Rich Dad Poor Dad

What the Rich Teach their kids about Money that the Poor and the Middle Class Do Not!

By Robert T. Kiyosaki

Chapter 1

Reading Rich Dad Poor Dad made me come across words like financial literacy, accountancy and investments. The book shouts and tells you that working hard is good but not so to the extent where your hard work is towards good grades only. Similarly education is essential not for you working for me but making money work for you. That is why learning accounts and investing are 2 important things one need to learn and apply in real life. Most importantly stress your brain to answer questions like “WHY” and be a positive thinker in everything you do.

There are 6 lessons exposed to us as guideposts:

Chapter 2

1) Rich don’t work for money:

This chapter highlights the difference between thinking from head and emotional thinking. It introduces you to the concepts of taking advantage of opportunities to make money, having unnecessary fillers of greed and fear for doing work, the importance of telling truth to our self. It highlights the importance to be an observer and not a reactor to your emotions, to get the difference between emotional thinking and head thinking. The author makes an attempt to help us understand to stop ignoring small things out of our greed, fear or sheer ignorance that could bring about huge impact in later stages of life.

If a human stops searching for information and knowledge for oneself he closes his mind giving space to ignorance. Human mind is a struggle between illuminations and ignorance. Robert says learn to master the power of money. First step is to make money work for you without you being physically present. This is possible by consistently asking the right question “why” to our self. It is our matter of choice of thoughts that we listen to and we follow for our self that make us think whether the right solution obtained is short lived or long?

Chapter 3

2) Why teach financial literacy?

Financial literacy is to understand what proves to be an asset and what proves to be a liability including our expenses. Robert says if one can understand and interpret cashflow statements (income and expenses) and balance sheet (assets and liability) one can understand the difference between assets and liability. Your flow of money should be such that even if you quit your job today your monthly expenses are covered not by your savings or retirements plans but by your income generating assets. Get one thought absolutely clear to understand accounting and investing you need to be financial literate therefore rich buy assets and poor only have expenses and middle class buys liabilities which they think are assets. E.g.) house is a liability as your expenses are mortgage, clothing and households so it’s like you work (job) – get paycheck (income) – mortgage and house (liability) – pay taxes, property tax and expense on food etc. (expenses). Question: what goes in your assets NOTHING you don’t have anything left? Understand this crucial difference between assets and liability as that’s the second turning point after understanding the first one which is generating money without you being physically present. Other words make money work for you and you don’t work for money.

There is a lot of difference between action and reaction. Most of us are victims of reactions due to our emotions. As a result instead of thinking from our head we let our emotions take over which reacts for us. It is like we don’t tell the truth to our self or we don’t listen to our inner thoughts. We say people are emotional because they tend to react to peoples talk, instead of thinking and reacting as per the situation. If one can understand the difference between emotions and reality one is using the thinking process to tackle the situation and avoiding getting trapped in emotions.

Chapter 4

3) Mind your own business:

It is important to understand the true difference between profession and business. Profession is your income column where you work. Business is your asset column which works for you. Robert says work your profession but as well mind your own business. Along with your profession start your own business. When you start your business just by its startup won’t help have passion for it because with the passage of time your efforts may not be fruitful and your business may fail. E.g.) Mr. Ray Kroc, McDonald’s owner was a salesperson by profession he would sell hamburgers but his business owned real estate. Though he earned his income from selling hamburgers franchise the income is due to premier location selection of assets column investments.

Chapter 5

4) The History of Taxes and the Power of Corporations:

In this chapter what needs to be understood is the classification for financial IQ under 4 heads:

I. Understanding accountancy i.e. financial literacy: it helps you to identify your strengths and weakness through your asset and liability column.

II. Investing: formulate strategies and use your creative head to make money work on your assets for more money generation.

III. Understanding markets: understanding technical and emotion driven market plus understanding demand and supply factors i.e. fundamentals.

IV. Law: without understanding law you cannot survive. You need to earn, spend and then pay taxes so that deductions so obtained are on your left over money and not on your hard earned money.

