Book review and a short summary of Rich Dad Poor Dad by Robert T. Kiyosaki
Introduction
The book Rich Dad Poor Dad by Robert T. Kiyosaki is a book on personal finances. It highlights the importance of financial literacy and discusses it through the contrasting mindsets between the financially rich and the financially struggling and shares some lessons that can be drawn from them. It also notes some of the pitfalls that we could fall into if we don’t educate ourselves financially.
I read this book a while back and it is one of the first books I read on finances. It was eye opening to me and I really liked it. The following paragraphs discuss the main takeaways that I have from the book.
Differences between assets and liabilities
The book explains that assets are things we own that makes us more money than we spent on them. Liabilities are things we own that we have to spend more money on than what we make from them. The book says that the home we currently live in or our car are examples of liabilities. This is because the money we spent on them is larger than the money we make on them. For example our home has expenses such as maintenance, repairs or taxes, with no, say rental income coming from it. Similarly our car has expenses like insurance or maintenance but doesn’t make us any money directly. Examples of assets are businesses we own, royalties from intellectual properties or a rental property. These assets could make a profit for us. The book also talks about the difference between people who are rich, poor or middle class in terms of assets and liabilities. It says that the rich buy assets, the poor only have expenses or liabilities and the middle class buy liabilities thinking they are assets.
In summary assets make us money and liabilities lose us money. Understanding it could potentially help us better evaluate a purchase when it comes to its financial potential.
Understanding cashflow
The book explains cashflow in simple terms and there are drawings and diagrams in the book that I believe will make it easy for us to understand it. From what I learned from the book, cash flow is an account of the path taken by the money we bring in. What we earn is directed into expenses, assets or liabilities. If we have a way to reduce our expenses or liabilities then we have more money left for other things. If we direct more money into assets then we could generate additional income from those assets and increase our overall income. I think understanding this helps us better evaluate the big picture trajectory of our finances and implementing it will lead us onto the path of financial independence.
The upsides to owning a business compared to working in a job
The book talks about some of the upsides of being a business owner compared to working in a job. These upsides are through the flexibility and freedom in managing time and money. As a business owner you could employ someone else to take care of some task that you usually do and free up your time. If the business is losing money you can lay off employees, work in their place or introduce pay cuts to hopefully save the business and your source of income. If you are an employee you are tying your salary to your skill, effort and time. If the business is going through hard times then you may lose your job. Also you may not be paid adequately for your skills and expertise. But it is not all upsides as the book notes that a lot of businesses fail. Anyway having a decent business probably have more upsides compared to a decent job.
The book discusses taxes in some detail when it comes to ownership of assets. I am going to try to explain it with an example I have made up. Let’s say you are going to buy some stocks. You could buy it under your name or you could buy it under a business that you have set up. Setting up the business meaning collecting or providing certain details and registering it with the government department responsible for it. Let’s say you registered the type of business as a corporation. For the sake of our discussion consider that the income earned by a corporation is taxed less than the income earned by an individual. Imagine that there are 2 expenses in buying and selling stocks. First is the brokerage fees associated with buying and selling stocks. The second is say transportation costs to travel to the brokerage firm as you have asked them to conduct transactions only when you are physically there, as a security measure. If you open a bank account under the business and buy or sell stocks using it then these come under the ownership of the business and not in your name. If you buy them from your personal bank account then it is under your name. These two cases are different when it comes to how the profits are determined and taxed. The business gets taxed on the profit after the expenses of transportation and brokerage fees are deducted. As for the individual let’s say the entire profit is taxed. On top of that, as per our example, the profits are taxed at a lower rate for the business. So at the end of the same transactions there is more money left in your business account than in your personal account or in other words more money to reinvest and grow your income.
Please keep in mind that the above example is hypothetical and I am just sharing how I make sense of it. Additionally the author is from the USA and is probably talking about the tax situation in America when this book was written, so this may or may not be how it works for you. Anyway this was eye opening to me and I think this is something that is beneficial to be aware of.
Conclusion
I found this book really helpful and it gave me a lot of insights into understanding money. There were things in the book about debt that I couldn’t quiet stomach but other than that I think this book is great. I will add to it that it is a good idea to read multiple books on a topic to get a well rounded opinion on it. Different authors may be looking at a topic from different angles and having those different view points help us better understand the topic. Also everybody has their blind spots so reading different people’s work hopefully help us in recognizing and minimizing blind spots. I have linked a review and summary of an other book I would recommend as well in the “Related article” section below. Anyway I would highly recommend this book to learn about the importance of financial literacy, understanding the differences between assets and liabilities, understanding some realities of taxation and the benefits of owning a business over working in a job.
Book discussed
- Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! by Robert T. Kiyosaki