Today we’re going to talk about a book that has a special place in my heart. I read Rich Dad Poor Dad (What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!), by Robert Kiyosaki, when I had just gone to college, and it’s probably the main reason that I continuously dabbled in entrepreneurship. My dad is a very educated man and has always made decent money, but he falls into the “Poor Dad” description in this book. I’m so grateful for my dad and all the lessons he taught me, but I wish every parent knew the concepts in this book. I think this book is still the #1 best-selling personal finance book of all time. So let’s learn some good stuff from it.
Kiyosaki has a lot of great quotes, but this one is relevant to the main lesson we’ll learn today: “Assets put money in your pocket, whether you work or not, and liabilities take money from your pocket.” Now, remember I went to graduate school in professional accounting, even though I don’t fit your typical accountant stereotype. And it’s funny, because these definitions of assets and liabilities are not the proper, technical definitions. The funny thing is, I like them much more.
The actual definition of an asset is something that has future economic benefit, which isn’t exactly the same, because cash is an accounting asset for instance. A liability is much different, though: It’s the future sacrifices of those economic benefits because of past transactions or events. Don’t try to remember these, unless you want to become a CPA. Instead, let’s focus on Kiyosaki’s definitions, which are actually useful in running a business in the real world.
That’s the first golden nugget of today, but we’re going to focus on it a LOT more and basically learn what differentiates the poor, middleclass, and rich. I’m convinced that understanding this concept is the main driver behind becoming financially independent, so if I can help it click for you, I’ll be psyched. Then, I just wanted to touch on a couple of other powerful concepts he talks about in the book. One is that you should “work to learn” instead of working for money, and the other is the power of corporations.
But let’s jump into the meat of it with assets vs. liabilities. Oh, and I know sometimes that “versus” word is used just for comparison. That is NOT the case here: When it comes to building wealth, assets are good, and liabilities are bad. As the quote said, assets put money in your pocket, and liabilities take money out.
The common example he uses to show that most people don’t get this concept is that everyone used to call their house an asset. Before the housing crash, people used to think that the price of real estate only went in one direction, and that was up. But even then, unless you refinanced your house, it wasn’t putting money in your pocket, it was taking it out through your mortgage. Of course, it’s a different story if you own the property, and you’re making money through rental income.
So what are some assets? Well, a rental property would be one. A business is another. A stock that pays dividends would be another. These are all “cash flow assets.” A different kind would be “capital gains assets,” and you could argue that these are good too, like a house that increases in value, or a stock that doesn’t pay a dividend but goes up in value. There’s nothing wrong with these, but they’re a little harder to evaluate.
Before we move into the difference between the poor, middle class, and rich, I just want to define a couple of things. We’ve been talking about assets and liabilities, and, combined, these represent our “Balance Sheet.” Just think of this as the things we have. The other side of the coin is our “Income Statement,” and you can think of this as the flow of our money. “Income” is money coming in, and “Expense” is money going out on a one-time purchase (in other words, it won’t benefit us in the future). Food is a great example of a purchase. The best way to understand the difference between these financial classes is by comparing balance sheets and income statements.
So, this is basically how Mr. Kiyosaki shows this; I’ve just made a little tweak in how I draw the arrows and represent a 0 balance. This is what a poor person’s finances look like: He has a little income, and it may go up if he gets a raise, but, whether it’s through standard of living increases, inflation, or increasing his means, he will spend all of his income on expenses. Likewise, if his income goes down, his expenses have to go down. This makes it so he never has any money left over to buy either assets or liabilities.
This is what a middle class person’s finances look like: The biggest difference between him and a poor person is that his income exceeds his expenses. He takes the amount he has left over and buys liabilities like a car and a house. These liabilities, in turn, increase his expenses, so he has to continue to pull a paycheck to pay for them.
And this is what a richer person’s finances look like: The biggest difference between him and a middle class person is that he also has an income that exceeds his expenses, but he chooses to spend it on assets. The assets, in turn, generate even more income, which he can use to invest in even more assets, and the cycle perpetuates. Because the rich leverage money to make more money, they can buy nice cars and houses too, if they want, because their assets will pay for their liabilities’ expenses. Whew, I know that’s a lot, so just come back to these diagrams to refresh if you need to.
Let’s talk about the concept of working to learn really quick. This is one lesson I’m so glad my dad taught me. As early as grade school, if I got a bad grade on a test or something, he wouldn’t get mad. Instead, he would just say “make sure you understand WHY you got the questions wrong, so you know it for next time.” This focus on learning made me the machine I am today I think. And, because I would go back and learn what I missed, I always drilled home the fundamentals I would need to build on top of.
This just makes me want to stress the whole concept behind these knowledge businesses. Never stop learning. Like Warren Buffet says, “the more you learn, the more you earn.” And not just money. The more you learn, the more fulfilling and enjoyable your life is. So keep up the hard work with your business to become a true master of your industry. And keep learning the broad knowledge in these books, in this membership, and wherever else you can find it.
Last, let’s talk about the power of corporations. The first thing to understand is the tax protection that they provide. I can illustrate this with a simple example. If you’re an employee 1) you earn a wage, 2) the government taxes your wages, and 3) you pay a $100 phone bill. If you’re a business owner, 1) your business has income, 2) you have a $100 phone bill which is at least partially deductible, and THEN 3) you pay the government taxes. These deductions reduce your overall taxes.
The other biggy is the legal protection that they provide. If you’re an employee and something goes wrong at work, another party might sue your company. If you’re in business for yourself, someone could sue you directly. This is why you generally don’t want to be a sole proprietor, because there’s no legal protection. But if you create a separate legal entity, then that’s the thing at risk.
The beauty of today is how affordable this stuff is. You can form an LLC, which will give both tax and legal protection, for under $1,000.
Whew, I know that’s a lot, but I made the summary easy. If you look, who do these financials belong to? I’m sure you got it; this is for the rich, and it’s what we all want to try to do. First, get your income to exceed your expenses, then spend that excess on assets that will put more money in your pocket. Rinse and repeat until your assets generate enough income to pay for all your expenses, and that’s what’s called financial independence.
By the way, a little shameless plug here: this membership that you’re a part of is an asset. You are investing in something that is going to make you more money down the line. Any time you can invest in a book, seminar, course, or some way to increase your knowledge, it’s probably a good investment in an asset.
Hope you all learned a lot today. These concepts are pure gold. And here’s the exercise for today: 1) How can you increase your income? 2) How can you decrease your expenses? And 3) What kind of assets do you want to invest in?
This book, a $10 purchase, is a great example of an asset. I can’t calculate how much money this book has made and saved me. And let me know how I can improve these lessons!