Rich Dad Poor Dad is one of the most recommended finance books of all time. It discusses many concepts about money. The earlier you start reading it in life, the earlier you can be disciplined with money at a young age. I had the chance to read it for the first time during my sophomore year in college and it has a profound effect on me on the way I think about money.
The book starts with two boys whose fathers have a different mindset about money. The author, Robert Kiyosaki, uses two of his fathers (rich dad and poor dad) to portray how rich people and poor people think differently, which results in different financial situations in life. One is his biological father and another being his best friend, Mike’s father.
Robert presses the importance of financial literacy. He emphasizes that self-education is very important in getting further in life financially. At first, he explains the financial terms in a simple language. Then, he portrays the financial portfolio of a rich person and a poor person by using many diagrams, which are very easy to understand. I am impressed with his representation of the income and expenses flow towards assets and liabilities columns in the financial portfolio of the rich people and poor people.
Today, there are many investment vehicles that we can invest our hard-earned money. But, before we invest in any investments, it is vital to learn how things work. I remember Warren Buffet’s quote “Never lose money”, which reminds people to educate themselves before putting their money to work. I totally agree with his advice because the last thing that we want is to lose our hard-earned money in risky investments. We need to lower the risk of losing money by educating ourselves with new knowledge and skillsets.
He also challenges the common belief that your house is an asset. Instead, he describes that “your house is not always an asset”. When I read those words for the first time, I was mind-blown because I was brought up with the idea that investments in real estate are assets. In reality, the majority of people buy their homes through financing options. The most common option is the monthly mortgage payments for 30 years. If you were the homeowner and you were paying down your mortgage every month out of your pocket, your home is a liability and not an asset. It is because the mortgage amount is draining from your wallet every single month. Let’s put this in another scenario. If you were the homeowner and you rented out your home to a tenant, your home becomes an asset because it is generating monthly cash flow (rental income) for you. In fact, your tenant is the one paying your monthly mortgage. Rental income from your tenants not only helps you pay down your mortgage(debt) but also helps you generate an extra income stream for life. The author invests in rental properties that produce monthly cash flow for his family. He collects assets first before buying any expensive consumer products, which depreciate in value. Only when his assets produce more money, he spends lavishly on getting a brand new luxury car. From his strategy, we can learn that we should set our priorities on collecting assets first and then buy liabilities when those assets produce (monthly) cashflow.
Another interesting advice from the author is to have the right mindset. Having the right mindset can motivate you to pursue your goals. Instead of telling yourself, “I cannot do it”, you can ask yourself “How can I do it?”. The “How”. It is a powerful word that will push you to find the solutions to your problems.
