Rich Dad, Poor Dad
Rich Dad Poor Dad
What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!
Introduction: A Rich Dad, A Poor Dad
I had two fathers, a rich one and a poor one. One was highly educated and intelligent; he had a Ph.D. and completed four years of undergraduate work in less than two years. He then went on to Stanford University, the University of Chicago, and Northwestern University to do his advanced studies, all on full financial scholarships. My other father never finished the eighth grade.
Both men were successful in their careers, working hard all their lives. Both earned substantial incomes. Yet one struggled financially all his life. The other would become one of the richest men in Hawaii. One died leaving tens of millions of dollars to his family, charities, and his church. The other left bills to be paid.
Both men were strong, charismatic, and influential. Both offered me advice, but they did not advise the same things. Both men believed strongly in education but did not recommend the same course of study.
If I had had only one dad, I would have had to accept or reject his advice. Having two dads offered me the choice of contrasting points of view: one of a rich man and one of a poor man.
Instead of simply accepting or rejecting one or the other, I found myself thinking more, comparing, and then choosing for myself. The problem was that the rich man was not rich yet, and the poor man was not yet poor. Both were just starting out on their careers, and both were struggling with money and families. But they had very different points of view about money.
For example, one dad would say, "The love of money is the root of all evil." The other said, "The lack of money is the root of all evil."
As a young boy, having two strong fathers both influencing me was difficult. I wanted to be a good son and listen, but the two fathers did not say the same things. The contrast in their points of view, particularly about money, was so extreme that I grew curious and intrigued. I began to start thinking for a long time about what each was saying.
My education started when I was nine years old. My rich dad taught his son and me a lesson I have never forgotten. I was getting tired of waiting for my chance to make money. After all, we lived in one of the loveliest neighborhoods in Hawaii. Mike, my rich friend, seemed to have everything. His father, my rich dad, seemed to have a magical way with money that multiplied itself.
One Saturday morning, Mike and I were working with his dad, helping him maintain a small convenience store he owned. We were sweeping and stacking canned goods for about three hours when his father said it was time for a break. He drove us to a park with a beautiful beach, bought us ice cream, and began to talk to us about his plans.
"Boys," he said, "I want you to avoid one of life's biggest traps. You need to learn this lesson now, so you don't spend your life chasing money and end up like most people. If you don't learn it, you'll become like the two women and the little man sitting at my ice cream stand: working for money, scared of being fired, hoping for a pay raise, needing a retirement plan, or wishing for a lottery win. Or you'll be like your dad, spending every dime he makes, always needing more, driven by the fear that money might not last."
He continued, "If you learn this lesson, you'll enjoy a life of freedom and security. If you don't, you'll end up like most of the people playing it safe, playing by the rules. When it comes to money, most people want to play it safe and secure. But that approach is risky. If my financial education taught me anything, it's that playing it safe with money is the riskiest thing you can do."
Mike and I didn't really understand what he was talking about that day, but over the years, his words began to make sense. That day, he offered us a choice. He would either teach us or let us go back to believing what our other parents taught us about money. And his first lesson was simple but profound.
Lesson #1: The Rich Don't Work for Money
"I'm going to teach you, but not in a classroom. I'll teach you by having you work." That's what my rich dad told us. He offered us a job paying 10 cents an hour, far below minimum wage at the time.
After three weeks of working for 10 cents an hour, I decided to quit. I told my rich dad I wasn't learning anything and was getting ripped off. That's when he smiled and told me I was beginning to learn something important.
"Most people have a price. And they have a price because of human emotions named fear and greed. First, 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: wake up, go to work, pay bills."
He continued, "When those two emotions, fear and greed, are in control, you don't think clearly. If you don't see this happening, you'll spend your life living in this cycle forever. You'll work for money, never questioning why you believe what you believe or why you do what you do. You'll just get up every day and do it all over again."
My rich dad explained that most people spend their lives chasing paychecks, pay raises, and job security because of the emotions of fear and desire. They're not really thinking about what they're doing, just reacting to their feelings. He wanted us to learn to make money work for us, instead of us working for money.
So he made us an unusual offer: to work for nothing. We would continue to work every Saturday, but without pay. In exchange, he would teach us how to make money.
