First published around 2000s, Robert Kiyosaki’s Rich Dad Poor Dad quickly became an international best-seller. Translated into 51 languages across more than 109 countries, it has been on the New York Times bestseller list for over six years.
Portrayed through the comparison of his own highly educated, but financially struggling father (Poor Dad), against the financially successful, but less educated father of his best friend (Rich Dad), the book tells the tale of what happens when you do not understand the concepts behind how money works.
Opinions on the book are divided.
Some, like Oprah WInfrey endorsed it. Critics on the other hand often argued that the book was made up of boilerplate “self-help” advise that benefited few people.
While I agree that the book has little to no practical advice, I am of the belief that the book’s value lies in a far different field -> that of waking the average, financially illiterate person up.
The book, while controversial and at points, slightly too cliche in its labelling of people (such as rich, middle class, poor) nevertheless served to open my mind to money and its fundamental role in my life.
Years later, here I am writing about it.
I’ve condensed into four very specific points the fundamental concepts behind why I feel the book is so life-changing.
#1 – Your System Of Making Money Will Determine Your Wealth
This was not from his book Rich Dad but rather his book titled Cash Flow Quadrant. The 2 books pretty much go hand in hand and they teach much of the same things.
The cashflow quadrant reveals which system we currently use to make money and illustrates both its benefits and drawbacks.
They key is to make the jump from the Employees or Self-Employed side of the quadrant, to the Business Owner or Investor side of the quadrant.
This is to make sure that we eventually uncap our earnings potential. People in the employees and self-employed quadrant typically exchange labour or time for money -which is why people are paid in hours and months or based on projects or project milestones.
Naturally, since there is limited time and labour that can be produced in a day, their earnings are limited.
Business owners and Investors don’t exchange time or labor for money. They exchange knowledge, skills, and Other People’s Time (they pay their employees for their time) and Other People’s Money (they use seed funding or investors’ money)for even more money.
And as long as their skills, knowledge and ability to use other people’s time and money is there, their earnings are unlimited.
That’s the reason for trying to make the jump from the Employee or Self-Employed quadrant to the Business Owner or Investor quadrant.
I wish to stress that working within the self-employed and employee quadrant is nothing to be shameful about.
Gainful employment gives us purpose and drive. It socialises us and surrounds our lives with structure and friends, allowing us to form relationships that could last decades.
What you should be focusing on is how your money is made. You can stay within the quadrant you are now, as long as your money works in the Business Owner or Investor quadrant as well.
Robert Kiyosaki also mentions that you should keep your day job, and primarily use your job as a means to educate yourself on the business you want to start or to acquire the skills you want to have.
In other words, work for something beyond the simple salary. While you’re doing that, learn to invest or build a business and make the move from there once you are financially secure.
In my personal view, I don’t ever intend to leave the Employee quadrant.
I intend to work simply because I enjoy my work.
But I have, and will continue to invest 50% of my monthly income into the stock markets.
Over time, I will find my independence. You can find yours too as well as long as you remember the systems by which you are making money.
Homework: There is a concept of time management called time-boxing. You can read more about it here. The idea is to use your time more productively. My suggestion is that you dedicate 1-2 hours a day to learn a skill essential to functioning in the Business Owner or Investor quadrant so that you can eventually make the shift over for your money even if you never intend to quit your job. Read some books. Find some case studies. Research your ideas. But do it consistently. In a year, you’ll find you have a breadth and depth of knowledge about your passion or idea few can match.
#2 – Assets Put Money In Your Pocket. Liabilities Take Money Out of Your Pocket. So Why Is Everyone Buying Liabilities?
What should be an asset should be pretty clear going by the headline.
I think everyone can agree that as long as we focus on acquiring assets that actually pay us, and cut down on liabilities, we will end up wealthy.
So why is it that most of us focus on liabilities rather than assets?
Cars.
Holiday trips.
Accessories like phones, computers, wallets, clothes. Good food.
Our slogan not so long ago was the “5Cs”.
Cash.
Condominium.
Car.
Credit Card.
Country club.
Of the five above, only cash and condominium can be argued to be “paying us”, and then again only in very specific situations.
Condominiums that are stayed in don’t pay us. We pay taxes and mortgages on it. We even pay taxes once we sell it – whereas the stock market has zero taxes for Singaporeans.
Cash that ends up not growing doesn’t pay us as well.
It’s simply a need.
And so I ask.
What Are Your Assets?
What Pays You?
Most of us only have one thing that pays us: our job.
Our job is the only thing that pays us.
Everything else in our lives is typically a liability.
So if being rich is acquiring “Assets” and cutting “Liabilities”, why are most of us focused on acquiring “liabilities” and only keeping one Asset – our job?
How can you possibly retire or achieve “financial freedom” if that’s what you keep doing?
According to Robert Kiyosaki, these are all assets:
- Stocks
- Bonds
- Income-generating real estate
- Notes (IOUs)
- Royalties from intellectual property such as music, scripts, and patents
- Anything else that has value, produces income or appreciates, and has a ready market
Note that stocks, property, bonds, IOU, can all cause a loss of money. So please dedicate some time to learn about investing or business prior to jumping in.
Please note that it is important you remember the definition of an asset and a liability even if you’re invested in the stock markets.
It’s not just, “oh, I’m safe. I invest. ah ha!”
What do I mean? I’m referring to the common theme of people being very quick to sell winners and very slow to sell losers.
When you sell winners fast and sell losers slow, what you’re doing isn’t investing.
What you’re doing is buying liabilities and selling assets.
