Rich Dad, Poor Dad

Book Summary

This bestseller from Robert Kiyosaki intends to highlight the lack of financial literacy in the general public. Robert Kiyosaki expresses this through the lens of two men who influenced his life – one that of his real dad, who was highly educated but remained relatively poor without being able to generate any real wealth and the other being the father of his close friend Mike, who was not highly educated but was able to build an empire of wealth by understanding the nuances of our financial world.

The author states that the present education system is a relic of the bygone era, that of the Industrial Age. In the previous age, it was enough to study hard and be loyal to your company. Your employer would take care of you even after your retirement. However, that is fast changing as a result of globalization in which the fierce competition doesn’t leave enough margin for employers to sustain employee welfare programs like pension schemes or retirement plans. This places the burden of future expenses on the individual. The author argues that the present schooling system does very little to prepare an individual to look after their own finances and thus putting a large section of the public at great risk.

As his first lesson, the author puts in a tremendous effort to differentiate between an asset and liability. An asset is anything that puts money into your pocket while liability is anything that takes money out of your pocket. This seems pretty straightforward, at first glance. However, when the rule is applied strictly many of the properties that we intuitively believe to be assets, are truly liabilities. An example that best showcase this is a home. A roof our your head is the best investment that anyone can make – or so we are told. But according to the author, we take a home loan to afford a home and then spend a good portion of our lives trying to repay that debt. On top of that, a home can have other expenses like maintenance or renovation expenses. So, home is a liability because rather than putting money into your pocket, it takes money out of your pocket.

My initial thought was that is the author trying to say renting a home is better than owning a home ?? Or is he saying whether an individual should avoid debt at any cost ? The truth is that he was saying neither. The author just wants the reader to understand the difference between an asset and liability. He doesn’t want anyone to invest into a liability mistaking it to be an asset.

Now that the difference between an asset and liability has been firmly established, the author proceeds to explain a financial statement. Even without money, by glancing at how cash flows in a financial statement, one can understand whether the person is poor or middle class or rich. Any financial statement has an income column, an expense column, an asset column and finally a liability column. The following figure shows the financial statement for a poor person. Almost, all of the income goes to their expenses. There is no surplus that goes towards to asset building.

When we look at the financial statement of a person from middle class, we can see there is a surplus. However, this surplus is not devoted to asset building, but rather to pay off debt. The author argues that the middle class do not understand how to make the money work for them, but rather only to work for money – as taught by the schools. Hence, they fail to see the opportunity they possess and fall for short term goals that give the impression that they are doing well. However, the reality is that they are living from paycheck to paycheck with no thought given to retirement or future.

The financial statement of a poor person and a person from middle class are similar. The only difference is the latter is able to have a job that puts more money in the income section. However, more money just translates to higher expenses and larger tax. The society presumes that the lifestyle led by the middleclass is a successful one, and hence the focus to make sure a child studies hard and gets a well paying job. However, though the middle class person enjoys higher luxury than a poor man, he is unable to have more security or lead a lifestyle that is stress-free. The salary obtained by him is equivalent to the number of hours worked by him. In order to increase his earnings, he has to sacrifice the time he can spend on a vacation or with his family.

The rich follows a different rule. They understand that true richness means to have assets. They invest first in assets that generate passive income rather buying up properties through debt, i.e. liability. Passive income from assets is able to afford all the needs of a person. This helps not only in having more time for family, but is also the best way to save money on tax. Wealth is measured by how long you can sustain your lifestyle without a job, that is after you retire. Rich people have enough assets that generate passive income well into the future even after their death.

The author, through this book wants to provide an alternative path apart from the study-work-retire path provided by the society. The path is to learn about money and how to make money work for you. Personally, I do not agree completely with all the nitty-gritties presented in the book, however, the overall message seems about right. One should focus on assets rather than unknowingly building an empire of liabilities. If not handled properly, rather inheriting assets, our children might inherit liabilities.