Wealthy people control things but own nothing. Therefore at the time of being sued they don’t have anything. They work on Corporations and Trust’s which works for them to generate money. It is like using Corporations and Trust’s as protection base.

Idea 1 : Rich people corporations - Earn - Spend on expenses - Pay Tax on left over.

Idea 2 : People working for corporations - Earn - Pay tax (no choice) - Left over spend

The above gives you an idea how the rich play the game.

PS: In my opinion in both cases taxes have to be paid therefore Idea 1 better than idea 2 as you pay less tax.

Chapter 6

5) The rich invent money:

This chapter is about implementation of the first 5 chapter guideposts. You will come across various examples from Roberts’s life. Before coming to the examples there are few things that Robert says first be confident and please avoid self- doubt. Second place your foot on the ground only when your base is sound. If you’re not sure try, fail, learn and then with surety go again. You will either win or learn the game of financial intelligence runs on options and how do you create them by having information. The person who has the timeliest information owns the wealth.

Robert says treat money as if it is not real. The question is if money is not real then what? To which Robert replies “What we agree it is?” The author gives us a nice e.g. real estate market in 1994-97 was down. Real estate local office was costing $75000. Mr. Robert instead bought bankrupt attorney office for $20000 and sold the same for $60000. He earned $40000. In this example by application of financial intelligence and the 4 rules i.e. accountancy, investing, understanding markets and law his money earned him money. What I take away from this example is see things not from your eyes from your mind. Similarly one day Robert came across a house for sale. The owner couldn’t get any seller for over a year. Robert sensed the house to be good and bought the house for $20000. He waited for the boom time and sold the same house for $95000 till then the house was on rent. It is your financial intelligence that shows you whether the deal is good or bad or whether a bad deal can be made good. This is not gambling as you know what you are doing. It would be gambling if you were just throwing money into the deal and praying. These are strategies adopted by Warren Buffet and Rakesh Jhunjhunwala and we all know where they are now. Great opportunities are not seen with your eyes they are seen with your mind.

There are two kinds of investors:

a. People who buy a packaged investments. E.g. shopper who goes to a computer shop and buys a computer right off the shelf.

b. Investor who creates investments e.g. he assembles the deal. It’s like customizing. The investor may not know placement of all components of the computer but such investors do know how to put pieces of opportunities together. If not they know people who do it.

Rich dad says thrive to be the second type of investor as they know where huge wins are. It is also possible that at times those investors have to bear losses if the tide goes against them.

To be the second type of investor 3 main skills are needed:

I. How to find opportunities that everyone missed. Remember purchase a house at $20000 – selling price $60000 and earned profit of $40000.

II. How to raise money. Many a time there are huge opportunities but lack of capital stops an investor from moving ahead. Robert says find ways to raise money don’t stop your creative thinking to go ahead.

III. How to organize smart people. Intelligent people are those who work with or hire a person who is more intelligent than they are. As rightly heard and said if you need advise choose your advisors wisely.

If you cannot learn these skills then type a. investor is highly recommended for you. Robert says what you know is your greatest wealth and what you don’t know is your greatest risk. Since there is always risks learn to manage risk instead of avoiding it which we all mostly do.

Chapter 7

6) Work to learn – Don’t work for money

Robert points out that with the passage of time people posses specialized skills and get paychecks for their specialized work. However as your specialization gets utilized your paycheck at one point in time does not support you. As a result people often change industry for search of better job. Different industry have different requirement of skill set, these people work at lower income in other industry because they posses specialized skill from other industry. Most of these working people who have changed industry cannot digest this fact and are unhappy. Therefore Robert says work to learn – don’t work for money.

Many times people find it a hassle to learn new things or simply don’t want to learn because that’s not what they are interested in. e.g. Gym. Many people go to gym forcefully because they are reluctant. If we overcome this feeling of not going to gym we win half the battle. We are good in few things but in order to be successful we need to learn some basic skills so you must learn. You cannot teach old dog new tricks unless he is willing to change, because it’s hard to change. E.g. you may be an excellent writer but if you’re not a good seller you need to learn sales and marketing skills in order to sell your write ups. People don’t; simply because they are in such a professional stage of their life that learning such a small thing like sales is against their ego.

