Summary of Rich Dad Poor Dad is a 1997 book written by Robert Kiyosaki and Sharon Lechter, the book is written based on Kiyosaki’s life. The “rich dad” is his friend’s father who accumulated wealth due to entrepreneurship and savvy investing, while the “poor dad” is claimed to be Kiyosaki’s father who he says worked hard all his life but never obtained financial security.
Does working long hours for little money, clinging to the illusion of job security and looking forward to a three-week vacation each year and perhaps a shitty pension after 45 years of hard work sounds tempting to you? Yes? In that case, you don’t need this summary.
1: Assets and Liability.
Rich people buy assets, poor people buy liabilities that they think are assets. My house is my greatest investment! My house is a liability, if your house is your greatest investment, you have problems. If you want to be rich this is the main thing that you need to know. It’s that simple. I know that you’re shouting towards the screen right now in disbelief: Well, why aren’t everyone rich then? The equally simple answer is because people, in general, don’t know what an asset is. Let’s do a little test. Are you recently bought iPhone an asset? It isn’t. Is your BMW an asset? Nope, not. Is owning a part of a company an asset? Yep. Absolutely. It’s your house an asset? It isn’t. In that case, great job, then you probably already know what I’m about to say: An asset is something that puts money in your pocket. A liability is something that takes money out of your pocket. Let’s look at how a rich person acts when making money compared to a poor person. The rich get their income and straight away they buy assets. They buy assets such as stocks, bonds and real estate. Now, in the long run, these resources will create even more cash for them in the future. The middle class earns their money from a good job, but the moment they get their salary, they spend it on liabilities which they think are assets. Possessions such as TVs, cars and vacation homes. You might look rich and your friends might admire you for it, but you will never actually be rich practising this. But isn’t it risky to be in the stock market? What if there’s another financial collapse? It’s funny how people somehow justify buying an expensive car, which is a guaranteed money loss, while they think that buying financial assets is stupid because you might lose money. It’s crazy!
2: The power of corporations.
The rich should pay more in taxes to take care of the less fortunate. Taxes punish the productive and support the unproductive. I guess that you’ve all heard the story about Robin Hood, you know the guy who takes from the rich and gives to the poor? Inspired by this tale, the poor and the middle class invented taxes. The purpose is to create a more equal society where everyone is included. The problem is that the rich, they’re too smart for this and in the long run, instead of taking from the rich and giving to the poor, the effect has become more like taking from the middle class and giving to the poor. Rich people are too smart for the system and they find all types of ways and vehicles to protect their hard-earned money. One such vehicle is corporations. Corporations are good for two things primarily. First and foremost, it allows you to pay less tax. The number one expenditure of the average household is taxes. It isn’t uncommon for people to work between January and May for the government. People often pay up to 40-50 per cent in taxes. People tax before they get their salary when buying things and even when they die! Warren Buffett, who’s the third wealthiest man on this planet is famous for paying less tax than his secretary. What a corporation allows you to do, is to pay for expenses before paying taxes. You’re also allowed to deduct the VAT from the sales by the same amount as your procurements. This effectively allows you to buy stuff for as low as 50% of the original price. For instance, an expensive dinner together with your girlfriend could be bought through your company and be half as expensive as for those without a company. Naaah, just kidding, don’t do that, that would be illegal, as the dinner has nothing to do with your company. At least if you get caught, don’t blame it on me. I never advised you to do it. The second thing that corporations are good for is to protect yourself from personal lawsuits, which could be devastating for personal finance. With an LLC or an “Aktiebolag” in Swedish, you are protected from such risks and the downside is limited to your company, not your wallet. Imagine that you’re a shop owner that is selling boat supplies. A group of Swedish Vikings raids your shop and steals everything. Your oars, your best wood and your super hot secretary. The family of the secretary decides to sue you for being irresponsible. Who in the world would announce free mead outside their shop during times of Viking invasions? You lose in court because of your carelessness, which would force you to file for personal bankruptcy if you were without a company. In this case, though, you had one, and the lawsuit is limited to the company.
