Summary of the book "Rich Dad, Poor Dad" - By Robert T. Kiyosaki
Key Concepts in this book:
- We are unable to leave the "rat race" and become wealthy because we are afraid of society's condemnation.
- Financially illiterate people can be driven to make irrational decisions by fear and greed.
- We receive no instruction in financial intelligence, even though it is critical for both personal and societal prosperity.
- The foundations of becoming affluent are financial self-education and a realistic assessment of your finances.
- You must learn to take chances to become affluent.
- Because the road to prosperity is lengthy, you must stay motivated.
- Even financially savvy people might fall into poverty due to laziness and hubris.
- Only invest in assets that will put money in your wallet; avoid liabilities that will take money out of your pocket.
- Your job covers the bills, but it's your company that will make you wealthy.
- To help you save money on taxes, learn about the tax code.
- Anyone looking to get out of the rat race.
- Anyone interested in learning how the rich get rich.
- Anyone wondering how to approach investing.
1. We are unable to leave the "rat race" and become wealthy because we are afraid of society's condemnation.
Most of us are familiar with the term "rat race," but how would we explain it if asked?
"The never-ending pattern of working for everyone but yourself," according to one definition. This means you put in all the effort, but others - the government, bill collectors, and your bosses – reap the benefits.
We commonly refer to the rat race as something that we're all involved in. At the same time, we discuss it as something we despise. So, why do we continue to race?
Because the dread of society's judgment dominates most people's life.
Consider the adage, "Go to school, study hard, and obtain a decent job."
We still preach this credo, even though it's antiquated advice based on our parents' beliefs. You could get a job right out of college, work for the same firm for decades, and retire with a nice pension back then. This is no longer a surefire way to live a life free of financial difficulties or poverty.
Because you're still stuck in the "rat race," you can study hard, get into a good school, and graduate into a high-paying job without ever witnessing financial gain. Your bosses, not you, are reaping the benefits of your labour.
Despite this, we continue to believe in and practice the above mantra for fear of failing to meet the expectations that have been instilled in us since birth. What's the end result? We may be staying out of poverty, but we aren't getting any wealthier.
2. Financially illiterate people can be driven to make irrational decisions by fear and greed.
Everyone, affluent or not, has two basic feelings when it comes to money: greed and fear. If you have a lot of money, you're probably thinking about all the new items you can buy with it (greed). If you don't have it, you're concerned that you'll never have enough (fear).
People who don't know how to handle their money are especially vulnerable to allowing their emotions to guide their decisions.
Let's imagine you recently obtained promotion and a significant wage boost.
You might put the extra money into something like stocks or bonds, which would grow in value over time, or you could treat yourself to something new, such as a car or a house.
This is when emotion takes over if you're a financially illiterate individual.
The fear of losing money is so strong that it keeps you from investing in stocks or other assets due to the perceived dangers, even though such investments would provide you with long-term prosperity.
At the same time, greed motivates you to spend your increased salary on a better lifestyle, such as purchasing a larger home, which appears to be a far more real and secure option than purchasing company stock.
This update, however, comes with a larger mortgage and increased utility expenditures, effectively cancelling out your raise.
This is how fear and greed prevent the financially illiterate from achieving long-term riches.
So, how do you deal with such strong feelings?
By increasing your financial awareness of topics such as investments, risk, and debt. This will enable you to make more sensible judgments, even when faced with greed and fear.
3. We receive no instruction in financial intelligence, even though it is critical for both personal and societal prosperity.
Most individuals believe that being talented and capable is enough to get wealthy. However, the world is full of such people, most of whom are impoverished. What they lack is financial intelligence, or a broad understanding of financial topics such as accounting, investing, and so on.
Regrettably, we are not raised with this intelligence. Our educational systems are designed to teach students a range of skills, but financial intelligence is not one of them.
