“I had two fathers, a rich one and a poor one,” writes the author, Robert Kiyosaki. Although well educated, his biological father (poor dad) struggled financially whilst his best friend’s father, whom Kiyosaki refers to as ‘rich dad,’ dropped out of middle school but eventually became a millionaire. The book Rich Dad Poor Dad (1997) examines the perspectives of both his father’s as well as how they helped shape his thoughts regarding money, investing and life in general.
Read this book summary in 6 Minutes
Rich Dad Poor Dad Summary
- The Rich Don’t Work For Money
- Financial Literacy is Key
- Invest in Businesses!
- Understand Taxes & The Power of Corporations
- The Rich Invent Money
- Work To Learn, not for money
Rich Dad Poor Dad Summary
#1: Know the difference between an Asset and a Liability, and Buy Assets
Kiyosaki defines an asset as something that puts money in your pocket, whereas a liability as something that takes money out of your pocket.
He demonstrates the distinct cash flow pattern between an asset and a liability and how the former generates income for you whilst the latter drains your accounts.
Furthermore, it’s important to be able to distinguish between one from the other, as the author stresses:
“It is rule number one. It is the only rule. This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability.”
#2: Don’t invest in Liabilities that you think are Assets
Kiyosaki points out that a common mistake that the poor and middle class make is by owning a house that is too expensive before building up a solid financial portfolio.
He reasons that when you buy a house too early, you go into it without additional capital to support you. You also lose out on the real-world education you could have gained from buying other assets.
Instead, he advises: “I am not saying don’t buy a house. What I am saying is that you should understand the difference between an asset and a liability. When I want a bigger house, I first buy assets that will generate the cash flow to pay for the house.”
#3: Develop A Wealthy Mindset
The author writes: “The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth.”
Throughout the book, Kiyosaki provides numerous examples as to how his rich dad and his poor dad held different attitudes and gave contrasting advice about whatever the topic of discussion may have been. It was evident that each of them had a completely different mindset.
As he accumulated more wisdom and experience throughout his adolescence and well into adulthood, he became more inclined towards rich dad’s advice.
Great opportunities are often invisible to the eye, but visible to the mind Kiyosaki tells us. To be financially independent, he stresses the importance of developing your mind.
#4: Make Money Work For You
The author illuminates that most people who work for money, don’t know what else to do with it besides save, and so eventually they drive themselves into debt. This is because learning to work for money is often easier than learning to invest.
Kiyosaki further points out that the difference between the rich and the poor isn’t about their wealth, but it’s to do with their mentality. Whilst the majority are risk-averse and play it safe, the wealthy learn how to use what money they make for generating even more gains. In other words, they make money work for them.
#5: Be Driven by Passion, not by Fear & Greed
“When it comes to money,” says Kiyosaki’s Rich Dad, “most people want to play it safe and feel secure. So passion does not direct them. Fear does.”
He elaborates: “…the fear of being without money motivates us to work hard, and then once we get that paycheck, greed or desire starts us thinking about all the wonderful things money can buy. The pattern is then set.”
“Offer them more money,” he adds, “and they continue the cycle by increasing their spending. This is what I call the Rat Race.”
It is not just the poor and the middle-class Rich Dad points out, fear is also the reason that drives many of the ‘rich folks’. Many rich people believe that by amassing tons of money, they can eliminate the fear of being poor. But what happens as they accumulate more and more money is that they realize that the fear just gets worse and they now fear losing the money.
Thus, even though our emotions are what make us human, we have to be able to separate ourselves from our emotions and do our own thinking. Kiyosaki’s rich dad tells him that if you can’t handle emotions such as fear and desire, you end up being a ‘highly paid slave.’
His advice: Be truthful about your emotions and to use your mind and emotions in your favor, not against yourself. Be an observer rather than a reactor.
#6: Increase your Financial IQ
Traditional wisdom tells us that we need to keep working for the paycheck. But it is only when we let go of this notion and start asking ourselves questions such as ‘is there another way?’ can we then find smarter ways to make more money.
As Kiyosaki writes, “they think that more money will solve the problem and don’t realize that it is their lack of financial education that is the problem.”
