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Life By Design Blog

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Business Book Club: Rich Dad Poor Dad

I've set myself a goal to read one self-development book per month. To make sure I really reflect on what I'm reading I'm going to extract the wisdom from the best business and personal development books and share it with you.

This month I’ve been reading Rich Dad Poor Dad: Robert Kiyosaki

The Book

I have some big financial decisions to make this year and while I am sensible with money, I know that I can improve my money mindset. Robert Kiyosaki promises to explain what the rich teach their children about money that the poor and middle class do not. I was hoping it might change my outlook and help me make more from my finances.

This book attempts to change your mindset towards money and makes the case for teaching financial literacy in schools. Kiyosaki also explains how to get started in using money to your advantage rather than being at the mercy of employers and financial institutions.

Kiyosaki starts off by telling the story of his two dads. Turns out he isn’t from a same-sex family. His ‘poor dad’ is his actual father, a highly educated man who works as a lecturer at a university. His ‘rich dad’ is his childhood friends father, a man who isn’t yet wealthy but runs his own business. This is the man who gave Kiyosaki his financial education.

Kiyosaki explains that when he was a child he was often told ‘we can’t afford it’. Being one of the poorer students at school ignited his desire to learn more about money. His ‘poor dad’ didn’t offer any helpful advice but after Kiyosaki and his best friend tried to literally make money by melting down nickel toothpaste tubes (and wanting to keep them away from a life of counterfeiting cash) his ‘rich dad’ could see that he needed to show the boys how money works.

Rich dad poor dad.png

What did I learn?

The rich don’t work for money

The first thing Rich Dad does is to set the boys to work in his business to show them the value of money. He pays them 10 cents an hour. After a few Saturdays the boys complain that they haven’t learnt very much. Rich Dad promises to give them lessons but the catch is that, in return, they have to agree to work for nothing for a few weeks. As much as the boys don’t like the pay cut they are keen to learn so they agree. The boys give up their Saturday baseball games to work earning nothing and a few Saturdays later the boys complain again that they still haven’t learnt anything. Rich Dad explains that they have been learning something all this time. He asks how badly they want to learn about money from him. They tell him that they are desperate to learn. Now Rich Dad puts forward a different proposition.:

They can learn from him or instead, he will give them a pay rise to 50 cents but no learning.

They decline. Then, he offers them 1$ per hour. It’s tempting but they decline.

Rich Dad increases his offer to 5$ per hour. The boys start to think of all the things they could buy with that kind of money but they really want to know how to be rich so reluctantly they decline.

Finally, Rich Dad offers them $10 an hour. A rate that would be good for a long-standing adult worker. Every thought in the boy's heads was telling them to take this offer and they nearly cave in but they know that in the long term it would be better to turn down money now and learn how to be rich for the future and again, they decline.

This is their first lesson. Rich Dad congratulates the boys on passing the first hurdle to becoming rich. He wasn’t being miserly by not paying the boys. He wanted them to be so sick of working from wage to wage and being beholden to an employer that they would be fired up to be smarter with money. He explains that we are taught to go to school, get qualifications and go work for an employer. The employer decides how much we can earn and if and when we get a pay rise. Most people’s expenses soon take up everything they earn and they become too focused on paying bills and not losing what they have to ever take action to question or improve their position.

The rich don’t do this. The rich don’t work for money, they look for ways to make money work for them. They aren’t interested in working from pay slip to pay slip. They are taught to think about how money can earn them more money. You don’t need to already be rich to make money work for you. Here are some tips about how you can go about it.

Stop saying “I can’t afford it”

Rich Dad was brought up in a household where he regularly heard the words ‘I can’t afford it’.

Kiyosaki suggests banishing these words from your vocabulary and instead to ask yourself “How can I afford it?”.

He isn’t suggesting that you can always afford things. Sometimes you can’t. But what this question does is force you think about what it would take to afford something and that, in turn, forces you to consider your priorities and whether how you are spending your money is getting you the things you want.

This kind of thinking is far more helpful. It helps us think about where our money goes and what we would have to give up to get the things we want. Often we could afford what we want if we were prepared to prioritise the money needed over other things. Even if the item you want isn’t affordable right now, you at least have to think about all the things you could do to get it and the trade-offs you would have to make and decide if you are willing to do what it takes. At least if you decide you don’t want to make the purchase you can not buy it knowing that it’s because you have your priorities in order, not because you can't afford it.

What you think are your assets are probably liabilities

This was the biggest eye-opener for me.

The poor and middle-class buy liabilities they think are assets.

Also:

Your home is a liability, not an asset.

I have to admit that I would have thought that my home was an asset. Having read Kiyosaki's explanation I can see why it isn’t.

His definition of assets and liabilities are simple:

Assets: put money in your pocket

Liabilities: take money out of your pocket

So if you have a mortgage on your house (or even if you don’t but you need to pay to maintain and insure it), your house is a liability. Kiyosaki isn’t saying you shouldn’t get a mortgage to buy a home, just that we shouldn’t think of it as an asset.

