How to become financially independent; perhaps even how to become rich?
This is the subject of Robert Kiyosaki’s book Rich Dad, Poor Dad, which has sold more than 25 million copies worldwide.
In his book, Robert Kiyosaki shares what separates the financially wealthy from people who are poor by trying to offer you some concrete techniques to become a member of the former category rather than the latter.
If this seems too good to be true, judge for yourself with this illustrated summary of the book’s concept.
Rich Dad, Poor Dad is the story of two fathers, one who has an array of diplomas, and the other who dropped out of high school.
When the overqualified Dad dies, he will leave almost no inheritance behind, and even a few unpaid bills.
The under qualified Dad will become one of the richest men in Hawaii and will pass on a veritable empire to his son.
Throughout his life, the former will say things like “I can’t afford to buy myself this or that”, and the other Dad will say: “How can I buy myself that?”
In this book, the rich Dad will teach two little boys some priceless lessons about money through their own experience.
The most important one is undoubtedly understanding how to use their mind and their time to create their own wealth.
One note: the terms “poor” and “rich” are used by Robert Kiyosaki to explain which type of behaviour is preferable in order to become financially independent.
It is not a judgement on the current state of your finances and your wealth.
Thanks to the 6 lessons drawn from this book, get out of the Rat Race: learn to seize opportunities, find solutions, take care of your own business and above all, make money work for you instead of being its slave.
Lesson number one: The rich don’t work for money
At the age of nine, Robert Kiyosaki and his best friend Mike asked Mike’s father, aka Rich Dad, to teach them how to make money.
After 3 weeks working as a cleaner at one of Mike’s Dad’s many shops for a miserable pittance of 10 cents per week, Kiyosaki couldn’t take any more and handed in his notice. That was when the rich dad gave him his first lesson about money.
Some people leave their job because they are not being paid enough. Others see an opportunity to learn something new.
Then Rich Dad asked the young boys to work for him for free. B acting this way, he forced them to picture a way to create their own source of revenue, independent from working for him.
Inspiration struck they noticed certain comic books left in the store. They collected them and opened a lending library for their classmates. And they asked for an entrance fee: 10 cents for two hours reading.
They paid Mike’s sister 1 dollar per week to manage the business.
Soon they were making $9.50 per week without having to worry about managing the library themselves. Their first business came into being.
So lesson number one is: work to learn.
Lesson number two: Why teach financial literacy?
The gap is currently widening between those who are rich and those who are least well-off. This is no accident. The way that the educational system is currently built does not allow the gap to be reduced. Its primary goal is to teach you how to enter the working world as it already exists. In other words, to teach you how to become very good employees and not very good employers. That makes all the difference.
As it currently stands, the educational system does not teach the basics of how to manage personal finances. This has allowed wealthy people to build their wealth. It is up to you to teach yourself. You can then use that knowledge to acquire the assets that will allow you to manage your own income. The problem is not how much you earn, but how much you can save.
The first step to getting out of the “rat race” is to understand the difference between an asset and a liability.
An asset is a security or a contract that allows its owner to generate income. In contrast, a liability generates expenses.
Some examples of assets are: property, shares, bonds and intellectual property, etc. Some examples of liabilities are: loans, consumer credit, credit cards, etc.
Poor people manage their money on a day-to-day basis. People who belong to the middle classes buy liabilities, but think that they are acquiring assets. Rich people and soon-to-be rich people build a solid base of assets that create revenue for them.
The middle classes are in a constant state of financial struggle. Their salary is their primary source of revenue. Salary increases generally go hand in hand with tax increases. Their expenses increase at the same rate as their salaries. This is where the expression “rat race” comes from – a frantic race to consume and pay back several loans that you have taken out in order to consume.
Finally, they consider their home to be their most important asset instead of investing in assets that will generate revenue for them. No, your main residence is not an asset.
Rich people stay rich and get richer by constantly acquiring assets. Their investments generate income that far exceeds the pace of their expenses.
Here is why your main residence is not an asset:
- You will work your entire life to pay back your mortgage.
- Your maintenance costs are significant.
- You have to pay property tax.
- Your main residence may be worth less if the housing market crashes or if you buy when prices are high.
- Rather than investing in an asset that brings in money regularly, you make monthly repayments to the bank. In other words, the real owner of your home is the bank.
If you genuinely want to acquire your main residence, you first need to generate income that allows you to finance your monthly payments.
Here are some examples of genuine assets:
- Rent out an apartment. The rent paid by your tenant allows you to pay back the loan you took out to acquire the property.
- A business that does not require your presence, but in which you are the main shareholder.
To summarise, the main steps towards getting out of the rat race are:
- Understanding the difference between an asset and a liability.
