So far we’ve had some very worthwhile insight reading the acclaimed wealth building book Rich Dad/Poor Dad by Robert Kiyosaki. Coming into it blind has proven to be a very smart decision. Having heard all of the praise and criticism over the years I was able to identify many points where I think our friends in the FIRE community formed their opinions. You can check out part one here for the first batch of lessons.
In this latest section of our deep dive into the book we look at chapters 3-6 and find some rich gems and sadly some obvious turds.
The Lessons of Chapter 3
Your Profession is What You Do, Your Business is Wealth Creation
This is a great piece of general advice for anybody looking to enter the FIRE space. For many years people thought that investing was the pastime of the already rich or people ‘in the know’ like bankers and lawyers.
With the advent of the internet this has never been further from the truth. Technology has allowed people to take control of their lives and to easily access investment opportunities. What used to only make sense in terms of thousands invested now makes sense in terms of dollars invested.
There is no excuse now to not invest if you have the money, and that is a key point. On the route to wealth you might have the best job in the world or you might have a dead end low paying role but the fact remains: your job doesn’t make you rich, your money management does.
For a perfect example look at our friend Steve at the FrugalExPat blog. Steve works as an English language teacher in Taiwan (read his story here). He makes a decent salary but, as the title suggests, lives very frugally. Steve and his wife have achieved savings levels above what many Doctors have, how? They used their work as a vehicle for their real calling, wealth creation.
True Net Worth Is What Will Hold And Add Value
This needs to be written on a brick and thrown at everybody who has ever bought a brand new car. Things that increase in real value, that’s value adjusted for inflation, are part of a net worth, everything else is not suitable for the calculation.
A lot of people have made this mistake in the past, especially with regard to things like cars or even investments like baseball cards. Sure, some things like baseball cards can appreciate in value, cars too, but unless there is a long established trend for what you’re looking to buy, you’re not investing, you’re speculating.
Things that you can sell and at least recoup your costs are rare. They are usually expensive and sought after by many. Often this boils down to some forms of property, guaranteed income instruments, and if we’re kind, index fund style investments.
Keep Expenses Low, Reduce Liabilities, Acquire Assets
Sage advice for all FIREfighters out there. When you have success in your personal and professional lives you run the risk of the wealth killer, lifestyle inflation.
Lifestyle inflation is similar to economic inflation, it is the process by which what you consider a ‘normal’ life keeps becoming more expensive. For example, you get a new high paying job in the city so you now buy takeout coffee 5 days a week instead of one. This is ‘normal’ for you now.
The key is always to look at life through an objective lens. To look at the average household spending by line item and try to remain there. At the same time you don’t want to waste your time and energy being a cheapskate either and we have tips to avoid that here.
When you keep your lifestyle spending in check this gives you a chance to reduce any debts you many have but also to remove any useless spending habits too. For example, an extra car you don’t need is just as much a liability as your line of credit or student loans.
Both of these will eventually free up cash to acquire assets, the entire goal of building a wealthy life.
If You Don’t Love It, You Won’t Take Care Of It
With the amount of cheap electronics and fast fashion our economy encourages us to buy this point has never been more relevant. We are encouraged to be wasteful, even in supermarkets we are often forced to buy too much food in too much packaging.
This creates a mindset of disposability. Why buy one pair of jeans for $150 when you can buy one for $20. Worse yet people will pay $150 for designer jeans but not $150 for jeans made in their own country supporting local business.
When you have money it is easy to buy a lot of conveniences. Things like a coffee machine or maybe a smart fridge. The trap you fall into is buying things that only add a ‘meh’ factor to your life. If you drink fast food coffee happily, you don’t need a Keurig. You won’t love anything that doesn’t make a positive impact into your life.
A great example of this is my air fryer. I use it on average once a day, it is a key part of our cooking and I love it as much as anyone can love an appliance. For this reason it is taken care of and not treated disposably. The same thing goes for any item or asset. If you hate the idea of being a landlord, you shouldn’t own a rental property for the same reason. Effort is vitally important.
A Note On ‘The Rich’ (BearMoney)
In this chapter Kiyosaki makes a point about the ‘rich buying luxuries last’. The point he is trying to make here is that creating generational wealth requires you to be frugal and sensible. Where he misses the mark is the contention that this holds true for all rich people, hell it’s true for only a small minority.
