I have mixed feelings about this book. It’s not particularly well-written, yet it exposes some uncomfortable truth with regards to financial literacy.
Here is my summary note of each chapter.
The main purpose of this book is to advocate for financial literacy and warn against the never ending “rat-race” that most employees inevitably get stuck in. Once a person invests in a home, a vehicle, and choose to start a family, the race is on, and the monthly expenses preclude any chance of saving up any money.
The mindset of a poor person is to study hard in school, get into a good company for a safe, and stable income, then accumulate enough to afford a mortgage, a vehicle, and eventually a family. However, the problem is that a home shouldn’t be considered an asset, and that a stable income will never be sufficient for the numerous expenses that is required to get through life; especially housing and child expense. Mortgage payments hinder any attempt to save money, and government taxes are absurdly unfair – more than 30%-40% of what you earn will go towards the government. The result of this is inadequate pension plan and a person outliving his/her money.
On the other hand, the rich person mindset is to invest earning, take risks in starting businesses, and take advantage of the numerous tax benefits that is available for business owners and investors. As we will explain in more detail, the goal of a rich person is to accumulate enough asset to generate passive income greater than that of his/her expenses. When this occurs, the person can safely retire without any financial woes.
The first chapter of the book is an introduction of the author’s childhood and his two father figures; one stressed the importance of studying and getting good grades to move up the corporate ladder, while the other stressed the importance of financial literacy and starting your own business. Kiyosaki considers the merit for both sides but ended up following the path of the rich dad.
Chapter 2 repeats many aspects already discussed previously; however, it does bring up some new and interesting points.
“Intelligence solves problems and produces money. Money without financial intelligence is money gone soon.”
Without proper management and financial literacy, a sudden windfall of money would not last long. The book introduced the mindset and balance sheet of poor/middle-class vs. rich people. The difference is as follows.
The book outlines a common path to financial nightmare that most young couples fall into after graduation. The names change, but the stories stay the same.
A hardworking, educated young couple graduate from college, receive stable employment from a well-established company, and share a cramped rented apartment close to where they work. Soon enough, the apartment becomes too cramped, so the couple starts saving up so that they can save up for a home, and maybe have children. As soon as they purchase their first house, they’ve entered the rat race. Pretty soon, a baby comes along, and expense skyrockets with mortgage payments, property taxes, tuition for their kids, insurance, and etc. So, they work harder just to keep their heads above water with the monthly expenses. Throughout this entire process, they are getting taxed at every opportunity. The result is this never-ending rat race to maintain income, to acquire promotion that inevitably disappoints, and to hope the government can take care of them when they are older – a grim prospect for most despite paying the government 30% of their life’s earning.
The problem is that working hard just isn’t enough. As a home owner, your income is swallowed up by three different parties before some – if any – ends up in your hand.
You work for the company, which provides you with a stable income. All your sweat and tears doesn’t make you any richer. All your efforts and successes just helps provide for the owner’s success and retirement
After receiving income, you work for the government in the form of taxes. The government takes about 1/3 of your paycheck. Most people work from January to May just for the government in the form of taxes
From your after-tax income, you now work for the bank to pay off mortgage and credit-card debt. The bank often pays infinitesimal interest while charging astronomical interest. If one does not have any financial awareness, they’ll be sucked dry by the bank.
This chapter begins with an interesting allegory of Macdonald’s founder Ray Krocs as he speaks with some MBA students.
Many may think Macdonald’s is a fast-food hamburger business; however, it is a real-estate business. Although they make mediocre hamburgers, each franchise occupies some of the most expensive and sought-after piece of real estate in the world. The same applies to KFC, Burger King, 7-Eleven, and mattress stores.
The main take-away is to ask yourself what business you are in. To achieve financial freedom, it would be prudent to mind your own business, instead of minding the business of others.
Alternatively, keep your day job and try to purchase assets that put money into your pockets. Keep expenses low, reduce liability, and build a significant asset column before they leave home to get married, buy a house, and have kids.
Lastly, the author offers the proper mindset moving forward.
“Once a dollar goes into [your assets column], never let it come out. Think of it this way: Once a dollar goes into your asset column, it becomes your employee. The best thing about money is that it works 24 hours a day and can work for generations”
The main purpose of chapter 4 is to introduce a brief history of taxes and shed some light on the absurd about of taxes we pay as employees.
At the genesis of America, most Americans were anti-tax. Of course, it had been the tax on tea that led to the Tea Party which ultimately sparked the revolutionary war. But during war times, it became necessary to tax the citizens to ensure victory in the conflict. At its very core, taxes are used to take from the rich, and transfer this fund to the government who can help alleviate poverty, reduce gap between poor and the rich, and provide essential services to the people. But this morphed into something more insidious as governments grew appetite. The rich used numerous loopholes to avoid paying taxes, which shifted the tax burdens to the middle class.
“The rich will never be taxed. More and more often we see governments use the tax laws to provide incentives to business owners and investors to create jobs and housing. These incentives reduce the taxes of the rich. So the only place for the government to drive tax revenue is from the middle class”
When governments and political candidates call for increased taxes for the rich, the wealthy and financially smart people have an infinite number of tools at their disposal to outsmart the system. Like it or not, they do not play but the same set of rules. They can take advantage of tax loopholes, tread grey areas of the law, take advantage of the raft of government incentives for business owners, or move their company headquarter to tax haven like the Bahamas or Ireland.
