Book Review #2: Rich dad, poor dad: Author: Robert Kiyosaki and Sharon Lechter

"What the rich teach their kids about money - that the poor and middle class do not !"

The book 'Rich Dad, Poor Dad', that Mr.Kiyosaki has co-authored with Sharon Lechter, could have been one of those widely read and appreciated books on Financial Literacy and practical suggestions on how one can become rich. There is a need for such books.

If only Mr.Kiyosaki had not decided to embed his book with the Ayn Randian philosophy of 'Makers' vs 'Takers'. By incorporating his political philosophy on a book on Financial Literacy, Mr.Kiyosaki has diverted attention from the core ideas of the book. One can't just read the book without simultaneously thinking about the implicit political viewpoints being discussed in it.

The premise of this book is that for surviving in today's world, we need to be financially literate. Our educational system churns out people who are literate in Sciences, Art, Literature, History etc, but ignores the most important literacy of it all, the financial literacy. In her introduction to the book, Ms.Lechter argues that there is a need for imparting financial literacy in schools and that there is a need for books like these which focuses on the subject. Ms.Lechter, a certified accountant, working with a 'Big 8' firm feels that today's children are not educated on handling money. Like any typical parent she advises her children to 'study hard' so that they can get a 'good job'. To her consternation, her son informs her that most of the rich people like Steve Jobs and Bill Gates dropped out of collage and look where it took them to?

Concerned, Ms.Lechter carries on trying to educate her children on the importance of studying hard, all the while worrying that her kids are not getting the required Financial Literacy badly needed to survive in the future.

She and her husband sets up a meeting with Mr.Kiyosaki and his wife Kim. During discussions Mr.Kiyosaki impresses Ms.Lechter that the difference between wealthy and the others is that the wealthy think differently from others. As an example, when a company downsizes, the middle class people working in the company will feel sad and will protest about downsizing, while the rich people, who invested in the company, will become wealthier as the value of the investments in the company appreciates.

As per Mr.Kiyosaki, this approach of rich people is based on a thorough understanding of laws, concepts and principles of money and wealth.  All these concepts have theoretical and empirical underpinnings and everyone should have access to the concepts so that they can learn to think and act like rich people.

Mr.Kiyosaki argues that while every person will spend most of his life time with a primary objective of earning money and trying to accumulate wealth, most of them attempt to do this ignorant of the laws of wealth and having any kind of financial literacy. The author considers this a gap in the current education system that it does not teach the most important skill and knowledge that any person should possess.

While reading this book, I couldn't help comparing this book with the book 'The Millionaire Next Door' which I had reviewed here. While there are commonalities in the profile of the Rich Dad and of this book and a typical millionaire in TMND (Both have very little formal education, both owns businesses, both dress in working clothes most of the time etc) a significant difference between the two books is that RDPD focuses on CASHFLOW, which is considered as realized income as per TMND and which will be taxed as per the tax laws. The focus of TMND is on unrealized income in the form of value appreciation of the investments.

Back to Rich Dad, Poor Dad. The book is divided into 10 Chapters. The first chapter sets the tone of the book by comparing and contrasting the two dads. The next six chapters expounds on the six lessons that the Rich Dad taught the author. The last three chapters provides some suggestions and guidance on how a normal individual can earn money and become wealthy.

In Chapter 1,  'Rich Dad, Poor Dad', the author sets the tone of this book by comparing and contrasting the two dads. Both the dads were strong and successful. Both earned substantial incomes. However, what fascinates the reader is the contrast between the 'Rich Dad (RD) and the 'Poor Dad (PD)'.

