It is iconic, a book that you cannot get away from if you live anywhere in the personal finance sphere. Alongside other great works such as The Richest Man in Babylon or the Intelligent Investor it has changed many peoples’ lives. The books is, of course, ‘Rich Dad, Poor Dad’ by Robert Kiyosaki and Sharon Lecther, and nobody at BearMoney has ever read it.
Yep, you heard me, we have committed the cardinal sin of not reading the holy texts. However, this gives us a great opportunity to read it for the first time without the wide eyes of being rookie personal finance readers.
We’re going to break down the lessons provided in the book and see if they still hold weight and if ‘Rich Dad, Poor Dad’ should still be one of your first steps toward wealth building.
The book itself is broken into big lessons, but when we dive deeper we can see a much, much larger number of key points. Let’s se how we’re all going to become millionaires.
The Lessons of Chapter 0
The first thing we have to accept and move on from in the introduction is the ‘old switcheroo’ that the author pulls on us. Through carefully swapping his comparisons he attempts to make us assume ‘rich dad’ is obviously the holder of a PHD and ‘poor dad’ must be the uneducated one. This was probably relevant in 90s when first written but today the majority of people accept that college doesn’t equal great success.
Nevertheless it is a good thing to highlight how much influence the community your children have access to can be. To have two father figures with such differing ideologies and levels of education/ success in the same community is practically unheard of these days.
Money is taught at home
This is a very important reality. While it is of course an extra burden for you to be the only person teaching your children about money, it also means the government isn’t deciding how they should think about their finances. It also highlights the fact that a lot of what you need to be successful is non-academic. A reality check for many people I’m sure.
The Modern Economy is Ignorance, Not Design
Unfortunately this is the first point at which I have to disagree with Mr Kiyosaki. The idea that the current economic toxicity of consumer debt and wasteful spending is born of financial ignorance is just wrong. The entire economy is designed to promote debt and stupid spending. The Neoliberal economic model is about increasing inequality through debt and welfare/state economy cuts and the nationalizing of private sector risk.
Teaching finance in schools would therefore be a threat to this system. Ignorance persists because the financially powerful want it to exist. If people were finically savvy, many investors would become penniless because many corporations would be in serious trouble.
Welfare and Job Security Are Apocalyptically Bad
The author takes multiple digs at social programs and labor rights in these sections without providing any real sort of evidence. When introduced later to the idea of fear as the noose that keeps worker servile this is highly ironic.
The idea that tenure in an academic position or a government pension is a bad thing flies in the face of the idea of fear as motivator. We will touch on this later in the next sections but it is clear from the outset that the author has a libertarian view of the state and taxation. When taken at face value this actually becomes contrary to the ideology of ‘rich dad’. It’s a small theme but people hungry to beat the drum of Reaganonmics again will seize on it.
The irony isn’t lost when the poem by Robert Frost ‘ The Road Not Taken’ is reproduced a poem which is actually about how interchangeable ideas are and how time warps our self perception.
It’s not a huge deal but it isn’t a valuable point. It’s barely even a coherent one.
Know when to trust your gut and trust it!
A core theme of this book is cultivating an ability to understand and take risks. In essence a rich dad mindset means understanding the environment around you and striving to maximize your gains from it. This often involves walking away from traditional wisdom and trusting your gut.
This is a vital lesson for many people. The masses generally don’t enjoy nuance and you can see this today in the personal finance sphere. By logic ETFs should have done away with mutual funds, yet they persist. Why? A lot of people still think they’re ‘safe’ and cheaper than buying securities.
Cultivating and trusting your gut is probably the best tip you can give somebody.
The lessons are still applicable at the median (BearMoney)
This is our own insight here that we wanted to get out ahead of. Given that the lessons of the book are formulated in the 1950 and 60s it would be dangerous to assume the monetary reality in 2021 is the same.
Issues such as minimum wage, expenses, and inequality have changed dramatically over there past several decades. Despite this it is worth noting that if you apply a ‘median’ case scenario for this book its lessons are still relevant. This means that the average American household today is in a broadly similar position to the average household of the time.
There isn’t any reason to say ‘Ok Boomer’ to the practical advice within ‘Rich Dad, Poor Dad’.
