Book of the Week: Rich Dad, Poor Dad

29 Dec 2014

rich_dad_poor_dad I read Rich Dad, Poor Dad by Robert Kiyosaki, because I grew up without the benefit of having two dads. In the future more people will grow up with two dads. The poor dad was educated by school while the rich dad was educated by life. Robert takes advice from his rich dad, but is constantly reminded of how everyone else thinks by his poor dad. One of the stupidest things you can do is spending your time getting good grades in school to get a well paying, stable job. Doing so will only guarantee you’ll be poor for the rest of your life. The books explains why people who do everything they are told while growing up end up poor and educated. The book is divided into six lessons. Lesson #1 The Rich Don’t Work for Money

“If you learn this lesson, you will grow into a wise, wealthy and happy young man. If you don’t, you will spend your life blaming a job, low pay or your boss for your problems. You’ll live life hoping for that big break that will solve all your money problems. Or if you’re the kind of person who has no guts, you just give up every time life pushes you. If you’re that kind of person, you’ll live all your lie paying it safe, doing the right things, saving yourself for some event that never happens. Then, you die a boring old man. You’ll have lots of friends who really like you because you were such a nice hard-working guy. You spent a life playing it safe, doing the right things. But the truth is, you let life push you into submission. Deep down you were terrified of taking risks. You really wanted to win, but the fear of losing was greater than the excitement of winning. Deep inside, you and only you will know you didn’t go for it. You chose to play it safe” - Rich Dad

If you work for money, you end working harder and harder to ultimately give your money to tax collectors. If you have the mentality of a worker, you are dooming yourself to being poor. People trapped in the rat race let fear and desire (greed) govern their thinking. They are afraid of being without money. They are afraid of not having any money for retirement. Once they get their hands on money, they increase their spending. People think if they can acquire the next thing out of their spending reach, they will be happy, but it is not the case. Once they get it, there is something else they want. Fear can also afflict the rich, because they fear losing their money and keep working.

By not getting paid for our work at the store, we were forced to use our imaginations to identify an opportunity to make money. By starting our own business, the comic-book library, we were in control of our own finances, not dependent on an employer. The best part was that our business generated money for us, even when we weren’t physically there. Our money worked for us.

Robert and his friend Mike decided to work for free. Eventually he noticed discarded comic books, which he asked to have on the condition he was not to resell them. Instead he started a library where he charged per hour of usage and enlisted Mike’s sister to mind the library. If he didn’t work for nothing, he might have not been forced to think up a business idea. This was a start. [youtube https://www.youtube.com/watch?v=VVgIX0s1wY8&w;=560&h;=315] I’m reminded a bit of a Stanford class in which the students were given $5 of seed funding to make money. The most successful teams did not even use the $5. If you use your head, you can make money without having any capital. You just need to be creative. We impose artificial limitations on ourselves. Lesson #2 Why Teach Financial Literacy

When we were told to follow set procedures and not deviate from the rules, we could see how this schooling process actually discouraged creativity. We started to understand why our rich dad told us that schools were designed to product good employees instead of employers.

School was designed to train farmers to work in factories. School does not teach important things like financial literacy. People go out into the world without knowing how to take care of their finances. They take out big mortgages on a home and live paycheck to paycheck. Buying a big home to live in is one of the most stupid things you can do. It does however make you middle class and keeps you there. Home as Liability

  1. Most people work all their lives paying for a home they never own, because most people buy a new house every so many years.
  2. Expenses paid for with after-tax dollars.
  3. Property taxes
  4. Houses do not always go up in value.
  5. Opportunity costs since money tied up in house.

Income Statement and Balance Sheet income_statement_balance_sheet The income statement and balance sheet illustrate how the cash flow is different for poor, middle class and wealthy people. The poor person has all their income go to expenses. The middle class person has liabilities, which don’t generate income and put a drain on their income as expenses. The wealthy get their money from assets, which they can use pretax money and be taxed at a lower rate as income. The middle class accumulate liabilities while the wealthy accumulate assets. Lesson #3 Mind Your Own Business

There is a big difference between your profession and your business. Often I ask people, “What is your business?” And they will say, “Oh, I’m a banker.” Then I ask them if they own the bank? And they usually respond. “No, I work there.”

Minding your own business means working on developing things in the asset column of your balance sheet. When money goes to the asset column, it starts working for you. Assets

It is not an asset if you cannot liquidate it quickly. Your car is not an asset, because it depreciates the moment the buy it. Lesson #4 The History of Taxes and the Power of Corporations

The reason the middle class is so heavily taxed is because of the Robin Hood ideal. The real reality is that the rich are not taxed. It’s the middle class who pays for the poor, especially the educated upper-income middle class.

In the beginning there were no taxes. Then the government started taxing to pay for wars. Eventually the government and people got used to taxes. Governments got bigger and taxes went up. Government agencies are incentivized to use their budgets and grow their organizations. Corporations are incentivized to cut costs and increase profit. The incentives make for a bigger and bigger government. You can try to tax the rich, but you only end up taxing the middle class, because the rich can afford to pay people to help them get around taxes. Warren Buffet pays a lower tax rate than his secretary. Section 1031

For example, “1031” is jargon for Section 1031 of the Internal Revenue Code, which allows a seller to delay paying taxes on a piece of real estate that is sold for a capital gain through an exchange for a more expensive piece of real estate.

The rich know how to use the tax law. Section 1031 let’s you trade up a property without paying capital gains on the property. So you can keep doing this to get bigger and better property without paying the tax man. If you avoid paying taxes and taxes on gains, you can become wealthy as the gains compound. If you’re working, your money goes to taxes. Lesson #5 The Rich Invent Money

Most people never win because they’re more afraid of losing. That is why I found school so silly. In school we learn that mistakes are bad, and we are punished for making them. Yet, if you look at the way humans are designed to learn, we learn by making mistakes.

The rich invent money through creative financial instruments like mortgage-backed securities. When the bank doesn’t give them money, they find other ways to get it. Some of these ways involve taking calculated risks. When they pay off, the rich get richer. Lesson #6 Work to Learn - Don’t Work for Money

Being an intellectual, he thought that salespeople were below him

If you ask a someone who has been on both the technical side and the business side, they will tell you that engineers can’t sell. If you want to run a successful business or be successful, you need to know how to sell. People who have never tried to sell before, don’t realize how difficult it is.

Rich dad forbade the words “I can’t afford it.” In my real home, that’s all I heard. Instead, rich dad required his children to say, “How can I afford it?” His reasoning, the words, “I can’t afford it” shut down your brain. It didn’t have to think anymore. “How can I afford it?” opened up the brain. Forced it to think and search for answers.

You’ll never become rich working for someone else. What’s important is learning. Once you begin working only for a paycheck, you have already put yourself in a dead end. Any criticism a person would have of the book, would be to say you can summarize the book as “Invest in stocks and real estate like Robert and you can be rich too!” Purchase Rich Dad, Poor Dad from Amazon.com or check it out at your local library.