• While PD says 'I work for money', RD says 'I make money work for me'
• While PD says 'Love of money is the root of all evil', RD says 'Lack of money is the root of all evil'
• While PD says 'I can't afford it', RD asks 'How can I afford it?'
• PD is highly educated but financially illeterate. RD dropped out of school at 13, but is highly literate financially
• PD thought that rich should pay more in taxes to take care of the less fortunate. RD maintained that 'taxes reward those who do not produce and punish those who do'
• RD encouraged talking about money and business at dinner table. PD forbade money being discussed over a meal.
• PD says 'When it comes to money, don't take risks'. RD says 'Learn to manage risks'.
• PD believed that home is the persons greatest asset. RD believed that having a home of ones own is a liability
• Both paid their bills on time. PD paid the bills first and RD paid the bills last.
• PD believed in the idea of company or government taking care of a person and her needs. RD believed in financial self reliance.
• PD taught the author how to write and impressive resume so that he can get a good job. RD taught him how to write business and financial plans
• PD always said 'I will never be rich'. RD always referred to himself as rich.
• PD will say 'Money doesn't matter'. RD will say 'Money is power'

The chapter also outlines the two broad themes of the book. One is the need for Financial Literacy. Our education system teaches people everything except the laws and concepts of Finance and Wealth. However an average person spends his lifetime earning and spending money. It is a paradox that the education system doesn't teach a person on something as important as money since money is what  a person is going to spend a lifetime working for.

The other theme is the power of ideas and thoughts. For example, the PD always thought that 'I will never be rich' and that is what he ended up as (not rich). He made statements like 'I can't afford it' and those statements turned into reality. The emphasis of this book is on the power of thoughts and emotions and how one can handle the same to one's benefit.

The author rounds off the first chapter with the poem 'The Road Not Taken' by Robert Frost.

Chapters 2 through 7 discusses 6 money lessons that the RD taught the author. They are,

Lesson #1: Rich don't work for money

Lesson #2: Why teach financial literacy?

Lesson #3: Mind your own business

Lesson #4: History of taxes and the power of corporations

Lesson #5: The rich invent money

Lesson #6: Work to learn - Don't work for money

The final three chapters discusses the practical aspect of putting the above lessons in practice.

The primary focus of chapter 2, 'Rich don't work for money' is the difference in thinking between the rich and the poor when it comes to the idea of money. When thinking about money poor people fall pray to the emotions of fear and greed. They are fearful when they do not have money and when they have money, they are greedy for more. When faced with lack of money, rather than critically analyzing the situation that they are in, the poor people allow their emotions of fear to do the decision making. Due to the fear of not having the money, the poor people jump at the first opportunity of getting a job and getting paid. As per RD, a job is a short-term solution to a long-term problem.

Even rich people are not exempt from the above phenomena. The fear of losing all they have and going bankrupt motivates many rich people to work harder at accumulating more and more wealth. According to the Rich Dad, the rich people who allow fear to influence their behaviour is no different from an unemployed person standing in line to get that job.

Rich people think differently. They are also not immune to the emotion of fear. However, faced with a situation which induces fear, rich people ask the question 'What is the best way in which I can overcome this situation?'. A question put like that acts as a catalyst on the creative part of the brain and the brain will provide multiple options to handle that situation.

This chapter says that rather than working for money, we should make money work for us. The chapter is vague on how one can go about doing that and is left to the later chapters to elaborate. This chapter lays out the philosophical underpinnings for the remaining chapters. The chapter is filled with pearls of wisdom. RD points out that many a time life puts you through tests. That is life's way of teaching you lessons. Those who fail to recognize that life is doing the pushing will end up blaming themselves or blaming others for their misfortunes.

Having made the point that fear and greed makes people take wrong decisions in life, the natural question is how can you overcome the ill effects of these emotions. The answer to that is to gain knowledge. One need to learn how money works so as to realize how one can make money work for them. This is where Financial Literacy comes in. The best way to know about something is to learn about it. So is the case with money. The best way to understand money is to learn more about it. And that is what this book is about. It attempts to teach you how money flows in and out of your life and how you can change your attitude and approach to money so that it remains with you.