The Lessons of Chapter 1
Making Money Work For You Requires A Surplus (BearMoney)
‘Rich dad’ did not start his business empire in a vacuum. This point should be completely obvious to anybody reading but it is not stated nearly enough in the opening chapters. At some point in his career, ‘rich dad’ had to take excess capital he possessed or borrowed and invest it into making more money.
Why is this obvious fact so important? Well, if you are going to emulate ‘rich dad’ you have to understand that at some point you will need to deploy spare resources to make money ‘work for you’. There is a definitive grind to getting your money to work for you. Don’t let anybody else tell you otherwise. The idea with success is that it, like interest, compounds.
‘Rich dad’ definitely at one point, worked for money, it didn’t work for him. Never forget that you can start a similar journey even as a wage worker.
The Real Goal – Obtain The Median At 40 hours or less (BearMoney)
What?, I hear you say. I want this book to teach me how to work 1 hours a week and be a millionaire, the Elon Musk of frozen yogurt. That’s a totally fair goal to have, but how do you get the time and excess capital to start? You either have to earn it, loan it, or be gifted it.
At some point you are going to have to put in steady work to build momentum. So the real goal, for anybody without the money to already start is to obtain enough capital without sacrificing too much time so that you can realize your financial dreams.
In simple terms, you have to find your way to making a semi-passive income every day. Remember, even ‘rich dad’ worked, dealing with clients, employees, and suppliers is work. The difference is that other people made money for him every minute he invested. This is your real goal, acquire capital and use it to exponentially increase your wealth.
The rich don’t pay taxes
This is totally true, the wealthy tend to have the wherewithal to avail of numerous tax avoidance schemes. Whatever your personal view on the amount of tax payed by the mega rich you can’t deny the fact that they create and use tax efficient vehicles to keep as much money as possible.
Ironically enough, some of this comes about via corporate welfare which is something the author would probably disagree with. Even in a country not run by and for billionaires though, there would be ample ethical ways to minimize tax.
The only relevant thing is to remember that there are plenty of ways to minimize your taxes within the system, use them!
Fear is a motivator in an insecure society
One of the key points of this book put forward from the very beginning is that peoples fear and greed are overwhelming forces that keep them tied to the cycle of earn and spend. The insecurity that people face with things such a rent/mortgages and bills as well as their desire to buy nice things keeps them afraid to risk losing their jobs or achieve more.
This creates a situation where people will accept less money than they are worth or than they think is fair. They therefore give up both control of their destiny and the goal of reaching their economic potential. This is a very relevant point and important for a lot of people.
The ironic thing about it is that the author has already railed against practices that ensure secure employment and lower exploitation of workers. ‘Rich dad’ even highlights that not everybody can be an entrepreneur, that the world needs doctors and soldiers etc.
At this point in reading you have to wonder what the author would make of employment protections in countries such as France. This far into the book it seems like their is both wisdom and political agenda. The wisdom is don’t be afraid, the agenda is government bad.
Society collapses when inequality gets too high
This is a hugely important point for any reader of financial books in general. Systemic inequality causes systemic instability. ‘Rich dad’ understood this in a very nuanced frame of society that had educated, financially savvy people, with a competent government and a structured society.
This lesson from ‘rich dad’ flies in the face most economic talking heads in North America. The increasing share of wealth that the top 10% of American society control should be setting off alarm bells. Instead people who advocate for reform are called jealous or communist.
The other crazy idea, competent government, is something that also is required for a society not to collapse. Of course, how big/small or what kind of government is a matter for debate but the lesson remains relevant.
Without efficient government and lower wealth inequality, any society is on the path to ruin. That is a tall order.
Bean counting is only part of the answer
The actual dollars and cents of saving is incredibly important, but it is not the only part of the equation. To be successful as ‘rich dad’ has been you have to understand both what the numbers means and the context in which they exist.
‘Rich dad’ did not have a long education but he learned a lot about finances and money through experience. He no doubt was able to read markets and opportunities better over time. However, his attitude and application of all of the lessons above was just as important as his understanding of money.
His ability to manage risk as well as just to take risks in the first place took him just as far as knowing the value of a dollar and the best way to turn a profit.
The Lessons of Chapter 2
Retirement doesn’t mean not working
How many times have you had discussions with your friends about retirement and one of them talks about just laying on a beach somewhere? It used to be the old wisdom, you work 30-35 years and retire somewhere hot to live out the rest of your days in bliss. Not anymore.