One of the way rich people pay less taxes is through Corporations, which is simply a legal document that creates a legal body without a soul. Through corporations, one can take advantage of many tax credits and incentives. For instance, business owners can leverage their mortgage interest payment as tax deduction or spend pre-tax incomes on things they spend for their business; such as writing off vehicle miles.
To be rich, one must have adequate financial literacy, which can be divided into 4 components:
Accounting – Number crunching
Investing – Having the right mindset and creativity to get ROI on investment portfolio
Understanding Market – Before investing on something, you should get a basic understanding of the market
Legal – Tax advantages, and protection from lawsuits
“Often in the real world, it’s not the smart who get ahead, but the bold”
To be rich, you must have intelligence and knowledge. Most importantly, you must have courage to pursue your ideas. Perhaps what stifles many people who excel academically is their inability to accept these failures. Much wealth can be made, but only once an individual can accept that “work hard, save, borrow” isn’t the only financial option they have.
“Sometimes you win and sometimes you learn. But have fun. 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 humans are designed to learn by making mistakes”
The correct mindset with regards to investment is that there is no “right time”. Being an investor is a way of life. Many argue that there are no good real estate investment opportunities at a specified time or location. The truth is that opportunities are everywhere, many people just aren’t financially smart enough to notice them.
As a side note, many people view the real estate market as a speculative investment, where you buy low and sell high. However, this is not what real estate is about. Although the most extravagant gains come from passive appreciation of the market, another majority of the earning from real estate come from principal recapturing. When your tenants pay off your mortgage, that money doesn’t just disappear. The key to investment then, is to accumulate as much real estate as possible, and have multiple streams of cashflow paying off multiple mortgages.
Another considerable advice is that many people are not held back by their lack of technical knowledge; rather, they are held back by their lack of confidence. You will never have enough knowledge, and you will never be fully prepared. The smart thing to do is to just start. As Marie Forleo once said:
“The key to success is starting before you are ready”
The central theme of this chapter is to urge people the importance of learning. We should work to learn, not work to earn. It is not the authors intent to appear anti-intellectual. His main viewpoint is that our education system is archaic and does a poor job preparing students for the real world.
To be successful and financially well-off, the author recommends student to learn a little about a lot, instead of a lot about little. One should be careful when choosing to specialize. If you do decide to become highly specialize in something, make sure that something is unionized, or have skills that are easily transferable to other industries.
There is a horrible management theory that goes:
“Workers work hard enough to not be fired, and owners pay just enough so that workers won’t quit.”
The chance of people outliving their money is very real. Many retirees live on less than $10k a year, and many more do have enough money saved up in the first place. The danger is even more pronounced for millennials. As many millennials are choosing to rent rather than buy, there is a good chance that many will come to an age where they own nothing, not even their own home.
This short chapter deals with the many shortcomings people have when it comes to being financially well-off. The information is well organized and comes down to 5 points:
The chapter proceeds to provide actionable tips or mindset to curb these obstacles. The first of which is overcoming fear.
“No one likes losing money, the only people who have never lost money investing are those who have not done it”
The difference between the rich and the poor is how they manage fear. It is okay to be fearful, but just know that fear will always be present. There will never be a day when you are not afraid any more. In the game of life, too many people play to not lose, rather than playing to win.
Another obstacle is laziness. The prescription for this comes in two parts. First, we must change our mindset from “I can’t do it” to “How can I do it?”. Doing so rewires the brain to come up with solutions rather than giving up. The second step is to be a little bit greedy; to want more and desire a better life. Too much greed is bad, but a little can help spur you on.
If you want to be financially successful, following the steps outline below.
Find your purpose. Why do you want to have financial freedom? Without a reason or purpose, anything in life is hard.
Develop good financial habits and choose to be rich. Many people choose not to be rich simply because it is too much of a hassle for them. Instead, they say things like “Money do not bring happiness.” “I am not interested in money.” “I think about it more when I save up enough to invest.”
Surround yourself with people who have done what you want to achieve. Often times, it is our close relatives who will try to shut us down. “You can’t do that because you will lose a lot of money” translates to “I don’t know how to do it myself, so I don’t think you can either.” Smart people listen to inspiration and warnings, whereas amateurs only listen to warnings.
Learn and master many formulas to achieve financial success. Also, in today’s world, it is incredibly important to learn quickly, rather than learn deeply.
Have the personal discipline to save enough money for investment and not splurge on frivolous things. In addition, if you come up short, don’t be tempted to dip into your savings. Use this opportunity to let the pressure inspire your financial genius
Get advice from experts whose interest, drive, and goals align with yours
Seek investment that has something for free, and try to maximize return on investment
Look for role models. Find out how they became successful and emulate them.
The last chapter offers some additional guidance with getting started. I will simply list them below:
Stop doing what you are doing if you are unhappy. Life is too short to be wasted on something you are not satisfied with. The definition of insanity is doing the same thing and expecting different results
Look for new ideas and learn something new everyday
Find mentors who has done what you want to do
Think big and don’t fret over the small stuff
Action always beats inaction
“Always remember: Profits are made in the buying, not in the selling”
“All of you were given two great gifts: your mind and your time. It is up to you to do what you please with both. With each dollar ill that enters your hand, you, and only you, have the power to determine your destiny. Spend it foolishly, and you choose to be poor. Spend it on liabilities and you join the middle class. Invest it in your mind and learn how to acquire assets, and you will be choosing wealth as your goal and your future. The choice is yours, and only yours, Everyday with every dollar, you decide to be rich, poor, or middle class”