The author points out that increasing one’s financial IQ is paramount for achieving financial independence. It consists of having knowledge in 4 broad areas of expertise:
The first area of expertise is in accounting, and to improve in your ability to read numbers. The more money you are responsible for, the more accuracy is required. It involves understanding financial statements such as the balance sheet and income statement, as well as their relationship with the other.
Second, involves investing which the author describes as the science of ‘money making money.’
The third is the ability to understand markets; its technical aspects as well as basic supply and demand.
Finally, the fourth area of expertise is understanding law. Specifically, it involves gaining insight into how corporations work and how it can provide tax advantages to individuals.
#7: Mind your own Business…
Kiyosaki writes: “…there is a big difference between your profession and your business. Often I ask people, “What is your business?” And they will say, “Oh, I’m a banker.” Then I ask them if they own the bank. And they usually respond, “No, I work there.” In that instance, they have confused their profession with their business. Their profession may be a banker, but they still need their own business.”
To mind your own business does not mean you have to quit your day job and stake everything on a single entrepreneurial adventure. But instead, the author advises that you should continue to work for a wage or salary and instead of buying liabilities impulsively (which tend to lose value and even cost you as soon as you buy them), to invest in assets that will generate money for you.
#8: Leverage the Power of Corporations
Whilst the author’s biological father (poor dad) was a socialist, his rich dad was a capitalist and each had different philosophies when it came to the subject of money. As Kiyosaki learned more about the financial system, he realized that his rich dad’s capitalist philosophy made more sense.
Regarding corporations, he tells us that “the rich created the corporation as a vehicle to limit their risk to the assets of each voyage. The rich put their money into a corporation to finance the voyage. The corporation would then hire a crew to sail to the New World to look for treasure. If the ship was lost, the crew lost their lives, but the loss to the rich would be limited only to the money they invested for that particular voyage.”
Furthermore, he points out how corporations end up paying less tax than the individual…
He explains: “Employees earn and get taxed, and they try to live on what is left. A corporation earns, spends everything it can, and is taxed on anything that is left. It’s one of the biggest legal tax loopholes that the rich use. They’re easy to set up and are not expensive if you own investments that are producing good cashflow. For example, by owning your own corporation, your vacations can be board meetings in Hawaii. Car payments, insurance, repairs, and health-club memberships are company expenses. Most restaurant meals are partial expenses, and on and on. But it’s done legally with pre-tax dollars.” (p86; Robert Kiyosaki, Rich Dad Poor Dad)
#9: Buy luxuries last…
In Rich Dad Poor Dad, Kiyosaki makes an important distinction between the rich and the poor with regards to how they buy luxuries. He tells us that the poor and middle class often buy luxuries first whereas the rich buy luxuries last.
His reasoning: that whilst buying luxuries make you look rich, in reality, it just gets you deeper in credit. In addition, he says that buying a luxury on credit can make you come to resent that luxury as the debt becomes a financial burden.
Thus, as the author advises: “The old-money people, the long-term rich, build their asset column first. Then the income generated from the asset column buys their luxuries.” (p75; Robert Kiyosaki, Rich Dad Poor Dad summary)
#10: Value Learning over Money
One can gain a lot financially by investing in themselves and learning a new skill. The author recommends not to look for work based on how much money it will earn you, but for what you can learn from it. He emphasizes readers to increase their financial intelligence, which, as already mentioned is a synergy of accounting, investing, marketing and law and thus gain a better perspective on business systems in general.
Using the example of McDonald’s, he clarifies:
“When I ask the classes I teach, ‘How many of you can cook a better hamburger than McDonald’s?’ almost all the students raise their hands. I then ask, ‘So if most of you can cook a better hamburger, how come McDonald’s makes more money than you?’
The answer is obvious: McDonald’s is excellent at business systems. The reason so many talented people are poor is because they focus on building a better hamburger and know little to nothing about business systems.”
Maybe McDonald’s does not make the best hamburger, but they are the best at selling and delivering a basic average burger.”
He recalls how both his fathers had opposing views on what to focus on, as he tells us: “Job security meant everything to my educated dad. Learning meant everything to my rich dad.”