This is where my blog gets interesting!
I’ve recently read two books (and I’m not a big fan of reading books!), one of which was Rich Dad, Poor Dad, by Robert Kiyosaki. I can’t recommend it highly enough. It’s a book everybody in the world should read – even if you’re not a financial person – because it teaches financial literacy. The book contrasts the thought processes of rich and poor people (the book denotes poor people as people who work until 60/65 years old). Rich Dad, Poor Dad teaches the one thing that school doesn’t – financial intelligence. My interpretation of financial intelligence is knowing how to use money to your advantage – and using assets to make more money.
Rich Dad, Poor Dad says 95% of people are raised and taught to work for money. We are conditioned to work hard at school, get a good education so we can get jobs with good promotional prospects and salary increases (and putting money into a pension fund throughout our working life). We expect to work until we reach 65 (or even 70 now!) - and when we retire we receive a poor pension.
5% of the population are rich. They do not spend their whole lives working for money. Rich people lean how to get money working for them – and then become financially free. This is my goal!
The other book that I’ve read (which I actually read first) is Property Magic (2009 edition) by Simon Zutshi. I love this book – it confirmed to me becoming a professional property investor is exactly what I want to do. The book is easy to read and I highly recommend it to anyone who wants to start investing in UK property.
The key to becoming rich is understanding the difference between an asset and a liability. An asset brings you money. A liability costs you money. To become rich all you need to do is minimise your liabilities (expenses) and keep buying assets (income or cash flow). It really is that simple!
People who buy things on credit cards (and don’t pay them off every month) are just buying liabilities – that is not financial intelligence.
People who keep releasing equity from existing property to buy more and more property are not using financial intelligence. They are relying on property prices increasing all of the time. These people could argue property prices always increase in the long term – but all these people keep doing is increasing their debts (liabilities).
Apologies – I was going to explain Return On Investment (ROI) but it will now be in my next post. I plan to explain the following in my next three postings.
- Return On Investment
- Using money and credit cards to your advantage
- My philosophy in life
Thanks for this Patrick – I entirely agree with you on financial intelligence – in fact Robert Kiyosaki’s ‘Rich Dad, Poor Dad’ is required reading on the Powerchange GOLD Coach Training Course:
Out of interest I looked for my book review on ‘Rich Dad, Poor Dad’ and reproduced it below:
Review of Rich Dad, Poor Dad (Robert Kiyosaki) by Roy Stannard
Getting started
These are the steps suggested to follow to awaken your financial genius
1. You need a big dream. Some thing that is strong and will drive you to success.
2. Use the power of choice. For example, you could sit at home and watch TV all day or you could take a course in financial planning. The choice is yours
3. Choose your friends carefully. Choose people who have great personal characteristics that you admire.
4. Keep learning. The world is changing rapidly. What may have worked yesterday might not work today.
5. Pay yourself first. Spend money on assets before you do anything else with your pay cheque.
Six Lessons
The title Rich Dad, Poor Dad refers to the two main male influences that Robert had as a child. His own father, the figurative “poor dad,” worked at a steady job for a living, while the “rich dad” (the father of a friend) ran a multitude of businesses. Most of this book is told from the perspective of Robert learning from his “rich dad” about how to make money – and seeing how his “poor dad” made huge money mistakes. The first two thirds of the book covers six lessons taught to Robert by his rich dad.
Lesson 1: The Rich Don’t Work For Money
This lesson has an ambiguous title that gives two separate meanings based on how you read it – actually, based on where you put the emphasis. If you read the title as the rich don’t work for money, that’s the wrong one. The rich in fact do work, and they work quite hard. The way the title should be read is that the rich don’t work for money. They work to learn things, and the things they learn can easily be applied to make money over and over again. I agree with this sentiment entirely – good ideas are always more valuable than good labor, because you can keep mining good ideas, while good labor is spent the second you do the work.
Another part of this lesson I liked is that the “rich dad” is actually quite frugal. Although he has a lot of money in the bank, he drives a cheap car and doesn’t live in a mansion. Too many people equate rich with material things, so I enjoy it when it is shown that being rich often has very little connection to material possessions. Being rich means never having to worry about paying your bills – it doesn’t mean driving a Ferrari (well, at least not until you can pay cash for it and not break a sweat).
Without a doubt, this was my favorite part of the entire book, even with the short, out of place rant about the gold standard (actually a misnomer, because the only way the book makes any sense in terms of time is if the rich dad is actually talking about the Bretton Woods system and not the true gold standard) and how the United States was doomed if they abandoned it.
Lesson 2: Why Teach Financial Literacy?
