Rich Dad Poor Dad: My Take on a Classic
After hearing good things about this little book for years, I finally picked up Rich Dad Poor Dad by Robert T. Kiyosaki. I hadn’t done much reading on the topic of finances, and Kiyosaki’s book seemed like a great place to start. After all, this book is the self-proclaimed #1 personal finance book of all time and spawned a whole series of books on finances.
In addition to all the public accolades, Rich Dad Poor Dad was also the only book on financial literacy I’d ever seen in my father’s library. My dad is a quiet, reserved man driven by common sense, and his lessons on finance were focused on discipline, delayed gratification, and risk avoidance: save as much as you can, always avoid debt, don’t waste money on things that immediately lose value, and avoid recurring expenses until absolutely necessary (even if it meant doing things like living at home during college while my friends stayed on campus). He didn’t want money to rule our lives. I was curious to see if any of the ideas in Rich Dad Poor Dad resonated with my dad’s philosophies.
The book kicks off with a narrative about Kiyosaki’s childhood, comparing the traditional financial advice of his academic father (the Poor Dad) to that of his friend’s businessman father (the Rich Dad). Seeking to make some extra money, young Kiyosaki and his friend seek work from the Rich Dad, only to be sent on a series of learning exercises meant to show the boys that merely working hard wasn’t going to get them far. There were many opportunities around them if only they were motivated enough to seek something more. Rich Dad became a life mentor to both of them far into adulthood. Poor Dad initially objected to how they were being treated as young employees and later objected to the resulting deviation from a traditional career path, but as you probably guessed, Rich Dad’s advice delivered results despite the fact that it downplayed loyalty to a career path and stability through risk avoidance.
The core concept of this book is that the middle class has the potential for financial growth but lacks the financial literacy and discipline to pull it off. Kiyosaki states that the main difference between the rich and the middle class is that the rich invest their money in assets (things that make more money, like stocks, real estate, and intellectual property) while the middle class takes its extra money and dumps it straight into liabilities (things that continually drain money, like mortgages and car payments). It’s not that the rich avoid liabilities; they just build up assets that can cover the expenses incurred by the liabilities. Essentially, the middle class work their asses off trying to keep their heads above water while the rich use their money to make more money. Kiyosaki’s point is not that the middle class is screwed; rather, he states that anyone can follow the model of the rich given the proper training, practice, and motivation.
Kiyosaki’s explanation for the self-inflicted misery of the middle class is that financial decisions are made through either fear or greed rather than through the application of financial intelligence. They work themselves to death at jobs they hate because they are afraid of what might happen if they lose their sole source of income. Yet, when they actually get a raise or make a little extra money, they immediately become greedy and buy something that creates an additional regular expense and liability. The fear of losing money then returns, and the cycle repeats itself. Kiyosaki states that if these people learn how to handle their money properly, stop making decisions based on emotion, invest in viable assets, and keep their eyes out for financial opportunity, they can grow beyond the Rat Race of the middle class.
Kiyosaki expounds upon these ideas, giving grandiose examples of how he invests his money and finds extraordinary opportunities, particularly in real estate. He borrows money, uses it for real estate ventures, and makes exponential returns without necessarily having to spend large amounts of his own capital. He actively avoids banks, often providing financing for those who purchase his investment property and pocketing the interest himself. He orchestrates his business deals through his personal corporations, allowing him to write off many purchases as business expenses and limiting his tax obligations by funneling his profits through capital gains (which are taxed at a rate much lower than federal income tax). Some of Kiyosaki’s ventures returned $100,000 over the course of a week. Others supplied millions over the course of 15 years.
While Rich Dad, Poor Dad has opened my eyes to the plight of the middle class, our poor ability to manage finances, and the potential for growing beyond the so-called Rat Race, there are some pitfalls that the book seems to gloss over when it comes to being more financially adventurous. Kiyosaki does not talk about failed ventures, only his successes. He talks about how you need to love winning more than you hate losing. He wants you to overcome your negative emotions that keep you in the Rat Race, and to an extent, I agree with this sentiment. I can understand why he doesn’t focus on failures in a book that is supposed to help people overcome fear-driven behavior. However, you cannot avoid the hidden costs of taking on new ventures. There is no free lunch. In most ventures, what you may gain is offset by an equal level of risk. Any profits are paid for by the risk you incur.
For instance, when you borrow money to make a downpayment on a real estate investment you normally couldn’t afford (as Kiyosaki managed to do in one of his examples), you could potentially make hundreds of thousands in the course of a few months, elevating your financial status to a level you never would have achieved simply by working, waiting, and saving your money. However, in such a venture, you are risking potentially enormous loss if the deal goes south and you find yourself caught in fluctuations of a financial magnitude beyond your means to absorb. You lose and your lender loses. If this investment represents the majority of your savings and assets, you may never fully recover. That’s why for some types of mortgages, lenders are required to ensure you aren’t making a downpayment using a gift or borrowed money; if you can’t afford the downpayment on your own, you are labeled as a risk by their underwriters (here’s a nice little blog with some more info in case you’re curious).
As newbie investors compared to Kiyosaki, we need to be fully aware of what we’re doing. As someone who is sensitive to risk, I can’t read about these financial exploits without thinking about what might have happened if it went wrong. As a newly-married man, my failures now affect more than just myself, and that is even more of a motivation to be careful. However, this book did help me realize that with proper knowledge and wisdom, it is possible to do more than simply work hard and cross my fingers. While I may never participate in high-risk speculative ventures, I’ve begun to think about how I can better utilize my savings rather than hiding it away. The key here (as Kiyosaki mentions a time or two) is that my investments should match my financial intelligence. I may never have the time, the knowledge, or the balls to make big plays, but I can start where I’m at now and begin the process of learning what makes sense for me.
Initially, Rich Dad Poor Dad felt enlightening because I saw so much of my myself in the Poor Dad. I thought maybe my foundation in financial conservatism was holding me back, and my eyes were about to be opened. However, as the proclaimed path to riches was laid bare in the rest of the book, my sentiment shifted. While Kiyosaki momentarily pays lip service to the practical ideals of wisdom and moderation, it’s hard to ignore his overuse of success-oriented examples and glorification of risk-taking. I started to sense that Kiyosaki was trying to sell me on an idea rather than providing me with enough information to develop my own conclusion. While there is definitely knowledge to be gained through this book, I would personally seek out more objective material before making any serious decisions. Rich Dad Poor Dad helped me begin exploring the possibilities of new financial opportunity, but I still hold to the core tenets of wisdom and restraint I learned from my dad.