Many people from wealth or who create wealth through predatory means (corruption, explotation etc) are obsessed with showing off their wealth and view luxuries as a default. Again we fall victim to the definition of ‘Rich’ in this book: A self made and frugal millionaire. While there are many, many self made millionaires and many many frugal millionaires, people who are both are at best a sizeable minority.
For the benefit of this article series therefore we will be understanding ‘The Rich’ to mean ‘The Self Made’ on the assumption that they are also frugal. It seems like an minor distinction but so much of this book falls apart if you heap praise on the entire % of the population with wealth.
The Lessons of Chapter 4
Taxes and Government Bad (BearMoney)
This is perhaps one of the most moronic takes in the entire book. It effectively boils down to taxes bad, tax avoidance smart. The author even goes on the state that ‘That’s why I don’t like government people. They have different objectives than most business people’.
To the author, the objective of serving the people and the nation are something that is not to be liked. This is a terrible take born of the typical ignorant mindset of libertarians: government has inefficiency therefore it is inherently bad. Government should never have the same goals as business people.
He goes on to state therefore that tax avoidance strategies are smart and good because they avoid paying into the bureaucracy, they avoid paying into serving the nation. That is at best narcissism and at worst sociopathy.
The author seems completely oblivious to the regulatory capture and political corruption perpetuated by a large segment of the ‘rich’ and corporations. A significant minority of the group he lauds actively make things worse for people and society in general. The lack of self-awareness is stunning.
Note: I would never argue that government or tax systems are perfect but the authors argument is not that we need to do better, it’s that the goal is fundamentally flawed. His stance is either dumb, self-serving, or both.
The Pillars of Rich Mindset: Accounting, Investing, Markets, and Law
One of the best lessons in the book so far is presented in quite a straightforward and short way. The importance of navigating the economic system safely and at maximum efficiency.
When you understand Accounting you are able to maximize your net income over an entire lifetime.
When you understand Investing you are able to maximize your gross income over an entire lifetime.
When you understand Markets you are able to take advantage of growth opportunities earlier than other people
When you understand Law you are able to protect and nurture your wealth safe from many economic dangers.
Now you should always try to get professional advice in the fields of accounting and law and sometimes in the other two. However, you should also have more than the average persons understanding of all four so that you know what strategies to best use.
It can be daunting at first but there are very good strategies that are simple and safe to follow. You don’t need to do complicated international banking if you can invest in the S&P 500.
Incorporating your wealth is a tremendous idea. Corporations have something known as limited liability. That means that even though you own, work for, and reap the benefits of your corporation, nobody can come after your personal assets if the business fails (crime notwithstanding).
This means that in a corporation you can take risks that otherwise might be too difficult to do. In addition you can all keep money in a corporation without immediately paying tax. For example, if you have a side business that earns $50,000 over 10 years, you could keep that money in the corporation, buy dividend stocks with it and only pay income tax on the dividends (depends on legal jurisdiction).
You can also use expenses when you are a corporation. Although there are tricky tax rules around different expenses the fact of the matter is than many things from computers to food can be written off as expenses and reduced your corporations tax liability.
I know a person that writes a travel blog that expenses their trips. This effectively reduces the cost of her trips by 20% while also providing money via the articles she writes. Imagine a two-week vacation in Paris only costing $200 net.
The Lessons of Chapter 5
New Wealth Is Not In Land and Factories
Given that Rich Dad, Poor Dad was written at a time before the global financial crisis and the ongoing climate change disaster this point has aged like milk left in the sun.
The author is correct that wealth has been relocating from traditional industrialization in the Western World and that you can make billions without ever even owning an office or physical products. However, what the dotcom bubble, central bank money printing and scandals like Theranos have shown us, made up wealth floating in cyberspace is more vulnerable than many thought.
Land and access to water is going to be the number one economic concern for most countries in the next 50 years. It is better to have $400,000 of land with a well than it is to hold $400,000 of bitcoin, anybody can see that.
I don’t think this is a mistake from the author, rather it is an prediction that turned out to be wide of the mark. There’s always wealth to be made in land.
It’s Not Gambling If You Know What You Are Doing
This is a pretty short piece of advice but highly relevant. If you are an expert in something, or have done it many many times, risk is just a normal part of wealth creation. The key thing to remember is that you have to know what you are doing, not just think that you do.
The Biggest Gains Come From Seeing Past The Market
This is a great piece of advice to avoid short term speculation and really set yourself up for generational wealth building. The market is not always right and it very often does not price things appropriately. This can lead to big big gains but more often than not it leads to big big losses.