Children are not taught about saving or investing, and as a result, are unaware of concepts such as compound interest, as proven by the fact that even today's high school students frequently max out their credit cards.
This lack of financial intelligence training affects not only today's youngsters but also highly educated adults, many of whom make terrible financial decisions.
Politicians, for example, are often regarded as the most intelligent and well-educated members of society, but there's a reason why countries end up with massive national debt: most of the ruling politicians lack financial acumen.
Ordinary individuals can also be shockingly bad with their money, as indicated by their lack of retirement planning. In the United States, for example, 50 per cent of the workforce does not have a pension and about 75 to 80 per cent of those who do have ineffective pensions.
Clearly, society has left us with little financial information, and it is up to each individual to educate themselves.
When we're looking for wealth during a period of significant economic change, it's even more important to pursue a good financial education on our own.
4. The foundations of becoming affluent are financial self-education and a realistic assessment of your finances.
You can begin your journey toward personal wealth at any age, but the earlier you begin, the better - if you start when you're 20, you're significantly more likely to become wealthy than if you start when you're 30.
Regardless of age, the best approach to begin started is to assess your finances, make goals, and then obtain the education required to achieve those goals.
Take a hard look at your existing financial situation first. What kind of income can you reasonably expect from your current employment now and in the future, and what kind of costs can you afford? You might discover, for example, that the new Mercedes you've been lusting after is simply out of reach.
You'll be able to create realistic financial objectives after that. You may state, for example, that in five years you want to be able to afford that Mercedes.
The following step is to begin developing your financial intelligence. Consider this an investment in your most valuable resource: your mind.
You can accomplish this in a variety of ways, but one effective strategy is to adjust your focus: work for what you learn rather than what you earn.
Try working for a network marketing organization for a short time if you're terrified of rejection. While you may not be paid well, you will develop valuable sales skills and self-confidence, which will come in handy in the future.
In your leisure time, you can also further your financial education. Enrol in finance classes and seminars, study books on the subject, and seek out specialists to network with.
You have a decent chance of becoming wealthy if you construct your financial foundation on these building blocks.
5. You must learn to take chances to become affluent.
Doing the same thing over and over again and expecting different outcomes is regarded as insanity. According to this logic, if you want to improve your financial situation, you'll need to start managing your money differently.
Learning to take risks is most likely the most significant shift you'll need to make. To reach where they are, all financially successful people have taken risks, and they are successful because they manage rather than fear these dangers.
Taking chances entails not always being balanced and safe with your money, which is exactly what you're doing when you deposit it in a bank's basic checking and savings accounts.
Rather than playing it safe, consider investing in stocks or bonds. While these are deemed riskier than traditional bank accounts, they offer the potential to generate significantly more money – potentially in a relatively short period (as with stocks).
If you don't want to invest in the stock market, there are several other options, such as real estate or so-called tax lien certificates, that will help you develop your wealth over time. Tax lien certificates have interest rates that vary between 8% and 30%.
Naturally, the greater the profit potential, the greater the danger. When it comes to stocks, for example, there's always the possibility of losing your entire investment. However, if you don't take the risk in the first place, you'll almost certainly lose money.
As you can see, taking those bigger chances and managing the bigger risks that come with them is vital if you want to start earning more money.
6. Because the road to prosperity is lengthy, you must stay motivated.
The road to riches is long and winding. When you face a stumbling block, such as witnessing the price of a company you invested in suddenly plummet, it's tempting to lose hope. You'll need to find ways to stay motivated in the face of setbacks if you want to reach your financial goals.
Making a list of "wants" and "don't want" for your own reference is one way to enhance motivation.
"I don't want to wind up like my parents," for example, or "I want to be debt-free in three years."
These lists can be used whenever you need a reminder of why you must persevere on your path to prosperity.
Spending money on yourself before paying your bills is another effective strategy to stay motivated.