This is the section of the book that causes a lot of controversy when discussed. In a nutshell, this chapter redefines the term asset. For most, an asset is something that has value. For example, your home is an asset because it is something you own that has value.
Well, this section of the book redefines the word. To Robert Kiyosaki, an asset is something that generates income, while a liability is anything that has costs. In other words, by this definition, your primary residence is not an asset but a liability. It may have cash value, but it doesn’t generate income. Instead, assets are forms of passive income that you control, like a rental property or intellectual property.
So what’s the overall lesson here? Basically, you become rich by accumulating assets, assets as defined by this book. This basically means that, in my case for example, my truck is not an asset but The Simple Dollar is an asset (it generates revenue on its own – I write because I enjoy it). Wealth comes from having enough assets that generate enough income so that all of your expenses are covered and there is enough left over to invest in more assets.
Lesson 3: Mind Your Own Business
The point of this chapter is that a financially healthy individual should be spending their spare time not spending their paychecks, but investing as much of it as possible in assets (as defined by this book). This is another lesson I strongly agree with: pay off your debts and start investing as soon as you can into things that can generate revenue. This lesson was short and sweet.
Lesson 4: The History of Taxes and the Power of Corporations
This is the section of the book that made me start disbelieving in the overall ideas presented. First of all, after all this talk of following in the footsteps of the rather frugal “rich dad” example, Kiyosaki begins to describe a lifestyle of buying Porsches and the like. What? It doesn’t jibe at all with the earlier lessons at all.
Even worse, the chapter misrepresents several fundamental facts about taxation that I’m quite aware of, because my father held a corporation and dealt with the taxes on it. First of all, if you start claiming stuff like Porsches as part of necessary company expenses, you are going to get audited. There’s a big difference between forming a personal corporation and buying a company car for use with that corporation, but the IRS is very clear on being rational with spending just to avoid things like buying Porsches. You can justify a company jet as being needed for travel, but what necessity for business does a Porsche provide that another car does not?
Kiyosaki mentions various tax dodges in this chapter, but almost all of them aren’t tax dodges at all, but merely tax delays. With almost all of them, you either have to hold an asset until you die or you’re going to be hit with a monstrous tax bill. If you ever need to liquidate out of a need for cash, playing these games will mean that the IRS will eat you alive.
There are some advantages of keeping money in a corporate structure as an individual person, but they mostly relate to minimizing taxation on reasonable expenses related to money you earn independent of employment. It doesn’t mean that a corporation magically means you can start buying Porsches.
Lesson 5: The Rich Invent Money
Here, the disbelief continues when the author relates a tale of a ridiculously good real estate deal made on the “courthouse steps” in which Kiyosaki claims to have made $40,000 in five hours. I’ve spent some time myself seeing what kinds of deals are available from sheriff’s sales and such and the truth is that the only time you’ll find a deal like that is if every real estate business in the area is asleep at the wheel – and that’s simply not happening in this era.
That’s not to decry the overall lesson of this chapter; you can invent money. However, the easiest way to mint your own money in today’s arena is through creating your own intellectual property. With the internet, there are many ways to distribute and monetize your intellectual property: sell crafts you can make, create websites out of your own ideas, sell your music or performances.
Lesson 6: Work to Learn – Don’t Work For Money
While I agree in general with the lesson, the tone here was extremely insulting towards people who choose to be employed, referring to them as “hamsters.” Using this logic, the majority of the millionaires in the United States (as described in The Millionaire Next Door) are “hamsters.” That’s ridiculous and insulting.
Everyone should strive to learn as much as they can when they work, because it can transform your understanding of the world and perhaps build into methods of starting your own business and being self-employed. However, to look down at people who choose to be employed for a living as “hamsters” is ridiculous. Is Jack Welch a “hamster”? He was employed by General Electric for forty years.
Beginnings
The remainder of the book is a section entitled “Beginnings,” which seems from the title to indicate that it will discuss how to begin applying these lessons to your life. Instead, the section mostly is filled with some very weak personal productivity tips. Here’s what is inside.
Overcoming Obstacles One might have expected that this section would include getting yourself financially prepared to actually take action and accomplish the investments that the book discusses, but the obstacles discussed here are all psychological. That’s not to say that overcoming fear, cynicism, laziness, and arrogance aren’t worthwhile goals, but a person can be quite humble and still not be in a position to take advantage of the lessons presented earlier.