Kiyosaki suggests this misunderstanding of assets and liabilities keeps people in the rat race. He explains most people take on liabilities (mortgages, car payments, loans etc) that create a lot of expenses and that they tend to take on more the more they earn. This means most people, even those with good jobs, find themselves short of money.

Rich people, however, take on assets that generate income. Over time, their assets outgrow their liabilities and their income from these assets exceeds their expenditure. This is Rich Dad’s definition of being wealthy.

These are concepts that can take a while to get your head around so I’ll let Kiyosaki himself explain it:

Left: Poor/Middle Class Financial Statement Right: Rich Person Financial Statement

Pay yourself first

Literally.

I am familiar with this concept in terms of business. The idea that when you get paid you should invest in yourself first, whether that is in terms of your pension, personal development or buying business equipment etc You put money back into the business (or yourself first) otherwise you will never find the cash for it and you will not see these things as costs of doing business.

Kiyosaki also suggests you do this with your income too, even if you are employed. He suggests that you put money aside each month before any other money goes out to put into investments (even if it’s small ones at first). By putting your money aside you can build a fund which you can use to buy investments and soon enough you can generate income which in turn, can be used to acquire more assets. Kiyosaki is a keen investor in real estate however he points out that there are many ways to invest, even with small sums of money.

Have you ever met a rich person that didn’t lose some money?

A recurring theme in the book is overcoming fear. Although Kiyosaki points out the importance of developing your financial education he also repeatedly explains that being rich isn’t about being intelligent, it’s about having the right mindset. He says that the biggest thing that holds people back is fear. Fear of losing money, fear of giving up what you already have or fear of trying to invest and it not working. Most people want to play it safe. Kiyosaki isn’t suggesting that we all throw caution to the wind and become high rollers. He means that the fear of losing is often so great that it holds us back from playing to win. The fear of losing is usually greater than the joy of winning.

“People fear losing so much they lose”-Rich Dad

He makes the very valid point:

“I’ve noticed in life that winning follows losing. Before I finally learned to ride a bike, I first fell down many times. I’ve never met a golfer who never lost a golf ball. I’ve never met people who have fallen in love who have never had their heart broken. And I have never met someone rich who has never lost money”.

Rich Dad told Kiyosaki of his admiration for Texas and Texans. He likes that when they win, they win big. And when they lose it’s spectacular. They brag just as much when they lose as when they win. The Texans have a saying:

“If you’re going to go broke, go big. You don’t want to admit that you went broke over a duplex (a two apartment building)”.

No one is suggesting we go broke but I can’t help but think that Rich Dad is right on this one. You can’t learn to ride a bike without falling off, you can’t fall in love without experiencing some heartache and you can’t win at anything in life if your focus is on not losing.

Kiyosaki explains that most people are happy to keep their money in safe savings accounts. Of course, there’s nothing wrong with putting some money in a safer place (particularly if you need access to it at short notice) but safe accounts don’t give much of a return. Kiyosaki illustrates this by giving the example of $10,000 in savings. If you put that amount in an instant access account you’d get 1.5% (not much). But if you put this as a down payment on a small property and you got a buy to let mortgage on the rest, you could rent the property out and receive hundreds of pounds in rental income each month. Even if the rent is a small figure, it is still a better return on the money.

Even if property investment isn’t your thing you can see how this kind of thinking is different from how most people approach their savings.

Pursue your financial education

Kiyosaki makes a compelling case for improving your financial education. I worked in Finance for 15 years, I was a mortgage and insurance advisor and I feel that I am financially literate. I know how the various financial products work and about risk. However, this book has shown me that simply knowing how financial products work or managing a budget isn’t enough. Kiyosaki explains the mindset and outlook on money that enables the rich to get richer and the mindset that keeps the rest of us in the rat race. It stands to reason that if you want to have more money, you need to know how money works.

Kiyosaki explains how the rich educate their children about money, the importance of financial literacy, the history of taxes, the power of corporations and why you don’t need more income to be able to get rich. I have to say that it’s opened my eyes and inspired me to educate myself better.

What did I think of the book?

I’m not rich yet!

However, the book has changed my thinking about money. I have been a saver for most of my life, knowing that it is useful to have money put away but I have never really considered using money to make more money or questioned whether or not the lessons we were taught about money still hold value. Not only has the book made me think deeper about money, but it also explores some useful themes for taking control of your life in general such as overcoming fear, cynicism, arrogance and the importance of different types of education.

The book doesn't contain much detail on how to use the advice given in the book but it does give you plenty to think about and some steps to get started. And really, that’s all Kiyosaki is trying to achieve here. He does have many other publications, videos, courses and even a board game (which is very good. You can try it here) which brings some of the more detailed aspects to life. If you want an introduction to using your money better, then this is a great place to start.

This book has given me some confidence in some financial decisions that I am making and shaped my thinking of how to use my money better in future. There are more steps to take and there is some learning to do but it’s shown me how I can achieve my goals without having to earn more money or work longer hours and that has to be a good thing.

What should I read next?

Have you read the book? What did you think? What shall I read next?

If you have any recommendations let me know below or via Twitter, Facebook or LinkedIn

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