In this case in the public education sector. Poor dad felt the principles he had been taught would lead to future financial success and security. But unfortunately, in the later stages of poor dad's career, he lost his job and became unemployed, and the conventional wisdom of working hard and saving more money did not lead to a rich life. Instead, poor dad lost his wealth, which he built over years of hard work.
Rich dad was the dad of Robert's best friend growing up. He developed a high income by investing in assets which provided cash flow. This approach led to building tens of millions of dollars in assets. His approach was to teach financial literacy to his son and Robert Kiyosaki. These principles taught him that the rich teach their kids about their financial future, and the traditional approach of poor dad was not the solution. Robert Kiyosaki's rich dad taught him to make money work for him rather than being tied to a paycheck.
What are the Key Lessons For the Poor and Middle Classes?
The school system will not teach you about personal finance
Think back to your childhood. Did your education at school set you up for future financial success? The chances are it is very unlikely you would have had little if any financial education. Perhaps historically, this was linked to shool being designed to produce skilled workers or perhaps there are other reasons for this. Regardless of the reason, we often enter the workplace in early adulthood with poor financial literacy and low financial IQ. Robert's story highlights this, and he has become a passionate and outspoken advocate for improving financial education in the school system.
Rich people do not work for money
The first time I read this, I was taken aback. How do you pay the bills if you don't work for money? But this was my old thinking creeping in. What he means by this is that the way to becoming rich is by buying real assets. He states an asset puts money in your pocket, and a liability takes money out of your pocket.
The poor and middle-class make the mistake of buying liabilities and then needing to work hard, making money to pay for these outgoings continually. If you are at the beginning of your financial journey, this means controlling your liabilities whilst working on increasing your assets. At a later stage, if liabilities have become a problem, it is about reducing liabilities where possible and investing in assets with what is left. Once the income from assets pays your outgoings, you have reached financial independence from work. The distinction between assets and liabilities is a key distinction in the book.
Make money for yourself, not your employer
This idea is what Robert Kiyosaki calls 'minding your own business. Your employer may employ you for 40 hours per week. But what are you doing the rest of the time? He worked for several corporations, including Xerox and Standard Oil of California, while building his asset base. Ultimately, it was not his job that made him wealthy but the time and effort to build a well-diversified portfolio of assets.
Three-step approach - assess your situation, set goals, build financial education
This section of the book is where there are some real specifics on how to approach doing this. Firstly working out income vs expenses. So far, this is a reasonably standard approach to financial planning. Second is the approach of working out your assets and liabilities. The first time I did this, it was a real eye-opener to how few assets I owned. A few surprises later, it was clear I was on the path of Poor Dad.
Next is looking at where you want to be by setting realistic goals over a five-year timeframe. For example, how much money do you need? How could you get there with assets rather than earned income? How could your money work for you rather than you work for money?
The final step is building financial success through building a strong financial education. This education will depend on your approach, but learning financial basics and concentrating on the asset class you want to look at would be a good start. If that is property, what books could you read? What courses could you go on? If you take it one step further, you could work as an estate agent or letting agent. Who else do you know who knows more about Property than you? COuld you meet them for a coffee? You get the idea, but building a strong financial education is important.
The 2 Things Rich People Need to Raise Money are Financial Intelligence and Courage
This area of personal finance is far better understood by the rich. Raising finance for equity on your home from joint ventures or investors is a key skill separating the poor and middle class from the rich. But, of course, this needs to be back up with the skills that rich dad taught and growing confidence from education in personal finance.
The second key skill is to plan and take action. There are always reasons not to do this, the little voice inside telling you it will fail. Minimising risk will help, but ultimately the rich are willing to have the courage to act, potentially fail and learn from those mistakes.
Robert's story did not start with untold riches and wealth. Instead, it started with two dads' perspectives on approaching life and money. Sometimes it can seem overwhelming when starting, but starting small and building out of your current position is the key. Keeping money in cash may seem safe, but inflation at around 8% is seriously eroding your ability to save. Starting small, learning as you go is the right approach to building an asset base, diversifying as you go along.
Learn Rather Than Earn
What skills could you learn that would help you achieve your financial goals? We mentioned the estate agent in the property already. What other skills do you need, and how can you acquire them. In the book, Robert talks about working for Xerox, which taught him sales skills.
Is your current job helping you learn skills that aid your financial journey? If not, what else could you be doing? If you cannot quit the day job immediately, what could you be doing on the side to improve your skills base and build your financial literacy
Why was Rich Dad Poor Dad Controversial?
When Rich Dad Poor Dad was first published, it met with significant criticism in the personal finance arena. The main area of contention was around what was classified as an asset and a liability.
In traditional financial education, your own home is an asset as, although it does not bring income, it goes up in value. However, Rich Dad Poor Dad philosophy states an asset is only an asset if it puts money in your pocket.
This philosophy met with a lot of resistance and, even today, is questioned. The reality is probably slightly more complex than that. If your house goes up in value and you can release the equity to buy more assets, has it been an asset or liability? There will be some future blog posts on this to help you decide, but it was and remains controversial to some people.
Reflect On Your Financial Education
A good place to start is thinking about how you formed your financial perspective. Who influenced you the most? What influence did your parents have? Were they different to each other? Were you taught to be a good employee, buy a house and pay off your mortgage? Or were you exposed to different perspectives?
Understanding and being self-aware of these issues is a great place to start.
Analyse where you are currently
When was the last time you compared income vs expenses? Do you do this monthly, quarterly, or not at all? Is your income more than your current level of expenses? If not, how can you either earn more or reduce expenses?
The same for assets and liabilities. Do you know how many assets you have? What are your current liabilities?
Where do you want to be?
This vision is not necessarily the 7-bed mansion and Lamborgini on the drive (although possible), but where realistically could you be in 5 years? How many assets would you need to pay for this? I will go into exercises on this in future blogs, but it helps to have goals in this area. A rudderless ship is unlikely to reach its destination! Get specific on what you want/need and what you want your life to look like.
Who do you know who could help you?
They say your network is your net worth, so who do you know who can help? Do you have any friends who are better financially educated than you? What could you learn from them? Could they be your mentor?
We live in a time where even if you do not have a personal connection; you have access to millions of people worldwide online and through social media. This idea needs to be caveated with being aware of the sharks, but there are so many places online (Youtube, Instagram, Facebook etc.) to start you on your journey. If someone resonates with you and what you are trying to achieve, reach out to them. Worst case, you get ignored; best case, you build your financial education and network.
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I hope this has been helpful and if you have not read this book I would urge you to do so. There are also great free resources such as the video above on Youtube from the Rich Dad company which I would definitely subscribe to. We are all on a financial journey and I would love to hear your perspective on this. To do this, and receive regular updates, subscribe to the blog at:
Good luck on your journey!