Chapter 3 is on Teaching Financial Literacy. This chapter outlines financial ideas that form core of this book. The chapter starts with a powerful story about 12 business leaders meeting in a hotel in 1923. 20 years later, most of those rich, powerful business leaders died broke and bankrupt. That story tells you about the importance of having financial literacy. Even though rich, many of the business leaders were not financially literate. 

So what is this financial literacy? Is there some simple but powerful rule that we can learn. As it happens, there is a simple rule. The rule is 'Know the difference between assets and liabilities and accumulate assets'.

As rules go this is very simple to understand but very difficult to implement. The key challenge is in understanding the difference between Assets and Liability. 

Many of us think of our house as an asset. But does a house, on which you are paying mortgage, count as an asset? 

As per the definition given in this book, Asset is something which gives you ongoing positive cash flows (Cash Inflows). Based on this definition, house does not count as an asset. Instead of giving Cash flows, a home is a net cash user. You have cash outflows in the form of Mortgage payment, property tax, maintenance charges etc. 

The biggest problem with taking a mortgage loan and keeping on the annuity payments is the opportunity loss that it entails. Annuity locks in significant amount of money that could have been used to buy assets that could provide cash flow in future. As I have written in another post in this blog, it makes a lot of sense to stay in the rented apartment and use the savings to accumulate assets.  

This chapter also shows through simple illustrations, the difference in the Cashflow habits of Rich people and middle class. Middle Class people has their job as their only source of income and pay off their liabilities first and then their expenses leaving them with minimal amount to buy assets. Rich people on the other hand buy assets first and use the cash flow provided by the assets to pay off the liabilities and spend on the expenses.

Chapter 4, Mind your own business, is a short and crisp chapter. The author points out that what you do may not be your business unless it is working in the asset column of your personal balance sheet. If your income is from your job and you do not have any assets, you are not minding your own business, you are minding someone else's business. Mr.Kiyosaki urges everyone to focus on building their asset column. He suggests multiple ways to do that including Starting your own company, buying stocks and bonds, IOUs, Real Estate etc. Only caveat is that you should enjoy doing that and once you put in money into your asset pool, you should not take it out under any circumstances.

Chapter 5, with a lengthy name The history of taxes and the power of corporations, makes the point that taxes are the biggest expenses for a middle class person. At 30% tax rate, it is like a common man is working for almost 4 months for the government, for free. The taxes of ordinary working people are taxed at source which means that only post tax earnings reach their hand. For them, the cycle of cash flow is Earning --> Taxes --> Spending. The rich works around the above problem through the use of personal corporations. The tax laws provide a lot of options for accounting for personal corporations. In case of corporations, Revenue net of expenses is taxed, which mean that the cycle of cash flow is Earning ---> Expenses --> Taxes, which can make a big difference to the overall cash flow position of an individual.

Mr.Kiyosaki talks of building Financial IQ which consist of knowledge of accounting, investing, market knowledge and law. Knowledge in these four areas is necessary for an individual if he or she is planning to become seriously rich !!

Chapter 6, The rich invent money, talks about how rich make money. They put together deals thereby appreciating the value of their investments sometimes exponentially. What do they need to do that? They need Financial literacy. Mr.Kiyosaki, convincingly explains that as the times and technology changes, only the knowledgeable people will stand to benefit. He gives one or two personal examples of how he converted 20000 Dollars into 1.2 million dollars through various legal deals. He emphasizes that he was able to do that only because he knew the law. As per Mr.Kiyosaki, there are two types of investors. One type put money into stocks and bonds and buys the same from the market. This is simple and quick way to build assets. The other type creates deals. They assemble various asset components and sells it to investors. To do this they require three main skills.

1. How to find opportunities that are financially lucrative
2. How to raise money
3. How to organize smart people

While reading this chapter, I realize that I am an investor of Type 1 above. I simply buy and keep stocks. I am not into bonds much. To illustrate the point about rich inventing money, Kiyosaki talks about how he made 40000 in about 5 hours through a real estate deal. While reading it, I was reminded of the story of my friend Sunder who did a similar deal. Here is the post.