3: Stop focus on your income -Focus on your assets.
Study hard, so you can get a good job at a great company. No, study hard so you can find great companies to buy. Robert Kiyosaki’s poor Dad had a PhD but was always a struggle with money. His rich dad didn’t even finish high school and yet, he had an abundance. His PhD-dad studied so many years just to get a few hundred extras in salary every month. On the other hand, his rich dad used those years to start acquiring assets. The rich focus on their asset column, while everyone else focuses on their income statement. I find this to be an interesting subject. If the average person were to get a pay cut by 2%, he would be furious. On the other hand, if he loses 2% in the stock market (which is his assets) he shrugs it off by blaming bad luck or bad asset managers. Yet, for some people, it’s a worse situation to lose 2% of their assets than to lose 2% in salary. Salary levels are taken personal, while asset levels are not. This is a common problem for poor people. Start to take responsibility for your investment decisions!
4: Don’t diversify with too little money.
When it comes to money, just play it safe. No, learn how to manage your risks. There is no reason to diversify your portfolio if you only have a small fortune. If you want to become rich, you must first be focused. Look at the top 5 richest people in the world. These are rankings from 2018. Jeff Bezos, net worth: 112 billion. Owner of Amazon. Bill Gates, net worth: 90 billion. Owner of Microsoft. Warren Buffett, net worth: 84 billion. Owner of Berkshire Hathaway. Bernard Arnault, net worth: 72 billion. Owner of LVMH. Mark Zuckerberg, net worth 71 billion. Owner of Facebook. Stefan Persson, net worth: 17 billion. Owner of H&M. These people became rich, not by being diversified, but by being focused. Don’t do what the poor and middle-class do, which is to put their few eggs in too many baskets. Instead, focus, and put them in a few ones. If your savings are small compares your annual salary, I think this is especially true. Aim to get a yield that will have an impact on your life and go for diversification as soon as you’ve acquired wealth that will be tough to earn back through your daily job. In finance theory, it’s argued that diversification reduces risk, but I would argue that risk is a result of uncertainty, which in turn is the consequence of a lack of knowledge. Stay focused and you will have time to gather more info about each of your investments, and in turn, reduce your risk while keeping a high potential.
5: Educate in personal finance.
The love of money is the root of all evil. The lack of money is the root of all evil. Money is a form of power. Even more powerful though, is financial education. Money without financial intelligence is money soon gone. This is the reason why famous people such as 50 cents and Mike Tyson have been filing for bankruptcy, even though they’ve to earn big time. One of the reasons why the rich get even richer, the poor get poorer, and the middle-class struggles in debt are because the subject of money is taught at home, not in schools. Many of us learn personal finance from our parents. This means that if your parents aren’t rich already, you need to start getting advice from somewhere else on how to do it.
There are 4 parts of financial literacy that you should focus on, according to Robert Kiyosaki:-
Number 1 is accounting. Accounting is the ability to read numbers read – be it numbers from an annual report, or your bank account.
Number 2 is investing. This is the science of money making money.
Number 3 is understanding the markets. At least, you should understand the basic rules of supply and demand.
Number 4 is the law. Understanding the tax advantages and personal protection provided by corporations Don’t be afraid to spend your money on education that will improve your knowledge and develop skills necessary to beat your weaknesses. The author spends many thousands of dollars throughout his life on seminars, books, and so on. And guess what? The returns from these investments are unmatchable! Arrogant people often find this hard to do. They already know everything, and rather talk about what they know than try to learn something new. Listening is more important than talking. If that weren’t true. God would not have given us two ears and only one month.
Let’s sum it all up.
Takeaway number 1 is that you must buy assets to start generating passive income every month.
Takeaway number 2 is that a corporation is a useful vehicle to protect yourself from losses and to be able to pay yourself first, not the government.
Number 3 is to start taking responsibility for your own investment decision – they are even more important than your salary.
Advice number 4 is that you must invest in a focused manner to grow a large fortune.
Finally, number 5 is the advice to start educating yourself in personal finance. Focus on accounting, investing and understanding the markets.