Though it may seem paradoxical, this method will allow you to see exactly how much additional money you'll need each month to accomplish both of your goals: gratifying wants such as purchasing that vintage guitar you've had your eye on and meeting the demands of your bill collectors.
This doesn't imply you should get into debt, but you should keep "paying" yourself first; the added pressure of having to pay off your expenses later will motivate you to come up with new ways to earn enough money to satisfy both.
This strategy will also help you to improve and strengthen your financial self-discipline, which is a vital quality of all financially successful people.
Look up the biographies of affluent people like Warren Buffett or Donald Trump for outside inspiration. Reading about how they overcame adversity to attain success will help you stay motivated.
If you put these suggestions into action, you'll discover that remaining motivated on the road to prosperity isn't so difficult.
7. Even financially savvy people might fall into poverty due to laziness and hubris.
Personality flaws may continue to harm you and your money, even after you've improved your financial intelligence.
Two such traps are laziness and hubris, both of which can work against you in less-than-obvious ways.
We frequently associate laziness with slouching and doing nothing, yet laziness does not always imply inaction; it can also mean delaying tasks that must be completed.
Consider a businessman who works more than 60 hours per week. To the untrained eye, he appears to be rather active. He has, however, alienated his family by working such late hours. He's already noticed signals of problems at home, but instead of dealing with them, he buries himself in his work. In other words, he's being lazy: he's avoiding doing what he should be doing, and he'll very certainly pay the price in the form of a costly divorce.
Arrogance, on the other hand, can be a fatal flaw. In the case of financial ruin, it can be defined as "ignorance plus ego," or a mix of insufficient financial understanding and an ego that is too proud to accept it.
When it comes to investing, arrogance is an especially deadly fault. Some stockbrokers, for example, will try to feed your arrogance to sell you more shares and increase their own commission. They're like shady used-car salesmen who inflate your ego by touting the benefits of investment while keeping you in the dark about the drawbacks.
So, even if you become a financial genius, be aware of these personality flaws. You'll be considerably more likely to avoid financial catastrophe this way.
8. Only invest in assets that will put money in your wallet; avoid liabilities that will take money out of your pocket.
To make sound investing decisions, you must understand the distinction between an asset and a liability.
Simply said, an asset is something that earns you money, whereas a liability is something that costs you money.
Clearly, if you invest mostly in assets, you are more likely to become wealthy.
Businesses, stocks, bonds, mutual funds, income-producing real estate, IOU notes, royalties from intellectual property, and anything else with the value that generates income, increases over time, and can be sold easily are all examples of assets.
Your dollars become employees that work to generate revenue for you when you invest in assets. It's better if you commit more "workers." The idea is to increase your income above your expenses as much as possible, then reinvest the surplus into your assets, putting even more money to work for you.
Unfortunately, many investors make the error of mistaking some liabilities for assets regularly.
A house, for example, is commonly thought regarded as an asset, but it is actually one of the largest liabilities you may have. Purchasing a home frequently entails working for the rest of your life to pay off a 30-year mortgage and property taxes.
This is harmful to you in two ways: For starters, you'll have a huge charge deducted from your income every month for the following 360 months (a tell-tale indicator of a liability). Second, those 360 payments could have been put toward possibly more profitable assets, such as stocks or real estate that you rent out to tenants.
Knowing the difference between an asset and a liability can help you make informed decisions about where to put your money and what to avoid.
9. Your job covers the bills, but it's your company that will make you wealthy.
The majority of people regard their job and their business to be one and the same. However, there is a distinction when it comes to personal finances:
Whatever you do 40 hours a week to pay the bills, purchase groceries, and cover other living expenses is your profession. It usually assigns a specific title to you, such as "restaurant owner" or "salesman."
Your business, on the other hand, is the place where you put your time and money to help you build your assets.
Because a profession merely pays your bills, it's doubtful that it will make you wealthy on its own. You must create a business while working in your career to achieve the money.
