Summary of ‘RICH DAD POOR DAD’ book

The anecdote of financial reality.

Robert Kiyosaki shares his life experience in this book, indicating that all the standards we might believe that are the keys to success (hard working, formal education, PhD etc.), are not the real keys to become rich.

Summary of rich dad poor dad,

Robert’s father was a very successful person, achieving many academic excellences and gaining the number one position in the state of Hawaii’s educational system. However, he left some debts unpaid when he died. On the other hand, Robert’s mentor, who was his best friend’s father, had never finished eighth grade and he managed to become the richest man in the state.

This is surely like an anecdote of financial reality. This is because we are never taught anything about financial skills at school. Even in University “finance” classes only a generic, academic and theoretical knowledge is gained. In order to become rich, it doesn’t matter if you are a graduate with high grades as long as you don’t have financial skills.

This book is all about mindset and focuses on the thoughts we make about money and on actions to which those thoughts lead, which are decisive for becoming rich or not.

The 6 Lessons of Rich Dad, Poor Dad are:

1. The Rich Don’t Work for Money
2. Why Teach Financial Literacy?
3. Mind Your Own Business
4. The History of Taxes and the Power of Corporations
5. The Rich Invent Money
6. Work to Learn – Don’t Work for Money

1. The Rich Don’t Work for Money

Robert early soon in his book states: “The poor and middle class work for money. The rich have money work for them.”

The common thing people in poor and middle class do, is to try get good grades in school for the purpose of getting a safe job in the future with big benefits. This is sure a good plan but you simply won’t be rich. That’s because the course to become rich is very different and most people never take the time to learn it.

The cycle of fear and greed is responsible for that. Fear of being without money makes you work harder and once you get the money, you spend it for greedy desires, increasing your expenses and debts, which leads to fear again.

Most people keen to feel secure with their money so their fear takes the lead and prevents them from their passion to direct them instead. They make the easy choice of working for money instead of investing their time to create assets, which generate money. This is the whole course of study to become rich.

The author also answers to people that say: “I’m not interested in money.” Or “Money isn’t everything.” with this: “If that’s how you feel, why are you working eight hours a day, five days a week for it?”

2. Why Teach Financial Literacy?

Financial literacy isn’t taught in schools, even in finance classes at universities. The one and important thing about financial literacy it to know the difference between an asset and a liability, and buy assets.

Assets are everything that create income and liabilities are everything that create expenses. For example, you might have always thought that your house is an asset. It actually is, but only by the accounting definition. In reality, your house might be one of your biggest liabilities. You have to pay taxes, maintenance costs or even mortgage payments. Your house takes money out of your pockets and makes you miss opportunities to make that money work for you instead. So, from now on acknowledge your house as an expense and if you want a bigger house, you firstly have to create real assets that generate enough cash for that.

Another important fact the author mentions is that most people view wealth in terms of net worth or assets, without calculating their liabilities. Wealth is not net worth; it is the number of days you could survive if you stopped working, starting from today!

People remain poor simply because they don’t devote time and money on buying assets. Almost all the money they make, they spend it on liabilities.

3. Mind your own business

The poor and middle class people usually have a job working for other people. They depend only on that job for their total income and the worst thing is that they spend half of it in taxes and banks. It’s tragic to realize that everyone works five or six months out of the year just to pay taxes (that happens in America, there are many countries that are even worse).

People doing only that will never be rich. Apart from our profession we must have and take care of our business too. Don’t confuse profession with business, the asset column. Of course, this doesn’t mean to quit your traditional job, just don’t lose yourself to it. Earn money from your job but use that money to invest in assets, which don’t require your presence to make more money.

Stock, bonds, mutual funds, rental properties, notes, intellectual property royalties are some examples of assets. When you put money into assets don’t take it out. It will generate more money for you to buy liabilities, providing that it can cover its expense. Never buy a liability without first creating an asset that can cover it.

4. The History of Taxes and the Power of Corporations

Robert delves into the origin of the income tax and the age-old battle between the rich and the poor-middle class people, who desperately want to take money from them. The rich people are not illegal. They just know how to play the game smarter. They legally avoid taxes and the middle class pays almost most of the government’s spending.