The modern conception of retirement is very much an active retirement. It is more of a slow down, or a change of pace, than a stop. We understand that for human beings to live a happy and healthy life they need to actually do things. This is why retirement doesn’t mean not working, it means having full control over you efforts without any economic risk.
This is something that the FIRE movement talks about repeatedly, retirement is a phase of a journey not an end goal.
It’s not how much you make but how much you keep
This. 100 Times This. The only thing that matters is the net money you get into your pocket. Salary, investment income, sales, none of them matter until you have them in your hand. So many young people make this mistake by chasing high paying jobs in expensive cities. Earning $100,000 a year is great, a phenomenal achievement, but not when your bills eat up 75% of that.
Thinking about things in net benefit and long term return is absolutely vital. This mindshift helps in a lot of other areas with your spending, saving, and risk taking. It also helps with planning the future for your children and grandchildren.
Money in the pocket today, tomorrow, and 20 years from now is the key metric.
Lifestyle Inflation is Inevitable, Introspection
‘Rich dad’ has a very firm belief that the ‘Keeping Up With The Jones” mentality is an inventible consequence of earning more. Known as lifestyle inflation, it basically means that your need for fancy things will always grow alongside your increase in income. This means that you will always buy a bigger car, bigger house, the best clothes etc.
This was a terminally common belief up until the late 2010s. Today a lot of people actively make fun of people that do this (rightfully so). Although it is less than 20 years ago, it is still a relevant concern. However, it is not inevitable in any real significant sense.
People that budget well and invest generally spend money on pointless things, some of it fancy. When their income increases this can increase in absolutely terms but proportionately stay the same. I don’t see any issue with this. If you budget 5% for silly money, spend your 5%. That’s not a poor person mindset.
Speaking of mindset, ‘rich dad’ points out another vital lesson: the need for introspection. It it incredibly difficult to put into place good systems to succeed if you are constantly at war with yourself. You need to look inside, understand your motivations and problems, and deal with them.
You can follow ‘rich dad’ to the letter, but if you still think like ‘poor dad’, you’ll be in trouble.
Your Home Is Not An Asset
This one can be quite controversial, especially with property prices being what they are. Many of my friends and colleagues include their home in their net worth calculations. It’s an easy hack to add $250,000 to your net worth after all. However, there’s an issue with this. Your home is not a faceless asset.
‘Rich dad’ says an asset is something that puts money in your pocket. Technically then a home can be an asset, as you can turn a profit from renting out rooms or space in your house. In most cases however, owning and maintaining your home will cost money and never deliver a return.
Your primary residence is where you live. As we’ve established that it costs money to maintain and its value outside of renting a room is only realized if you sell it (or HELOC, but that’s a bit different), we start to see an issue. You have to live somewhere, either rent or buy. So your net worth becomes:
Value of Sold Home – Lifetime Cost of New Living Arrangement = Value of Home As Asset
Note, property is an asset, rental or otherwise. You can generate income from own property quite easily. The key thing about non-home property is that you can realize the gains.
This lesson is half practical and half ideological. I think it’s great but others would disagree.
Wealth Is How Long You Can Survive Being Economically Inert
This is another lesson that remains relevant despite people becoming more financially educated over time. Similar to the lesson about net income being what really matters, the amount of money you have coming into your house is only irrelevant for wealth calculations. It is the amount of time this money buys you that matters.
Cash flow is king and long term wealth involves have net positive cashflow. It is pointless to save $1 million and spend $100,000 a year when this money generates your $40-70,000 in dividends. Real wealth is being able to look at your spending right now and being able to fund it in perpetuity (or for a very very long time).
Without working another day in your life, all your expenses are covered, and you lead a fulfilling, balanced life. That is wealth, that is being a ‘rich dad’.
So many lessons
As you can see, for a section of a book that claims two lessons, we took away at least 16 pieces of wisdom or discussion areas. The vast majority of it was logical and though out, with only minor interference by either ideology or the passage of time. So far we have to consider ‘Rich Dad, Poor Dad’ to be a net positive guide to cultivating a wealth mindset.
What did you think of the lesson brought about in these chapters? Let us know below in the comments and be sure to check out in for the next installment of chapters 3-6 here.