Rich Dad, Poor Dad (Summary of the book)

Preference on investment rather than consumption is the key to create wealth.

As we saw the thought process of getting rich from summary of the book Think and Grow Rich, we now move on towards real world techniques to get rich. Hence, the summary of Rich Dad, Poor Dad.

The author creatively explains the concepts involved in how rich people think about their money, how they save taxes, how they invest and keep growing their assets instead of liabilities. Before we dive in — let me explain what is an Asset and what is a Liability.

Asset

Something that helps you fetch money, is an asset. Your job is not an asset. If you work for something and that pays you, it’s your job. On contrary, if money works for you, it is an asset. Investments that pay you dividends, real estate that fetches you rent, lending business that fetches you interest is an asset.

Liability

Something that puts a hole in your pocket (in terms of money) is a liability. A car on loan is a liability. Now, I am not saying don’t buy a car 😂, read on further how rich people buy luxuries they need. The shit (apologies for my language 😆) that you buy, that puts you in debt is a liability. Personally I feel, credit card is a liability, just use your own money, I mean, why the credit card ?😂.

What RICH people do ? —

They create assets from the money they earn. Author was not from a rich family background. His dad was a teacher who believed in having a degree, getting a government job, drawing a salary and continue the cycle that his dad had. But author’s friend — Mike, his dad had a different perspective. Mike’s dad said, always think of how can you make money work for you? and not the other way round.

Hence, the focus should be on creating assets, have money work for you. The money that comes in from assets, you can use it to buy luxuries. That’s exactly what rich people do. Author did the same thing. He had a job, he used his salary to build assets — real estates, stocks, etc. and made money to work for him. The money that his assets made for him, helped him buy his new Porche ❤️. So, did I say don’t buy luxuries because they dig a hole in pocket? Yes, but they dig a hole, when you buy it using debt. But when you have assets, your seed capital is intact, and you are free to enjoy whatever you want. Foreign tours? Luxury Cars? — you name it, you have it 😄.

What Poor People do ? —

The poor and the middle class work for money, the rich have money work for them. They let fear control their minds. What fear do poor and middle class people have ? — the fear of not being able to pay bills if they don’t work for money. For them, the fear of losing is greater than the excitement of winning. Losing money while making investments is part of the game. Nobody can escape it and fools don’t learn from it. Poor people play it safe when it comes to money. They just don’t want to lose and they miss out the big opportunity to earn.

We should not let our fear and greed take over our thinking ability. Fear and greed is what let people loop in the cycle of get up, go to work, pay bills. We should use them in our favour and not against us. We should confront our fear, weakness and neediness by choosing our own thoughts as the way out.

The need for financial literacy:

It’s not how much money you make, it’s how much money you keep.
The author retired and 47 and his wife at 37. They had their finances so well planned that their money worked for them after working for money to finance their assets. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone. The biggest problem is — Rich people buy assets, but the poor and middle class acquire liabilities that they think are assets.

Rule No: 1 — Understand the difference between an asset and a liability, and buy assets.
If you want to get rich, you just have to follow this one rule. Just one freaking rule. That is what it takes. No rocket science, just one rule. An asset puts money in your pocket and liability takes money out of your pocket.

Whenever you want to buy something, let’s say a bigger house, fund a foreign tour, a car with likes of Audi, BMW, Merc, Jaguar etc. first buy assets that will generate the cash flow to pay for any of these things. To be honest, I have been following this from my internship days and have bought myself whatever I wanted. You may think I am trying to brag about this or tooting my own horn, but it’s not, I am trying to say that you don’t need much capital to start with. I started with Rs: 5,000. Right now, all my monthly expenses like travel, restaurants, donations, luxuries, shopping, gym, nutrition for gym, all kinds of bills, etc. are taken care by the part of cash flow from my assets and reinvest the remaining. Just to give you an idea, it is more than what my dad makes from his day job. My salary from my job is kept intact and I keep buying more assets and still save and pay remaining taxes. What assets I have, you may ask? — more on that in another blog post 😉.

When does one know he/she is rich?

The first requirement is, most of us have to rely on our job to fund our own little venture of buying assets which is our side hustle. The early you start, the better it is. If you happen to know the principle of compounding, you can understand the importance of starting early. I started when I was 21 and now 2 years later, I am 23 and still learning and growing.
So to measure success lets define what wealth is — Wealth is a person’s ability to survive so many number of days forward — or, if I stopped working today, how long can I survive. If you can do this, then you are wealthy, but you may not be rich. When you keep growing your cash flow from your assets other than your physical labor, you are own your way to get rich. Keep reinvesting the excess that you have after your expenses and increase the cash flow.
Just keep in mind the following 3 points to keep progressing on your way to get rich —

1. The rich buy assets.
2. The poor only have expenses.
3. The middle class buy liabilities that they think are assets.

Mind your own business:

The rich focus on their asset columns while others focus on their income statements.
Our current education system focuses on preparing us to get good jobs by teaching scholastic skills. No one bothers to teach us how to be financially literate. Now job is important if we want to get rich since it will fund our little venture to buy assets.
The real assets as per author are:

1. Some business that won’t require you to be physically present or can be run by other people and you make money out of it. If you need to be present, then it’s your job and not business.
2. Stocks, bonds.
3. Royalties from your patents.
4. Anything else that has values and produces income out of it.