The main management skills needed for success are:

1. The management of cashflow

2. The management of systems (including yourself and time with your family)

3. The management of people

Robert says world is filled with talented poor people. All too often they are poor because they struggle financially or earn less than what they are capable of. This happens not because of what they know but because of what they don’t know. The ability to sell or communicate to another person is the basic skill to personal success be it to your customer, employee, boss, spouse or child. Communication skills such as writing, speaking and negotiating are crucial to life for success. Most of us specialize in one skill instead of understanding the business system. That’s why Robert says “know little about a lot”. He encourages people to work with smarter people and bring such smart people to work as a team. He focuses on the idea of acquiring different skills instead of specializing in one skill and limiting your options. Ever wondered why books have it written “best – selling author” and not “best – writing author”?

Chapter 8

Beginning: Overcoming Obstacles

There are many obstacles that come in our way to financial literacy. They are

I. Fear

II. Cynicism

III. Laziness

IV. Bad habits

V. Arrogance

I. Fear:

Fear of losing results in more damage than being bold. Fear of losing money is real. Robert tells us to understand that fear is something which everyone has. The obstacle is not having fear but the obstacle is how to handle fear. It’s like how you handle losing. Texans are the people who don’t bury their failures instead they get inspired by them. They take their fear and turn them into rallying cries. Failures inspire Texans to become winners and that is the same formula applied to all winners. Failure inspires winners. It defeats losers. It is the biggest secret of winners. It’s the secret that losers don’t know. There is a difference in remaining balanced and remaining focused. One need to stay focused and not balanced. If you have dreams of freedom – of getting out of the rat race – the first question is “How do I respond to failures?”

II. Cynicism:

Cynicism means to self - doubt. Your thoughts are paralyzed and this work is done by yourself or by family, friends and relatives. We often come across this question of I can’t do that? It’s not my cup of tea. It will never work. What makes me think I can do it? I’m not smart I’m not good enough etc… Peter Lynch says these are just noises which you should ignore. People who often tell us not to do this or we are not good enough are the ones who have never tried those things themselves in reality and still those people are saying us (the ones who want to do something) why we shouldn’t so? The real world is waiting for you to be rich but self – doubt makes us poor. Robert uses the right words “Doubts are expensive”. This feeling withholds the person from winning. Mr. Colonel Sanders is a good example for this. His recipes for fried chicken were rejected 1009 times. It was finally sold for millions of dollar to a person. So when you’re in doubt and are afraid just fry those noises surrounding you.

III. Laziness

Robert says busy people are the laziest. Laziness conditions your mind to not do things that you like resulting in sadness and a state of helplessness. This state of mind later leads to despondency and depression. Have you ever come across times when your spirit or soul says come-on lets go to gym and workout but your lazy mind says I’m tired I’ve worked really hard today. Or when your spirit or soul speaks out I’m sick and tired of being poor and your lazy mind says I can’t afford it? Your mind knows how rich and powerful your soul is and to curb that feeling in you it will say rich people are greedy. Besides it’s too much bother. It’s not safe. I might lose money. I am working hard enough as it is. I’ve got too much work anyways. Look at what I have to do tonight. My boss wants it finished by the morning.

So what is the cure to laziness or how can you beat laziness? The answer is little greed. It is not the goal but the process of attaining the goal we desired we should learn. Whenever you find yourself avoiding something you know you should be doing ask yourself “What’s in it for me?” and be a little greedy. It’s the best cure for laziness.

IV. Habits

Our life is more of a reflection of our habits than our education. Robert gives an example of his friends watching movie of Arnold Schwarzenegger. After watching the movie they all wished for his type of body. Someone said he was thin earlier others said he was born with that body. Robert says all these answers are examples of our habits controlling our behavior. If we ask question to our self what are the habits of rich people? Robert gives the answer in another example. Roberts’s poor dad paid all his bills first and then paid himself last. On the other end Roberts’s rich dad paid himself first and then paid all his bills. The question arises what will happen when there is shortage of funds? Rich dad replies same thing he would still pay himself first and his bills later. Rich dad says asset column to him is far more important than the government. So the obvious question to ask is what if the government comes after you for payment of your bills? To which Rich dad says keep asking the question “Why?’ to yourself. Rich people ask this question to themselves all the time. It gives them motivation to think and gives them solutions to the problem. After paying to oneself the pressure to pay taxes and to creditors is so great that it forces rich dad to seek other forms of income. This pressure to pay becomes rich people’s motivation. They work extra jobs, start other companies, trade in stock market, anything else just to make sure those guys (government and creditors) don’t start yelling at him for payments. Pressure made rich dad work harder; it forced him to think and in all made him smarter and more active when it comes to money. If rich dad would have paid himself last he would have felt no pressure, but he would broke.

V. Arrogance

Arrogance is ego + ignorance. Rich dad says what he knows makes him money but what he doesn’t know loses him money. Every time you become arrogant you lose money because when you are arrogant you truly believe that what you don’t know is not important.

Robert says when you know you are ignorant in a subject just start educating yourself by finding an expert in that field or by finding a book on that subject.

Chapter 9

Getting Started

This chapter deals with the fundas of Do’s and Don’ts. Robert gives you 10 steps to have control over power:

1) I need a reason greater than reality:

Robert says without a strong reason or purpose everything in life is hard and I agree to his prospective personally. In life one needs to have a deep seated emotion of motivation to do work else life will push you all the time and you would just flow with whatever is happening having no choice. Make a list of your dos and don’ts. If your do’s are less than your don’ts it indicates that the reality of don’t are so strong that the dos are falling weak in front of them. Just remember one thing list your don’t first and then list down your dos. E.g.) don’t: I don’t want to work all my life. I don’t want what my parents aspired for, I don’t like being an employee, I hated that my dad always missed my football games because he was working all his life, etc. Dos: I want to be free to travel the world and live a lifestyle I love, I want to be young when I do this, I want control over my time and my life, I want money to work for me etc. after listing find a reason which you could feel is your deep seated emotion of motivation and just go ahead with it.

2) I choose daily:

This life is ours. So ideally we decide how life moves in terms of money, capital and activities. Instead of following the herd Robert says spend time on educating yourself on different things. E.g.) when it comes to investing money don’t start investing in ABC Co. Ltd. but first invest time and money on learning investments. Mistakes will happen and that’s what first timers are all about but remember arrogance + intelligence = ignorance. Therefore avoid arrogance it would lead you to ignorance not intelligence. Spend time and money in educating yourself on things rather than just investing in any ABC Co.

3) Choose friends carefully:

Choose friends wisely doesn’t indicate make friends for your benefit so that you use and throw them but it indicates avoid making friends falling in “chicken little” – noisy category. It would be your financial intelligence if you make friends who know how to make money rather than make those friends who stay away from money or are scared or afraid of it because it’s risky.

4) Master a formula and then learn a new one:

This is something I strongly agree myself. Life is all about learning but what’s important is to learn the right things. Most of us have heard the saying “ You are what you eat” Robert modifies this saying and says “You become what you study”. In other words, be careful what you study and learn, because your mind is so powerful that you become what you put in your head. In today’s changing world, its not so much what you know anymore that counts, because what you know is old. It is how fast you learn. That skill is priceless. Its priceless in finding out faster formulas.

5) Pay yourself first:

Pay yourself is not the previous idea mentioned earlier about paying yourself first but your bills later. It’s about self – discipline. Robert says if you have low self – esteem and low tolerance for financial pressure you can never be rich because the world would constantly push around such people. Why?, because these people lack internal control and discipline and therefore they become victim of people who have internal control and self discipline.

There are 3 management lessons that need to understand in order to start your own business. They are:

1. Management of cashflow

2. Management of people

3. Management of personal time