For the next few weeks, my rich dad observed Mike and me as we ran his small convenience store. He taught us to see business opportunities everywhere. He taught us to read financial statements and understand how money works.
"Money is just an illusion," he would say. "Only the fear and greed of the unaware make it real. If you can learn to see past these emotions, you'll grow rich even when everyone else is complaining about not having enough."
One day, he showed us that we were wasting resources by throwing away old comic books. He suggested we start a comic book library where kids could read all they wanted for 10 cents. Mike and I ran this small business, which was located in Mike's basement, for three months. We hired Mike's sister to be our librarian - she charged every kid 10 cents admission. The business operated from 2:30 to 4:30 p.m. every day after school.
On an average week, we earned $9.50, and we paid Mike's sister $1 per week. We maintained the comic book inventory, and reinvested the remaining $8.50 into new comics and sometimes Coke to sell to our customers.
After three months, bullies broke up our business by threatening Mike's sister. But by then, rich dad had taught us something valuable: money is not real. The more Mike and I sat in our meetings with rich dad, the more we realized that we were thinking with our emotions rather than our heads.
"The poor and middle class work for money. The rich make money work for them." This was the most important lesson my rich dad taught us.
The main cause of poverty or financial struggle, he believed, is fear and ignorance, not the economy or the government or the rich. It's self-inflicted fear and ignorance that keeps people trapped.
Lesson #2: Why Teach Financial Literacy?
In 1990, my best friend, Mike, took over his father's empire and is in fact doing a better job than his dad did. We get together once a year on the golf course. He and his wife are wealthier than you could imagine. My rich dad's empire is in good hands.
In 1994, I retired at the age of 47, and my wife, Kim, was 37. Retirement does not mean not working. For us, it means that we can work or not work, and our wealth grows automatically, staying ahead of inflation. Our assets are large enough to grow by themselves. It's like planting a tree. You water it for years, and then one day it doesn't need you anymore.
My educated dad always stressed the importance of reading books, while my rich dad stressed the need to master financial literacy.
If you want to be rich, you need to be financially literate. The rules of money are simple. Know the difference between an asset and a liability, and buy assets.
"Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets."
This is the most important distinction that rich dad taught me. He would often say, "The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets."
Most people struggle financially because they don't know the difference between an asset and a liability. "If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities."
An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket. That's rich dad's definition, simple but profound.
The rich acquire assets like:
- Businesses that don't require their presence
- Stocks
- Bonds
- Income-generating real estate
- Notes (IOUs)
- Royalties from intellectual property
- Anything else that has value, produces income, and has a ready market
The poor and middle class acquire liabilities like:
- Homes (that take money out of your pocket with expenses)
- Cars
- Credit card debt
- Consumer loans
Rich dad would say, "The poor and the middle class work for money. The rich have money work for them."
Rich dad drew a simple diagram that became the foundation of my financial education:
The above diagram shows income flowing into assets, and assets producing more income, while the poor and middle class have income flowing directly to expenses and liabilities.
The primary reason people struggle financially is that they spend years in school learning concepts but not how money works. The result is that people learn to work for money but never learn to have money work for them.
This is the cash flow pattern of someone who buys liabilities, thinking they are assets:
And this is the cash flow pattern of a rich person:
The middle class finds itself in a constant state of financial struggle. Their primary income is through wages, and as their wages increase, so do their taxes. Their expenses tend to increase in proportion to their salary increase: hence, the phrase "the rat race." They treat their home as their primary asset, instead of investing in income-producing assets.
A true luxury is a reward for investing in and developing a real asset. For example, when my wife and I had extra cash from our apartment houses, she bought her Mercedes. It didn't take any additional work or risk on our part because the apartment house bought the car. She had to wait four years while the real estate investment portfolio grew and began generating enough excess cash flow to pay for the car. But the luxury, the Mercedes, was a true reward because she had proved she knew how to grow her asset column.
Too often, people buy luxuries on credit, creating a liability that steals from their ability to build assets. After I achieved financial independence, my company bought my Porsche. If I had bought it personally, I would have lost the tax deduction, the use of pre-tax dollars, and the time value of that money.