The mistake what we do:

There are times when people can’t find employment, then they tend to start their own company, get inspired by Instagram quotes and keep their senses out from their brain. But the odds are against success. 9 out of 10 startups fails every 5 years. This is exactly what author has mentioned. Otherwise it is wiser to keep a day job and keep building your asset column. Keep your day job, be a great hard working employee and keep building your asset column.

An important distinction between rich and poor is — The poor buy luxuries first, using credit card debt because they want to look rich, while the rich invest in their asset column first and then indulge in luxuries from the cash generated. It is not wrong to buy luxuries, but the way you do it can create a financial problem later on.

The smart way to handle your taxes — how rich pay their taxes

Author talks about how the tax system started, it was started by the poor and middle class folks to get money from the rich. But eventually, it backfired on the very same people who started it. The rich being rich 😂 found a way out of it. No matter what the take-from-the rich folks came up with, the rich always found a way out. Let me explain —

1. Corporations (The secret of the rich folks)— The thing about corporations is they are taxed differently than the salaried individuals. Corporations earn money, they spend for their expenses, then tax is paid on what is remaining. On the other hand, employees work, the amount of the money they make, is taxed first, the taxes are deducted and then the remaining is credited to banks. This is one way of going around taxes. Of-course there are legal implications to it, it is not straight forward. I have been trying to work on it, but it seems too deep.
2. Rich folks don’t own anything — Sometimes, the folks who are jealous of rich, try to force a lawsuit, tip off the income tax folks, but rich are smart AF. When the lawyers and government dig deep, they find that the rich don’t own anything. Everything is owned buy their corporation.

The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth.

A lot of folks ask is it really necessary to learn finance? Why cannot I just keep my job and just enjoy on credit and keep paying monthly instalments for the credit? — Author says, Learn so that you just have more options. No one has a job which is permanent for it’s lifetime. So this is the only way out, to learn to manage money that you have.

Financial Intelligence comes following skills:

1. Accounting
2. Investing
3. Understanding markets
4. The law

Simple math and economics is just what you need to do well financially. Trust me!

It is not gambling if you know what you are doing. It is gambling if you are just throwing money into a deal/markets and praying. You need to learn the new skill of investing. Life is much like going to a gym. The most painful part is deciding to go. Once you get past that, it’s easy. There have been many days where I have dreaded going to the gym, but once I am there and in motion, it is a pleasure. After the workout is over, I am always glad I talked myself into going. Same goes for learning a new skill.

The Secret of the Rich Families

Giving money is the secret to the most great wealthy families. The most important law of the money is Give and You shall receive.
Author’s rich dad (his friend, Mike’s dad) gave lots of money away to charities, church, etc. But his own dad, said: He will give when he will have lots of it. But the issue was there was never extra. He believed, receive and then you give. Now, you don’t need to go on credit and start donating, donate a part of what you have, generously. Karma is real!

Rich dad believes in one thing, Whenever you feel short or in need of something, give what you want first and it will come back in buckets.

Never believe in cynicism. There are people who only believe in rumours. They criticise instead of analyse. Do your own analysis of the investments. Yes, take advice, but use your brain.

Rich dad believed that saying I can’t afford, it shuts down your brain. Instead say, How can I afford it? because that opens up possibilities, excitement and dreams.

If you read till here, I would like to mention the my favourite 8 out of 10 steps from author to awaken you financial genius. Going into details of each step is out of the scope of this blog post, I would suggest you to read the book.

1. Find a reason greater than reality, the power of spirit.
2. Make daily choices, the power of choice.
3. Choose friends carefully, the power of association.
4. Master a formula to make money and then learn another, the power of learning quickly
5. Pay yourself first, the power of self-discipline.
6. Be a giver, the power of getting something for nothing.
7. Use assets to buy luxuries, the power of focus.
8. Teach and you shall receive, the power of giving.

So this is the summary of the book. Let me know what was good, what was bad. I promise to improvise in the next summary of the book — How to win friends and influence people.

Got questions? or want to say hi ? 😄 Find me on LinkedIN and Twitter.

Peace ☮️