Getting Started
This is another chapter heading that holds promise, but ends up going in a direction that doesn’t really lead to accumulation of assets. In essence, this is a chapter on personal productivity with a touch of the same rule of attraction nonsense found in The Secret. There are some good points in the chapter that are great for life management (take things one day at a time, for instance), but then the positive direction is ruined by statements that imply that your life has basically three choices: you either waste your money on consumer goods, you put your money in the bank and earn “nothing,” or you get rich in some vague, unspecified way. The point is to convince you that you…
Still Want More?
At last, some tangible things: read books and take classes to educate yourself! Ask questions! Do something! These are all great tips, but I felt really uncomfortable realizing that the first direct, clear applicable tip found in the book came near the end – and it was to read more books.
The book ended with a very brief section that outlined another unbelievably good financial situation.
Short summary
Robert Kiyosaki does a great job of helping you understand that rich people are rich because they buy assets that produce income. Poor people are poor because they accumulate liabilities and expenses. In order to become wealthy, you must spend money accumulating income producing assets such as real estate, businesses, stocks and bonds. For anyone who plans to accumulate wealth, this book is a must read.
Downside: Although Rich Dad, Poor Dad gives you a great big picture view of how to accumulate wealth, the book does not give you the practical “how to get started” details. To apply Kiyosaki’s advice, you will need additional educational material on how to get started, or get better at, investing.
They say money can’t buy you love, but securtiy and lifestyle upkeep tend to bill a pretty hefty fee. Do you know enough about money’s inter-workings to cover that bill and insure some leftover for a movie and popcorn later on? The first question that most people will fail to ask is; How much do I really know about money? Most will never be financially literate enough to know how to be wealthy or rich or even what the difference between the two is. There just doesn’t seem to be a casual flow of information relative to financial literacy or obtainment of assets. Robert Kiyosaki offers this information offers both, and more. Kiyosaki, grew up privileged enough to have a father figure willing and knowing enough to give an enthusiastic body check in the right direction. Robert spins his tale of growing up and growing wealth by contrasting two sets of advice he receive throughout his life from two very different men. “Rich dad” as Kiyosaki refers to him throughout the book, is the guiding light that made sure Robert knew to always play it smart, instead of playing it safe. While Poor Dad’s views reflect the societal standards that are constantly, and mindlessly regurgitated and passed down. Kiyosaki uses Poor Dads unknowingly narrow views as a comparison to the average of society, and the dangers of falling into the black hole that the masses create. Robert explains that fear of financial instabillity is what shepherds the lemmings of our time into this black hole, and that avoiding it is simply a question of perspective and self fortification through expansion of financial literacy. Kiyosaki exposes the very achievable opportunities that the average person does not see or know to look for, or are otherwise to afraid to consider. These investments are simply chances for your money to work for you, and they’re are passed up willingly every day for fear of loss and regret. With all the matchstick men and ever abundant market fluctuations out there it’s hard to decipher what safe or reliable ways a person can store or plant their hard earned money. Kiyosaki does not offer any ‘get rich quick’ schemes, or to the contrary a ‘play it safe’ approach (nor does he condemn it). Instead he offers guidance. He points in the general direction of freedom from your current restraints caused by the once horded secrets of the upper class. Guidance that will continue to benefit you through your worst red ledger days and back again. For as they say, knowing is half the battle, and after reading this book, you should be well underway to the completion of the first half of your financially secure lifestyle.
Among some of the book’s topics are:
• the value of financial intelligence
• that corporations spend first, then pay taxes, while individuals must pay taxes first
• that corporations are artificial entities that anyone can use, but the poor usually don’t know how
According to Kiyosaki and Lechter, wealth is measured as the number of days the income from your assets will sustain you, and financial independence is achieved when your monthly income from assets exceeds your monthly expenses. Each dad had a different way of teaching his son….
Quotations
• “Physical exercise improves health, mental exercise improves wealth, laziness destroys both.”
• “A true luxury is a reward for investing in and developing a real asset.”
• “Remember the Golden Rule. He who has the gold makes the rules.”
• “The only way to get out of the ‘rat race’ is to prove your proficiency at both accounting and investing, arguably two of the most difficult subjects to master.”
• “I have mentioned before that financial intelligence is a synergy of accounting, investing, marketing and law. Combine those four technical skills and making money with money is easier.”
• “Most people are poor because when it comes to investing, the world is filled with Chicken Littles running around yelling, ‘The sky is falling. The sky is falling.’”
• “Many of today’s youth have credit cards before they leave high school, yet they have never had a course in money or how to invest it, let alone understand how compound interest works on credit cards.”
• “The poor and middle class work for money. The rich have money work for them.” (P30).
• “The trouble with the rat-race is that even if you win, you’re still a rat.”
• “Mind your own Business”
I hope this inspires debate.
I look forward to you changing your name to Patrich Souiljaert!