Today, the most dangerous advice you can give a child is “Go to school, get good grades and look for a safe secure job.” That is old advice, and it is bad advice because if you want your child to have a financially secure future, they can’t play by the old set of rules. It’s just too risky, says Robert Kiyosaki in his iconic masterpiece, Rich Dad, Poor Dad.
I read this book many years ago and I was struck then by the simplicity and the transformational truth of its message. Those words are more true today, than when Mr. Kiyosaki penned them in 1997. In Rich Dad, Poor Dad, Mr. Kiyosaki outlines six principles for creating wealth. They are:
Principle #1 – The Rich Don’t Work for Money
The poor and the middle class work for money. The rich have money work for them. To live life dictated by the size of a paycheck is not really living. Quit clinging to the illusion of job security. In order to become financially free requires taking calculated risks.
Principle #2 – Know the difference between an asset and a liability, and buy assets
Rich people acquire income producing assets. The poor and the middle class acquire liabilities, but they think they are assets.
This is the Cash Flow Pattern of an Asset
The top two boxes represent an Income Statement, identifying money coming in and going out. The bottom diagram is the Balance Sheet showing a person’s assets and liabilities. An income producing asset generates a source of income separate from your salary. The rich have their assets working for them.
This is the Cash Flow Pattern of the Middle Class
The poor and the middle class buy liabilities, which do not generate income and take money to maintain. Liabilities are mortgages, consumer loans and credit card debt.
This is the Cash Flow Pattern of the Rich
Over time, the rich build their asset base. Their liabilities become smaller. Income from their assets increases to the point where it exceeds their expenses. The excess cash flow is used to invest in more income producing assets. And when the income generated from the asset column exceeds their personal expenses, it is at that point that the wealthy can retire.
Principle #3 – Build and Keep Your Asset Base Strong
To become financially secure focus on your asset column instead of your income column. Keep your daytime job, but start buying real assets, not liabilities or personal assets that have no real value once you get them home. What type of assets should you acquire?
- Businesses that do not require your presence. You own them, but they are managed or run by other people.
- Income generating real estate
- Notes (IOUs)
- Royalties from intellectual property such as patents, books, etc.
- And anything else that has value, produces income or appreciates and has a ready market.
Principle #4 – Know the Power of Corporations
An individual with the knowledge of the tax advantages and protection provided by a corporation can get rich so much faster than someone who is an employee or a small-business sole proprietor. There are two primary advantages of a corporation:
- Tax Advantages – A corporation earns, spends everything it can and then is taxed on anything that is left. Employees earn and get taxed and they try to live on what’s left.
- Protection from Lawsuits
Corporations and trusts protect a person’s assets from creditors. They control everything, but own nothing.
Principle #5 – The Rich Have Financial Intelligence
We all have tremendous potential and are blessed with gifts. What holds us back is self-doubt. It is not so much the lack of technical information that holds us back, but more the lack of self-confidence. To become rich requires both financial intelligence as well as courage.
Financial intelligence is made up of four main technical skills
- Financial literacy – the ability to read numbers
- Investment strategies – the science of money making money
- The market – supply and demand
- The law – the awareness of accounting, corporate, state and national rules and regulations
The rich have financial intelligence. They find an opportunity that everyone else has missed. They learn how to raise capital other than from lending institutions. They associate with smart people. They work with or hire people more intelligent than themselves. And they choose wise advisers to counsel them.
Principle #6 – Work to Learn, Don’t Work for Money
The world is filled with smart, talented, and educated people. Talent is not enough. They are one skill away from great wealth. If they mastered one more skill their income would jump exponentially. Take a long term view of your life and learn new skills.
The main management skills needed for success are:
- The management of cash flow
- The management of your time
- The management of people
The most important specialized skills are sales and understanding of marketing. It is the ability to sell that is basic to personal success.
This is my summary of Mr. Kiyosaki’s masterpiece Rich Dad, Poor Dad. Such simple principles of how to become financially successful. And yet so profound. The pure genius of the book does not come from the principles taught. Those principles were well known long before the book was written. No, the genius of the book came from the clarity of the author to state these truths in such a way that all of us could understand their importance.
Those are my thoughts. I welcome yours. What is your opinion about Rich Dad, Poor Dad?
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Source: Rich Dad, Poor Dad: What the Rich Tell Their Children About Money That the Poor and the Middle Class Do Not by Robert Kiyosaki, 1997