- Focussing your efforts on buying an asset that generates regular income.
- Keeping your debts and your expenses to a minimum
- Look after your own business.
Lesson number three: Mind your own business
We now come to lesson number 3, which is to mind your own business.
Kiyosaki began his professional career selling Xerox photocopiers. With the money he made, he invested in property.
In the space of just 3 years, the income generated by his investments in property exceeded his salary.
He then decided to leave his job to manage his own business full time. He knew that it was the only solution to get out of the rat race.
So, don’t spend all your income.
Build a portfolio of diversified assets that you will spend later when those assets start to bring in enough money.
Lesson number four: The history of taxes and the power of corporations
Income tax was invented in England in 1874. It was introduced to the United States in 1913.
Initially, the plan was to have rich people contribute to economic growth and the nation’s development. Later on, it was extended to the middle classes and the poor.
But rich people have a secret weapon to protect themselves from paying a lot of taxes. It is quite simply their business. The business offers them a number of advantages in terms of taxation.
Here is the mechanism that rich people use to minimise taxes:
Company employees:
- Earn money
- Pay their taxes
- Spend their money
Company owners:
- Earn money
- Spend their money
- Pay their taxes.
This is possible simply because all the charges that a company pays are deducted from its tax bill.
For example, if you earn €10,000 as an employee, you might pay around 20% tax on that. You will have €8,000 left.
If your company earns €10,000, you will first of all deduct all the charges that it has to pay from that €10,000, and you then pay taxes only on what is left.
Obviously, this should be done properly and the laws vary from country to country. So, check with your accountant. You cannot buy everything with your company, but there are quite a few things that can fall under expenses.
Kiyosaki then invites readers to take the main components of what he calls Financial IQ into consideration.
1. Accounting
You don’t have a choice.
If you want to invest in the stock exchange, you will need to have some idea about accounting to be able to read the annual reports of the companies you want to invest in.
The same applies if you want to create your own business.
I am going into a personal digression now. I do not agree with Kiyosaki on this point. And I believe that accounting can be outsourced to specialist service providers – accountants. You can invest in the stock market without reading annual company reports by investing in trackers.
2. The investment strategy
Experience helps to hone this faculty.
Talk to investors and watch how they behave.
Attend seminars on the subject.
3. Market law
Master the law of supply and demand.
No business owner can succeed without minimum knowledge of this subject.
Know how to understand the needs of your customers.
4. Law
You need a little bit of legal knowledge to grow your business within the limits of the law.
Take classes on this subject if necessary.
Lesson number five: The rich invent money
Self-confidence and a high financial IQ will be your best allies in your quest for financial freedom.
Of course, you will need to save money every month before you can invest. But this is not enough on its own.
Let’s take an example. At the start of 1990, the economy of Phoenix was at a low point. Houses bought for $100,000 sold for $75,000.
Kiyosaki went along to public auctions of foreclosed houses and he acquired the same type of house for $20,000.
He then sold it for $60,000 and made a fairly handsome profit.
After 6 months spent acting this way, he made a total net profit of $190,000 for 30 hours of actual work.
Rich Dad explains that there are two types of investor:
1. Those who buy investment packages
This is the case when you entrust your money to a real estate promoter or a fund manager. It is a clear and simple way of investing your money.
2. The professional investor
This is the case when you take care of your own investments. You seize opportunities when they come your way.
This is the kind of behaviour that Rich Dad encourages. To do this, you have to work on 3 types of attitude:
- Know how to identify an opportunity that no-one else sees.
- Be capable of raising money.
- Know how to work with intelligent people.
To identify an opportunity that no-one else sees, you have to learn how to identify what really makes the added value of a business.
Do you really believe that McDonald’s is all about hamburgers?
In reality, the core business of the fast food chain is property and the search for strategic locations in the up-and-coming areas of every city in the world.
There is one last thing that you have to master to invest successfully. You have to accept risk.
You have to control your emotions and not care about any eventual failures that come your way.
Your capacity to bounce back will make your success, not your desire to succeed right away.
Lesson number six: Work to learn. Don’t work for money.
Become an expert in marketing, management and communication.
Schools train professionals who go on to become so specialised in a particular field that they don’t know how to get along in any other. They then have to unionise to protect their work.
Specialisation is not necessarily the optic we are seeking. It is more important to have some knowledge of the key concept of each field to master the 20% that offers 80% of the added value of your future business.
This is the kind of teaching that Rich Dad passed on to Robert and Mike.
Mike went on to take over the empire that his father left him. Meanwhile, Robert created his own in real estate, launching new products and educational programmes.
I hope you enjoyed this summary, that it has motivated you and given you some concrete ideas to become financially independent.