Chapter 7 rounds off the set of lessons by asking everyone to Work to learn - Don't work to earn Mr.Kiyosaki postulates that most of the people are 'one skill away from great wealth'. Which means that most people can expand her wealth simply by learning new skills. Most of the people continue work in specialized area and end up limiting their wealth potential. As against being a specialist, the author recommends that we should try to learn 'a little about a lot'. By sating our need for learning different things, we are expanding our metier and that can help us increase our wealth.

If Financial Literacy is required for wealth creation, why are many financially literate people not successful? As per the book, there are four reasons why many financially literate people are not wealthy.

Reason 1 is Fear: They are afraid of failure and hence they do not take any risks. They keep avoiding what they fear do not move towards what they want in life. Fear clouds analysis. Many fearful people lose confidence in their knowledge and take decisions based on what they 'hear' outside.

Reading this I remembered another book that I had read named 'Five secrets you must learn before you die'. One of the secrets is 'Be true to yourself'. That book also make the same point that most people spend their entire lifetime running away from what they fear and not running towards what they want. When it comes to the above point about investments, this post and this post in my blog is an illustration.

In search for job security and job with government, many of us in India fall into the same trap of letting Fear overcome sensible decisions.

Reason 2 is Cynicism, which essentially displays as self doubt. Cynicism also clouds analysis. It is important to analyse any decisions that you make based on available data. Most people do not take good decisions because they do not take time to do thorough analysis.

Reason 3 is Laziness which includes both physical laziness and intellectual laziness. In my opinion, the second type of laziness is criminal. If you have the knowledge and intellect to do thorough analysis, why not put in the required hard work? Why become Mycroft Holmes when you can become Sherlock?

Reason 4, Bad Habits, is coupled with intellectual laziness. One bad habit that impact wealth creation is paying everyone else first before paying yourself. Rich people have developed a habit of 'Paying themselves first'. One could say that laziness is also a bad habit. Another bad habit is lack of decisiveness. When it comes to making investment decisions many of us vacillate and prevaricate.

Finally, is there something in this book that I do not agree with? Is there something that I did not like? Are there some scope for improvement?

I can think of three.

One, as I mentioned at the beginning of this review, this excellent book has been clouded a bit by author's political and philosophical view point about 'Rich' vs 'Poor', 'Makers Vs Takers' and 'Haves' Vs 'Havenots'. Considering that there are a number of rich people who do not share this contentious viewpoint and that this was not relevant to the main content of this book, Mr.Kiyosaki should have avoided this topic. And the world of Financial Literacy and literature would have been better for it.

Two, the authors focus is on Cash Flow. The book repeatedly exhorts the reader to buy assets that will provide positive cash flow. However as the authors of the book 'The millionaire next door' point out (My review), positive cashflow will fall into the category of 'Realized Income' and will be taxed at the prevailing tax rate. May be in an ideal world without taxes, positive cashflow may be an goal worth aspiring for, but in the mundane world of taxes, a cash flow will be taxed thereby lowering the return for the investor. It may be better for the investor to have an asset that appreciates in value rather than an asset that gives Cash Flow over a regular period.

Three, in some parts of the book, Mr.Kiyosaki points about how the rich people use the power of corporations to boost their wealth. He seem to imply that many of the day today expenses can be passed on as business expenses ('For example, by owning your corporation, Vacations are Board Meetings in Hawai'). One must be very careful of such advises least one falls on the wrong side of the Tax Authorities.

Have you ever experienced travelling in a train? It starts off slow from a station, picks up speed midway through the journey and again slows down as it approaches the next station. That is what reading this book feels like. It starts off by criticizing the current education system and lack of financial literacy, picks up steam with some wonderful chapters on purchasing assets and generating cash flow and meanders into generalities as it goes back to becoming philosophical and advisory.

But I also know that Mr.Kiyosaki filled some of the gaps in his next book 'Cash Flow Quadrant' which I will review some time soon. (Check out my review here)