Seeing past the market means understanding the fundamentals of the product or service that you are going to invest in. If you want to invest in Tesla, you should understand the aerospace, solar, and EV markets quite well but you should also understand the context that makes those markets exist.
Everybody might like Tesla because they were a first mover, but the car market demands cheaper and better built cars than Elon Musk delivers. So seeing past the market, what is the smart move?
It is of course ironic that the author couldn’t see past the market of ‘internet money’ and bashed the use of industry and land to create wealth, but that’s neither here nor there.
The Lessons of Chapter 6
Weird never happened anecdote about an interview
The author gives us an anecdote about a snobby female reporter with a ‘masters degree in English’ who refused his advice to go learn to sell. It is incredibly evident that this never happened to anybody that has read a made up story on the internet.
Honestly, the only thing that is missing is for everybody in the room to stand up and start applauding. The author does himself a disservice here by trying to shoehorn more of his ‘anti-system’ ideology. It’s almost as bad as when he tells us to join pyramid schemes later in the book. Pointless.
Success Is Five Skills, Your Skill And The Four Pillars Of A Rich Mindset
I really like this piece of advice. It speaks to many people who don’t have ‘traditional’ wealth building careers like banking or being a professional like a lawyer. The key to succeeding is to run with what you are good at and apply the broad functional knowledge of wealth building.
You don’t have to go into real estate or crypto or start a particular form of business. You take what you do and maximize the wealth that it builds you. For example, if you are that made up journalist from the anecdote above you could monetize your ability to write copy rather than your ability to write novels.
Then are many ways to monetize skills and you don’t have to fit into a box that anybody, BearMoney included, tells you to. If you are athletic you can monetize that. Remember that the investing to wealth portion can be done many ways, the cash accumulation is no different.
You Want To Know A Little About A Lot
Another good piece of advice. Being naturally curious about the world around you is a force multiplier when it comes to building wealth and creating opportunity.
We all understand the importance of interpersonal relationships so it’s clear that knowing a surface level of info about a lot of things will help you build rapport with many people. In addition, it might also save you money, make you money, or benefit you in some other way when you have a basic technical skill in something.
For example, if you have a corporation and spend 4-5 hours reading up on ‘allowable expenses’ you might not need an accountant to do it for you and you will save money and tax. Even knowing about the local sports team could close an big money deal for you.
A lot of success hinges on confidence or surface knowledge, so get reading and practicing!
Work For A Pyramid Scheme (NOT Bearmoney)
The author tells us to work for a pyramid scheme on page 122. I have no further comment to make.
The Management Skills: Cash Flow, Systems, People
This is a good tip for people seeking to build wealth in ways that require the input of others either through a productive company or through the use of professionals/freelancers etc. You have to understand all three aspects to succeed and more importantly, avoid failure.
Understanding cash flow means two things. First it means understanding the rhythm at which your assets will produce money for you. When buying with credit or dealing with suppliers this is very important. The second aspect of cash flow means understanding everything you need to use that money for. It is great to get $5,000 a month into the company but if you have to pay $7,000 a month for 6 months of the year you’ll need to plan for this.
That is where systems come in. Understanding how and why production, people, and processes works is absolutely vital. You need to be able to see bottlenecks, be around for key periods or even just know how big a job it is to replace the HVAC in your office. Systems account for everything external and internal it is not just the how your product goes from idea to profit.
Of course you can’t succeed without understanding people either. People are your allies, your enemies, and your consumers. They can work for you, work against you, and buy from you, sometimes all in the same day. If you understand what motivates them you will be able to achieve your goals.
Unfortunately the author seems to have a warped understanding of many groups of people and many different systems in our world. Nevertheless the point is valid, if not applied.
The Great and The Bad
This section of the books is very much a Jekyll/Hyde scenario. There are some of my favorite pieces of advice mixed in with downright dangerous and fairly stupid hot takes. I cannot believe such a well renowned author recommends that we join a pyramid scheme.
Something interesting is becoming apparent though. The love/hate relationship that the FIRE community has with this books is starting to make sense. The book has some great, great advice and if you apply everything that is great and leave out the ‘meh’ and the bad it is a great blueprint so far. Although at this rate I can’t see how anybody would say it is in totality a great book. It seems like Roberty Kiyosaki might be the Jordan Peterson of FIRE.
We’ll see whether we’re told to clean our room in chapters 7-9. You can check that out here.