Posted by The first time I heard about Rich Dad, Poor Dad was a very long time ago. I have heard several people talking about the CASHFLOW quadrants principles for financial independence. But it was just a few months ago that I finally got to listen to Robert Kiyosaki’s stories with his two dads. Here is a summary of the three main lessons I learned from him.
Rich Dad, Poor Dad
In Rich Dad, Poor Dad Robert is telling what we assume is his own story as a little kid. He tells us how from a young age he started to notice the difference between his two dads and to choose which way he wanted to follow. His own dad, Poor Dad, followed his studies as we are always told to do. Went to college for an undergraduate, also got a Masters and even got a PhD, which most of us just never will. With all that, he had barely enough money to support his family and was always struggling. His friend’s dad, Rich Dad, barely had school education and never went to college, but had a life closer to what Robert wanted for himself.
As Robert was growing he kept following closely the teachings of his Rich Dad, which got him into selling, against his father’s wishes. At some point he decided that he didn’t want to be employed anymore, so he got out of the company he was working for and started his own path in real estate. That’s how he got out of the rat race as he calls it.
Some people will criticize him for not writing a 100% true story or for not giving concrete numbers. But as I always say, self-improvement books won’t always be super straight-forward guides to achieve greatness or be happy. If it was that easy, then we wouldn’t even have to write it, it would be common knowledge.
Assets and liabilities
The main lesson I could extract from Rich Dad, Poor Dad is to establish the difference between an asset and a liability. Here some people might argue about which is which, his explanation is pretty simple: If it’s making you money, it’s an asset, if it’s making you lose money, it’s a liability. I don’t need someone else to tell me if my house, my car or my computer are assets or liabilities. Let’s say I have my house, it’s brand new, it was just built in a good part of the city. This house might not make money directly, but if I keep it, the cost of it is going to increase so after some time I will have more money in a certain way. What about if I decide to buy or keep an old house that has a lot of problems? This one I will have to keep maintaining and using money on, so it will definitely be a liability. If I buy a house and rent a spare room, the house is instantly making me money, so it stops being a liability and becomes an asset.
Another example is my laptop. Most people will say that buying a 2,000 dollars laptop is a total waste of money. But if I, as a software developer, use it to work, I can get my 2k laptop to make me way much more than 2,000 dollars. So yes, it is an asset. You can transfer that simple rule to anything else, you just have to be creative and look at the numbers.
But that doesn’t mean that every possession you have needs to be an asset. You just have to be mindful about it and try to gather more assets than liabilities. This is the true teaching of Rich Dad, Poor Dad. The moment you have more assets than you have liabilities, you get financially free and are not tied anymore to a job or a place. Yes, you’ll probably still have to work, but you’ll work to increase your assets count. You can even get more liabilities, as long as your assets to liabilities ratio remains positive.
A few months ago, I started following Robert’s YouTube channel, trying to build on top of what the book had already showed me. Here he expands on basically the same ideas, “build your portfolio of assets and limit your liabilities.” But there are two ideas that weren’t in the book, or at least not as clear: reduce the amount of taxes you pay and make your money work for you.
Reduce the amount of taxes you pay
In places or circumstances where you pay taxes based on the difference between your income and the costs in which you incurred in to generate such income – profits, the closer those two values are, the less taxes you pay. So if you take a loan to buy a house and then rent the house to pay the loan, you’ll own the house and you will generate cashflow but you will only be taxed on the difference between the house yields and the loan payments.
So yeah, I’m probably not gonna buy enough houses for myself anytime soon to get to actually apply that. Maybe I don’t want to go into the real-estate business at all like he did. But the idea of how taxes really work is what is valuable here. We usually don’t think about things like this, we hire an accountant to tell us how much we owe, pay it and repeat next year, but having an idea of these little details and applying them whenever we can can save us a lot of money on the long run.
Make your money work for you
The second idea, make your money work for you, is mentioned a lot in the book, but it is expanded in his YouTube channel. Basically, there are two types of investments, you can invest your time or you can invest your money. When you start working on most normal jobs, you invest much more time than you invest money to get your income. Since usually people don’t start their lives with a lot of money, you have to begin your money-making-trip that way, but the long-term plan should be to shift and start investing money along with your time as soon as you can and as much as you can.
This is not a miraculous formula that will make you rich in 5 years, it will take time. If you start working at 20 and start saving money, as little as it may be, it builds up. By the time you are 40 you can have a considerable amount of money saved. Then you can start thinking of other options that offer better returns for your money. Personally, I don’t plan to follow Robert’s steps very closely, I’m not a salesman as he is. But if I take the idea of making my money work for me and keep thinking about it, I will come up with other scenarios where I can apply this that are closer related to my domains.
For example, since I am a software engineer, I could build an app that generates me money and so and so. But what if I take some of the money I make from my actual job and pay someone to build it for me? I would have a lot more free time, I would just have to supervise their actual work and suggest the best paths to solve the problems. I would be using my money to make more money. A doctor could buy a whole space for their office, and then rent most of it to other doctors, the rent will probably pay itself and they will be working in what they want, but the moment they finish paying the loan the income of the offices rent will be all for them practically without doing anything.
So yeah, Robert Kiyosaki is a very controversial with very strong opinions, but if I were to summarize what I’ve learned from him it would be these three ideas:
- Learn to differentiate an asset from a liability and have more assets than liabilities.
- Make your money work for you.
- Reduce the amount of money you pay.
If you want to learn what Robert Kiyosaki has to teach you, you can find his books here: