The premise: when growing up, author Robert Kiyosaki had two dads advising him: 1) a Stanford-educated PhD who followed traditional career thinking, was allergic to risk, and was financially illiterate (the Poor Dad, his biological father); 2) a high school dropout who later built a business empire worth many millions and employing thousands (the Rich Dad, his best friend’s father).
The Poor Dad represents the traditional view on work and money - go to school, get a good job and climb the ladder, prize stability over independence, buy a house, and spend money without a clear long-term plan.
- Most parents belong to this system, so they pass it down to their kids.
- The traditional view worked better in the 20th century, when strong growth and decades-long employment meant stability was a viable strategy. Nowadays, pensions are rarely guaranteed; job security at a loyal employer is rare; professional education and academic success are no longer guarantees for security.
The Rich Dad represents what was then a more contrarian view - work for salary if you have to, but aim for financial independence; have your money generate more money; and take calculated risks boldly.
Most people adopt the Poor Dad view of finances and life. Even worse, they let money control their life:
- Fear of not having money makes people work hard.
- Then once they get a paycheck, greed gets them to buy things they covet.
- But the joy is short-lived. As they spend unwisely, they have money problems, and the fear of not having money drives back in. They have to go back to work to get the next paycheck.
- This cycles endlessly, even as their paychecks increase with raises - this is the Rat Race. Money ends up running their lives. They get stuck in jobs they dislike for the sake of money.
Lesson 1: The Rich Don’t Work For Money - Money Works for Them
The rich don’t get rich merely by being paid higher salaries (though this is a great help). They get rich by owning things that make them more money.
Wealthy people use their Income to buy Assets that return more Income. Meanwhile, they minimize their spending on Expenses and buying Liabilities, to have more money to buy more Assets.
People who don’t become rich either spend all their income on expenses, or buy liabilities that increase their expenses but don’t add income.
The key to financial independence is having money that makes more money. You want your money to make enough money that you don’t have to work anymore.
Lesson 2: Buy Assets, Not Liabilities
The key is to buy things that generate income (assets). You do NOT want to buy things that lose money over time or incur large expenses (liabilities).
This is obvious enough. But the most deceptive investments look like assets, but are actually liabilities.
- Example: buying a house as your primary investment. This viewpoint is problematic because it gets people to buy more house than they really need. A more costly house vacuums up money with high monthly expenses - money that could have been put more profitably elsewhere.
Real assets are businesses that don’t require your active management; stocks, bonds, and other securities; income-generating real estate; and intellectual property generating royalties.
Think about each dollar as your employee that works 24 hours a day tirelessly to make you more money.
The tradeoff between today’s expenses and future income should be clear. Every dollar you spend today is a dollar that does not work for you again, in perpetuity.
Lesson 3: Reduce Taxes through Corporations
Kiyosaki advises that people set up corporations to deduct expenses without paying taxes. (Shortform note: This is a controversial suggestion because it can easily go wrong if you don’t follow tax guidelines.)
The major thing worth noting here is that corporations let you deduct legitimate business expenses pre-tax, instead of paying from post-tax dollars.
Lesson 4: Overcome Your Mental Obstacles
Even if you have Rich Dad goals, you still need to execute your plan. Several common mental obstacles get in the way. We’ll address each one:
Self-doubt
- In the real world, more than just intelligence and grades is required. Guts, chutzpah, balls, daring, tenacity, grit are different names for the factor that plays a huge role in success.
- When you recognize a great opportunity, you must have the courage to chase it.
Fear
- Fear of losing makes you play it safe and avoid opportunities that can have huge upsides and relatively low downsides.
- Remember that failure will only make you stronger and smarter. Use your failure to inspire yourself to become a winner. Use this thinking to lower the perceived cost of failing.
- Fear of ostracism prevents people from having nonconsensus opinions. As it relates to finance, it’s in 1) not bucking the consensus traditional way of handling your career and money, 2) keeping up with the Joneses and matching their irresponsible spending. Focus on yourself and your personal goals, regardless of what other people think.
Laziness
- Counterintuitively, busy people are often the most lazy. They stay busy as a way of avoiding something they don’t want to face.
- Consider someone who’s moving all the time and brushes off investment opportunities as, “I’m working hard enough as it is, and my boss wants me to do more work. I don’t have the time.”
Guilt for Feeling Greedy
- Condemning greed might be a trained defense, learned helplessness. “I don’t know how to become rich. So I’m just going to try to believe being rich is bad, and there’s valor in not wanting to be rich. Even though secretly I would love to be rich.” It’s easy to imagine parents feeling this, then teaching it to their kids.
- Instead, embrace your greed. Money is empowering, and you have the right to design the future life that will make you happiest.
Arrogance
- When you’re ignorant in a subject, recognize this, then educate yourself.
- Intelligent people welcome new ideas, since new ideas add synergy with other ideas.
- Don’t feel a trade is underneath you. Some people have an allergy to learning sales techniques, without realizing that much of the world runs on sales of some sort.
Lesson 5: Develop Financial Intelligence. Keep Learning
Financial intelligence consists of knowledge in accounting, investing, markets, and law.
Financial intelligence allows you to construct creative ways to solve financial problems, vet the ones that are more likely to work, then have the technical ability to execute them.
Knowledge compounds in a scary way. Making yourself 1% better each day will pay off huge returns compared to someone who stays static. And the faster you can iterate your knowledge, the faster the returns compound.