Consider a chef who has attended culinary arts school and is well-versed in all aspects of the job. Even though she trade, cooking, pay enough to pay rent and feed her family, she is not becoming affluent.
As a result, she invests in real estate. She invests any extra money she has each month in income-producing properties, such as flats and condos she can rent to tenants.
Consider a car salesman who invests the remainder of his monthly income in stock trading.
Both vocations supplied enough revenue to make ends meet every month. These folks, on the other hand, are increasing their assets and moving closer to riches by investing their surplus money in their enterprises.
Because your profession generally pays for your business at first, it's a good idea to keep your day job until your company starts to expand sustainably.
When this occurs, your possessions, rather than your profession, become your primary source of income.
That is, after all, the mark of true financial independence.
10. To help you save money on taxes, learn about the tax code.
Everyone understands that taxes reduce personal wealth, yet most people don't bother to look into ways to reduce their tax burden. This can be done lawfully in a variety of ways.
Investing your money through the protection of a corporation is one approach to decrease taxation. The money you produce is taxed considerably more leniently if you invest through your own corporation than if you invest in your own name.
Corporations in the United States also come with a slew of other perks. Debts and obligations, for example, are placed in the corporation's name rather than the owner's, which protects against limited damages on bad investments.
When you work as an employee, you earn money, pay taxes, and then try to make ends meet. When you're shielded by a corporation, you earn, invest, or spend as much as you can before being taxed on the remainder.
It's no wonder, then, that corporations may assist people in becoming extremely wealthy.
There are other ways to reduce your taxes as well; it's just a matter of being more knowledgeable about the tax system's many loopholes and benefits.
For example, if you sell your present real estate assets to buy more expensive ones, the government will not tax your new real estate until you liquidate it, thanks to Section 1031 of the Internal Revenue Code of the United States tax system.
As a result, your capital gain grows while the government holds off on collecting anything from you until later.
By learning how your country's "system" works, you may be able to lawfully reduce the amount of money the government collects from you.
The basic premise of this book is that, because we are not taught financial intelligence in school, we must develop this trait on our own. Only when we have a good financial IQ and a firm, ambitious mindset are we likely to become wealthy or financially independent. Finally, success is determined by how much you invest in your mind because your mind is your most valuable asset in any financial condition.
Advice that can be implemented:
Start right now if you want to see results.
Although this book lays out the steps to financial independence and prosperity, you can only achieve your goals if you start taking action immediately.
This entails conducting research to identify the greatest books in your field (e.g. real estate, or the stock market). Where can you get them in your area? Which ones are the most suitable for newcomers? Also, learn about the "who's who" of the markets you intend to enter. Do they have a website that you can visit? When will their next book be released? Other broad websites, like Investopedia.com, contain a wealth of information for newcomers who aren't sure where to begin investing. In any case, remaining informed will help you stay afloat while also giving you a greater understanding of your marketplace.
Create a column sheet to document your monthly expenses, income, and current assets and obligations.
Throughout the book, one of Kiyosaki's primary ideas is to make sure your revenue exceeds your expenses.
The only way to do so is to maintain track of your finances. Create a worksheet in a program like Microsoft Excel that you may update every month. Calculate your monthly income, which includes any money you get, and compare it to your expenses, which include bills, rent, lifestyle expenses, taxes deducted from your paycheck, and any other expenses. Start tracking how much money your existing assets generate for you each month, as well as how much money your liabilities take away. This will help you determine what you can afford to eliminate from your life to begin increasing the gap between your income and expenses (in a positive direction).
Make friends with people who do what you want to do.
You can create valuable relationships in the long run by networking with people who are already active in the markets you're interested in.
Find someone who knows a lot about tax lien certificates in a local tax office, for example. Make an offer to take them out to lunch as a gift. But make sure they understand that you want to learn from their experience and knowledge, not that you're just looking for a way to get rich. Most experts will gladly give you a few ideas if you're honest about your aims and eager to listen.
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