One of the most important tool is the “like-kind” exchange under the IRC Code in section 1031. In short, it allows you to defer paying capital gains taxes on the sale of real estate if you use the money of the sale to buy another (presumably more expensive) piece of real estate.

Another important tool is the corporation, which allows you to set up separate assets that generate income. The big advantage of a corporation is that it is taxed after expenses, while an individual is taxed before expenses. If someone does that properly, you can legally write off many expenses (vacations, car expenses, health club memberships, restaurant meals etc.). The reality is this: the poor earn and immediately pay taxes and what’s left they may spend it, while the rich earn, spend/invest in whatever they wish and then they pay taxes.

Robert summarizes the idea of financial literacy in 4 parts:

1. Accounting: The ability to read and understand financial statements.
2. Investing: The science of money making more money.
3. Understanding markets: The science of supply and demand. Find what most people need and provide it to them.
4. Law: Understand taxes and avoid lawsuits.

5. The Rich Invent Money

Wealth was not always of the same type. Three hundred years ago, land was wealth. With the Industrial Revolution, industrialist owned wealth. Nowadays, wealth is nothing but information.

Most people do the one common thing, working hard, saving and borrowing money. Their excuse is usually that they don’t have enough money to take advantage of some opportunities. Some of them can’t even see the opportunities they have. Money and luck are things that are created. The rich know that their mind is their most valuable asset.

There are two different paths between people that are meant to be poor and those who are meant to be rich:

Poor path: Work hard, pay taxes, save anything left over and get taxed on the savings.
Rich path: Take time to develop financial intelligence and harness the power of your brain to create assets.

Three skills are needed to master to create investments:

1. Find an opportunity that everyone else has missed.
2. Find ways to raise money.
3. Learn to organize smart people.

Every investment has its own risks and most of the people are afraid of that. However, if you are informed and understand that investment, it’s not as risky as it would be to someone that is gambling or is simply sitting and praying for his fate to change.

6. Work to Learn – Don’t Work for Money

Robert suggests that young people should “seek work for what they will learn, more than what they will earn”. Learning a little about a lot instead of seeking specialization, is the key to become rich. Specialization is for employment who could provide you with a good job at perfect cases, not to be rich though. Use your job as a tool of practice in order to manage cash flow, systems and people. Develop communication, sales and marketing skills, and combine them with other skills which are often necessary to create wealth.

According to the author, there are some obstacles that prevent people from developing their asset columns.

1. Fear: The fear of losing money. Rich people make money all the time, they are not afraid of losing it. They actually lose money from time to time but they learn how to limit the losses and turn them to opportunities.

2. Cynicism: This obstacle usually comes from fear and doubts. A cynic always sees a dead end in everything. It’s good to have doubts, but that means that you should analyze and try to solve it, not immediately run away in fear. There is always a solution.

3. Laziness: There are times that people avoid their problems and ambitions to become rich, by staying busy. In order to become rich, you should devote time and effort to develop some skills. Staying “busy” on purpose with other matters it’s only an excuse to not admit your laziness. Rich people have a desire that overcomes that.

4. Arrogance: According to the author, arrogance is an ego plus ignorance. Financial education is the simple solution to that.

Final Summary

All poor and middle class people wish to have a better financial life, but few of them realize that almost everything we are taught from our education has nothing to do with developing financial skills. In order to become rich, we must first set up our mindset. Here is a quick revision of the key messages of this book.

1. Don’t work for money; work to create assets. The money you get from your job will never make you rich. Assets will.

2. Learn the difference between an asset and liability. Always buy an asset first, that will generate enough cash for buying a liability later.

3. Mind your own business, prioritize investing money in your asset column. You should always put your money on your asset column before taking care of any other obligatory expenses.

4. Study and understand well accounting, investing and law. This will make you recognize opportunities and methods to build wealth using useful tools, including 1031 exchanges and corporate structures.

5. Invent money. Use your mind to create investments, find opportunities, raising money and organizing people. Don’t buy packaged investments.

6. Pick a job based on what skills will teach and help you develop them, not for the money it pays you. Skills will help you become rich, the money you earn from your job will never have an impact on your path to become successful.

That’s the summary of ‘RICH DAD POOR DAD’ ,for more content like this stay connected with this blog.

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