Rich Dad Poor Dad: The Most Important Takeaway (In my Opinion)
Rich Dad Poor Dad is one of the most influential personal finance books at all times; I remember reading them when I was in my 20s. The story was about a son (Robert Kiyosaki) who had 2 dads: his biological dad (or “poor dad”) and his friend’s dad (aka “rich dad”). Robert wanted to know how to become rich and asked his phD dad so; his dad referred him to his friend’s dad who then employed him to work in his company. To cut the long story short, Robert as a child was fed up working for low wages in Rich dad’s company and complained to him that he hasn’t “taught” him anything about money. Rich dad then responded by saying he doesn’t teach like his poor dad does in a “classroom setting” and lays down a final offer to work for him for free. I could go on and on about the summary but here is the main takeaway I have found to be most useful in helping your personal finances:
You must know the difference between assets and liabilities. Make buying assets a priority and reduce liabilities.
What are assets exactly?
According to Robert Kiyosaki, assets are anything that “puts money in your pocket”. This happens whether you work or not. In short, it is passive income. Some examples of assets include:
- Dividends from stocks
2. Interest from bonds
3. Royalties from music or book sales
4. Residual income from a direct sales/multi-level marketing business
5. Recurring profit from a business that is run by a manager you employed
In contrast, liabilities “take money out of your pocket”. They are expenses which depreciate in value and/or has no positive cash flow in your finances.
Some examples of liabilities include:
- Mortgage loan
- Student loan
- Credit card debt
- Car loan
A common error that the poor and middle class often make is classifying their home and educational loans as “assets” than “liabilities”. For houses, unless you intend to rent it out to profit from your ownership of the home, you need to spend money paying the loan, taxes, insurance and maintenance expenses yearly. For higher education, the traditional argument for studying is that one can find a “better paying job” after one graduates. This may be true; however, finding a higher paying job isn’t guaranteed and it is a form of active income. This means that if you get fired or fall sick, you don’t receive any form of income. Also, due to globalization, one has to compete with overseas graduates from India and China who also believe in finding a “better paying job” and take your job with a lower starting salary.
Another misconception the poor and the middle class has about the rich is that they own big houses, drive nice cars, dine in the most fancy restaurants and own many luxury goods. Robert clarifies that it is not what you make or spend but how much you keep and make your savings work for you and your future generations to come that defines your net worth. It could be very well true that the rich has a lot of assets to generate income to own these expensive liabilities. However, the average man on the street strives to own such items without investing into financial assets first, meaning he is one paycheck from being broke.
If you know the difference between an asset and liability and make an effort to buy assets on a regular basis (while reducing your expenses incurred from your liabilities), you will be on the gradual way to financial freedom. This involves delaying gratification of consumption for a significant period of time before one can reap the fruits of financial freedom. Financial freedom happens when the amount of passive income generated from your assets exceeds your expenses incurred from your liabilities.
When I was in 2013, my first full time job as an admin assistant in a tuition centre didn’t pay me very well. In fact, after deduction of money for pension, I was left with $900 net income every month. Back then, I was 23. I didn’t have any money for luxury items or dating. But with proper budgeting and discipline (and the fact that the cost of living in my country in 2013 was much lower compared to today), I made it a point to invest in the stock market after reaching a threshold of $3,000. Investing for the long term is not get rich quick; one has to be patient in order to see your investments bear fruit. Back then, there was no Bitcoin or NFT to “supercharge” your returns. Fast forward to now in 2022, I have an investment portfolio of more than $100,000 in market value which is not bad considering that the jobs I had were only low-wage ones.
I recommend anyone (especially the younger generation) to read a copy of Rich Dad Poor Dad book if they want to improve their chances of financial freedom. While the book did not have any specific method of acquiring assets, it gives a mental framework of how to manage your finances in a more productive manner.
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