Homework: Write out a list of what is an asset and what is a liability in your life. See what you can do to cut out liabilities. And see what you can do to add to your assets. Skills pay you. Coding. Website creation. App creation. Investments also pay you. Stocks. Bonds. Businesses you own a share of. Copyrighted ideas pay you in royalties. Find assets. Buy assets. Build assets. Reduce liabilities. Rinse and repeat.
#3 – The Primary Reason the majority of the poor and middle class are fiscally conservative—which means, ‘I can’t afford to take risks’— is that they have no financial foundation.
Why are surgeons able to calmly and ably carry out complex operations on the human body?
Why are doctors confident in diagnosing illnesses?
Why are snipers confident in hitting their targets?
Why do you have the confidence of being able to walk, climb, and read, recite history, do simple math, write in english, read this article?
Deliberating on the above questions provides us with a simple answer.
You were trained. You were taught.
You were educated.
You were provided with a foundation.
Yet, all too often, people are either deathly afraid of investing and shun it, or they jump right in with no hesitation and no prior training.
You wouldn’t perform surgery without training. And you wouldn’t drive a car without driving lessons.
You wouldn’t take an exam without studying.
You wouldn’t try to take a physical test without heading to the gym.
So why are people consistently doing irrational things?
The only conclusion I can come to, is that fear and greed, not logic, rule these select group of people.
Don’t be like them. Get an education before you get invested. Or I’d rather you don’t invest at all.
Homework: Here are some great books on investing that you can pick up to get the education you should have had.
- Intelligent Investor by Benjamin Graham (chapters 8 and 20 highly recommended by Warren Buffett)
- Common Stocks and Uncommon Profits by Phillip Fisher, once again eagerly recommended by Warren Buffett
- Fooled by Randomness by Nassim Taleb
- The Essays of Warren Buffett by Lawrence Cunningham
- Poor Charlie’s Alamanac by Charlie Munger
- Margin of Safety by Seth Klarman
- The Most Important Thing Illuminated by Howard Marks
- The Little Book of Behavioral Investing, by James Montier
- The Little Book That Builds Wealth, by Pat Dorsey
#4 – “A person can be highly educated, professionally successful, and financially illiterate.”
A personal anecdote would probably be more helpful in illustrating what I mean. To begin with, I would classify someone as financially literate if they know their basic numbers in life.
A financially literate person should be able to answer these questions approximately without much difficulty.
- How much are they earning after tax and cpf? Is it fair considering their education level and job title?
- Are they earning above sector median rates, below, or on par?
- How much goes to their CPF accounts?
- How much goes into their investments?
- What are the rates of return on their investments when benchmarked against an index like the S&P 500?
- What are their financial plans?
- Can they read a company financial statement?
- Do they understand their tax benefits?
- Do they understand their retirement requirements?
- Do they have a plan for retiring?
- Are you at least making minimum returns as compared to the S&P 500 Index?
I’ve yet to meet someone outside of work who has the answers to these questions at the back of their fingertips.
To be exact, a friend whom I play poker with every now and again explained he would be happy to see 10% returns in his Investment Linked Policy, and that currently, it returned an average of 8% a year – after 7 years. This is not accounting for the fact that there are no dividends on the policy.
I almost spat my drink out at how happy he seemed with so low a return.
For a comparison, here’s the returns for the S&P 500 Index, with dividends reinvested, and adjusted for inflation, after a period of 7 years; the same length of time my friend has been invested with the Investment Linked Policy.
Had he invested in the index instead, he could have reaped a 129.384% returns by now instead of 56%.
A difference of 73.84%. Even considering 30% taxes on dividends received, he would still have a sizable lead over buying the Investment Linked Policy.
So why did he end up buying the policy? Why do most people even bother?
It’s simple. They don’t know the basic rates of returns to compare their policy against.
So when an agent or a financial adviser shows up with a policy that has something above 5%, they jump at the opportunity because oh my gosh does that sound high!!
Of course it’s high when you consider that banks are giving you less than 1% on your cash in the savings account. Even a DBS Multiplier account of 3.75% per annum will seem low in comparison to a 5-8% policy.
But when compared to a buy and hold S&P 500 Index?
It doesn’t even come close to passing muster.
This friend of mine, like most people on the street, is university educated, is a rather successful professional in the sales sector (mechanical parts), and lives rather comfortably.
Yet I would not classify him as financially literate. Why? For the simple fact that he has earned less than even the bottom line of what I consider the bottom benchmark.
So yes. Be successful in your career by all means. Be highly educated. But most important of all, be financially literate.
Homework for the Financially Literate:
- How much are they earning after tax and cpf? Is it fair considering their education level and job title?
- Are they earning above sector median rates, below, or on par?
- How much goes to their CPF accounts?
- How much goes into their investments?
- What are their rates of return when benchmarked against an index?
- What are their financial plans?
- Can they read a company financial statement?
- Do they understand their tax benefits?
- Do they understand their retirement requirements?
- Do they have a plan for retiring?
- Are you at least making minimum returns as compared to the S&P 500 Index?
Note that these aren’t the end all be all of the questions to answer. Simply a good base. Figure out the questions and figure out where you want to go. Establish milestones. Find investment models or instruments.
Also, note that I’m not out to bash financial advisers or Investment-linked policies.
I’m simply opening your eyes to the world of possible returns out there, and asking you to do a simple check to ensure your money is actually efficiently growing instead of being lazy with it and handing it over to someone else.
I hope these principles have helped you see the world of money and finance in a different light.
PS: For those of you who wish to learn how to invest faster instead of reading from books (though I must admit as a bibliophile, books are great!), you can choose to attend a free introductory investing workshop here.
More case studies are available here. An example of how we apply undervalued stock analysis can be found here. Enjoy.
thanks for the article and the list of recommended books! 🙂