Robert Kiyosaki first wrote his book ‘Rich Dad Poor Dad’ in 1997 and has since sold over 32 million copies. Despite being written over 20 years ago, it is still extremely relevant. Kiyosaki details a series of financial lessons that were taught to him by his ‘rich dad’ who was his friend’s dad, a successful business man. The book shows two contrasting points of view. His ‘poor dad’, a well educated teacher working for the state government, is described as being caught in the rat race; whereas his ‘rich dad’ is financially free.
The poor and middle class work for money. The rich have money work for them.
The first lesson that Kiyosaki shares with us is how the majority of people are caught in the rat race by working for money. While most would not realise it, everyone is working for the government as well as the company they also work for. How is that? We all pay taxes and social security which is paid directly to the government from our pay to pay for services such as healthcare or the military.
So if you were to put this in perspective many people work 1 or 2 months of the year just for the government, the rest is take home pay. Mind blowing!
However, if you are able to develop forms of income that pay you in passive or less work intensive way, your money will then be working for you. But how do we achieve this amazing reality? Kiyosaki has a surprisingly simple answer…
Rich people acquire assets. The poor and middle class acquire liabilities they think are assets.
‘Rich dad’ explains to Kiyosaki his number 1 rule: you must know the difference between an asset and a liability, and buy assets. This sounds like a ridiculously simple rule to follow, of cause I know the difference between an asset and a liability; I can hear you saying that! But if that were the case why do most people buy liabilities they think are assets?
Buying a house is an excellent example of this mindset. The majority of people will proudly say that owning their own home is the biggest investment they will ever make, and is their biggest asset. While this is indeed a massive achievement, is it really their biggest asset; or their biggest liability? If you think about it, how did you buy your house? Did you buy it outright with cash or like most people go to the bank and take out a mortgage. The your answer is the latter, your house is the biggest liability you have and will not be an asset until it is paid off.
Put simply an asset is something that puts money in your pocket. A liability takes money out of your pocket!
Cash flow tells the story of how a person handles money!
A massive take away from the book is that you need to understand cash flow and how to create a balance sheet. I have realised that I need to manage my personal finances in the same way I would a business. In business cash flow is key, the same must become true in personal finance. It is important to be able to visualise your income and expenses as cash flow.
Since reading Rich Dad Poor Dad I have created a simple sheet detailing monthly income and expenses of which the difference is expressed as cash flow. So if I have more income than expenses I have positive cash flow. Any positive cash flow should be directed towards the acquiring of assets in order to provide more positive cash flow; which in turn can be invested in more assets.
Eventually, if you were to follow this mindset your assets should grow to the point that it forms a large part if not all of your income. This is what I would define as financial freedom – a state where the sum of your assets provides income to cover the sum of all your expenses.
The rich focus on their asset columns while everyone else focuses on their income statements.
You need to mind your own business. I work for a company but this is not my business, my business is writing, investing and teaching first aid. If I don’t mind my business how could I hope my business to provide for me. But in order to mind my own business I need to become financially literate.
School teaches you to be academically literate, but not financially literate. If schools taught financial literacy there would be significantly less poverty and personal debt. You are taught everyday that you need pick your subject and become an expert in it. Kiyosake takes exception to this, and I tend to agree. He believes that it is better to become knowledgeable in a wide range of subjects rathet than an expert in a single subject.
In order to mind your business you need to understand the principles of accounting and taxation. To produce your product you need IT, design or project management skills. If you want to sell your product you need to understand marketing and how to reach your customers. Therefore, you need to develop a wide range of skills to make your business successful.
I have only briefly gone through some of the key concepts that Robert Kiyosaki explains to us in ‘Rich Dad Poor Dad’. I can say that reading his book, it has given me a changed perspective on how I need to manage my money and to progress. I fully recommend that you read this book which can be purchased here. Kiyosaki has produced a book that should be a staple of any reading list.