A top-selling personal finance book, Robert Kiyosaki explains the difference between his friend’s dad (Rich Dad) and his real father (Poor Dad) and their money habits.
This book is relatively simple, easy to read and understand. It provides a good introduction to personal finance. As I re-read the book, some parts of the book might be too generalised and not applicable to everyone.
That said, it draws upon principles that you can apply in your own life to make better financial decisions.
Here are 5 key takeaways from the book “Rich Dad Poor Dad” by Robert Kiyosaki:
Make Money Work for You
The middle class and the poor work for money. Instead the rich make the money work for them.
The poor and middle-class work for money, get a salary and pay their expenses.
The rich do not work for money. They invest in income-producing assets which generate more money for them.
Assets are anything which puts money in your pocket. For instance, investing in the stock market generates returns and is considered an asset.
Asset = puts money in your pocket (Generate money)
Liability = takes money out of your pocket (Costs you money)
Contrary to what people might think, owning a car is not an asset. On top of paying for the initial cost of the car itself, you have to incur expenses such as your car loan, insurance, and regular maintenance. Following the definition above, this makes owning a car a liability.
The rich buy assets. The poor only have expenses. The middle class buy liabilities they think are assets.
Many financial problems are caused by trying to keep up with the Joneses, trying to imitate the lifestyles of their friends and family members.
Instead of buying liabilities, work toward investing in income-generating assets.
Pay Yourself First
The phrase “paying yourself first” comes from George Clarson’s best-selling book The Richest Man in Babylon.
Out of the millions of people who have come across this term or people who understood this concept, only a few actually puts this into practice.
To pay yourself first means allocating your money to the assets column, before paying your monthly expenses and bills.
For the poor and middle-class, the salary they draw from their job goes straight to paying for their expenses (i.e. taxes, rent, food, transport etc). The rich, on the other hand, pay themselves first by investing in assets first.
However, paying for someone else first and paying yourself last, you’ll realise it leaves little or nothing left in the assets column.
It might be hard to wrap your head around this concept because you might think, “Hey, shouldn’t I settle my bills and pay for all my loans first before thinking about having money to invest?”.
The world pushes you around and puts pressure for you to pay for things. Paying yourself first does not mean being irresponsible and not paying your bills.
It’s about having the self-discipline and tolerance for financial pressure when the bill collectors are screaming for your attention. To make investing in assets your priority, the key to becoming rich.
Business vs Job
Do not confuse your profession and your business. When someone asks what do you do, you reply “I’m a banker” – that is your job, not your business.
Your business is under your asset column, not your income column.
Keep your daytime job but start buying real assets:
- Businesses that do not require your presence
- Invest in stocks, bonds, real estate
On the first point, Naval also mentions the type of possibilities of the Internet age. Not only does the Internet give you a wider audience and allows you to scale, but you also do not have to be physically present to make money.
Especially in this pandemic period, this becomes more relevant than ever before. More about this in the Four Hour Work Week.
The Most Important Asset
“Your mind is your greatest asset, so be careful what you put into it.”
Just like the phrase, “You are what you eat”, the content that you consume and the knowledge you feed yourself shape your decisions and becomes part of your identity.
Most of our money habits are shaped by our parents, the myths about money that we were told at a young age. These stories might not be relevant today. And you’d be surprised to know that some of these are not even true.
Actively seek out ways to grow your knowledge about money and manage your finances. Increase your financial literacy. Understand basic accounting, Buffett’s investment philosophy, the psychology of money, and our human biases when we make financial decisions.
Look for your heroes and learn from them. Find people who are successful in that field and tap on their wealth of knowledge. Read more books and find resources on the internet. Stand on the shoulders of giants.
The key here is to start early because knowledge compounds. Aim to become 1% better every day. The earlier you grow your knowledge, the better the compounding effect you get. Also, you’re less likely to make huge money mistakes.
As Warren Buffett said, “The most important investment you can make is in yourself.”
What is Your Reason?
Underlying everything that we do, there is a fundamental need we are trying to fulfil.
As with anything in life, you don’t have a strong enough “why” it makes the process difficult when you are faced with setbacks.
Your reason or purpose is usually a mix of “wants” and “don’t wants”.
“I don’t want to work my entire life and be stuck in the rat race.”
“I don’t want to live paycheck to paycheck.”
“I want control over my time and my life. I want to make money work for me so I can be free and travel the world with my loved ones.”
“I want control over my time and my life.”
Dig deeper and ask yourself these questions. “What does being financially free means to me?”, “Why is it so important for me to gain financial independence?”. Your purpose lies somewhere in these answers.
5 Key Takeaways
To recap, here are the five key main points:
- Make money work for you by Investing
- Always Pay Yourself First
- Know the difference between your Business and your Job
- Your Mind is the Most Important Asset
- Find your reason for financial independence
Among all these 5 takeaways, the last one is the most important.
Find your personal reason and understand why it is important for you to “gain financial freedom”. If you gain clarity on your why, you’ll naturally get to the how. Your journey starts with this step.
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