A friend's child was showing me his new credit card and asked if I'd like to buy a toy from him. I declined, explaining that I'm actually trying to teach him a valuable lesson. "You see, in today's world, many people use credit cards to buy luxuries now instead of focusing on investing in real assets first. Because of consumer debt and lack of financial education, most middle-class Americans have little or no retirement savings. The pension plans are underfunded, and Social Security is faltering. The coming retirement-age nightmare is being caused by people who follow conventional financial advice and count on the company pension plan and Social Security for retirement."
Lesson #3: Mind Your Own Business
The rich focus on their asset columns while everyone else focuses on their income statements.
That's why we so often hear: "I need a raise." "If only I had a promotion." "I'm going back to school to get more training so I can get a better job." "I'm going to work overtime." "Maybe I can get a second job."
In some circles, these are sensible ideas. But if you listen to rich dad, you're still not focusing on the right thing. To become financially secure, you need to mind your own business. Your business revolves around your asset column, not your income column.
The mistake in becoming what you study is that too many people forget to mind their own business. They spend their lives minding someone else's business and making that person rich.
To become financially secure, a person needs to mind their own business. Your business is not your profession. Your business is your asset column.
Once I understood this, I focused on building a solid asset base that would generate income automatically. My asset column included:
- Real estate
- Stocks
- Bonds
- Notes (IOUs)
- Royalties from intellectual property
- Other investments
I recommend starting early to build your asset column. Buy assets that you love. If you don't love real estate, don't buy it. If you love stocks, start there. The point is to start creating your asset column and filling it with things you understand and love.
The wealthy man builds his asset column first. Then the income generated from the asset column buys his luxuries. The poor and middle class buy luxuries with their own sweat, blood, and children's inheritance.
A true luxury is a reward for investing in and developing a real asset. Remember, luxuries should be the result of smart investing, not the cause of financial pressure.
My rich dad often said, "A business is a person's greatest asset. It's what gives them the ability to build great wealth. If you work for someone else's business, you're really just helping them build their asset."
My rich dad cautioned us against spending our lives working for money and then believing that a company or the government would care for us once the working days were over. "Most people don't understand why the rich get richer. It's because they're playing to win the game with assets. The poor and middle class don't—they're playing not to lose, and they think the solution is more money."
Lesson #4: The History of Taxes and the Power of Corporations
My rich dad taught me a valuable lesson: "The rich know that taxes punish those who work for money but reward those who make money work for them."
I remember when my rich dad first explained to me how the rich play by different rules than the poor or middle class. He knew I aspired to great wealth, so he made sure I knew the legal and tax advantages that a corporation offers the rich.
"If you work for money, the government takes a percentage of it before you even see it. But a corporation allows you to spend money before paying taxes, which can be a huge advantage."
To illustrate, he drew a simple diagram showing how most people work for a corporation:
Then he showed me how the rich structure things differently:
The rich create corporations that own their assets, and the corporations then pay their expenses. This is the foundation of what rich dad called the "Financial IQ" - the knowledge of accounting, investing, understanding markets, and the law.
My rich dad explained, "The rich aren't smarter than the poor, just more financially literate. The game of money is played with rules, and those rules favor the rich because they're the ones who created them."
With basic financial literacy, we understand that there are generally four main types of income:
- Earned income: Money you work for, like a salary. This is the highest taxed form of income.
- Portfolio income: Money from paper assets like stocks, bonds, and mutual funds.
- Passive income: Money from real estate and other investments that generate ongoing income without much daily effort.
- Corporate income: Money a business generates that can be sheltered from taxes through legitimate expenses.
My rich dad always emphasized the importance of financial education. "If you want to be rich, you need to play by the rules of the rich. And the most important rule is this: The rich don't work for money; they make money work for them."
He also said, "Corporations are the biggest secret of the rich." He explained that the rich often own their assets through corporations for legal protection and tax advantages. When you operate through a corporation, you can:
- Pay expenses before taxes
- Get tax-free medical benefits
- Deduct certain travel expenses
- Pay for education with pre-tax dollars
My rich dad emphasized, "The rich focus on increasing their financial intelligence to find legal ways to reduce their tax burden. They don't cheat; they use the system to their advantage."
Lesson #5: The Rich Invent Money
Each day, we are presented with opportunities to choose our future, but often we fail to see them. "Money is not real," my rich dad would say. "It's what we agree on it to be."
The single most powerful asset we all have is our mind. If trained well, it can create enormous wealth seemingly in an instant. But an untrained mind can also create extreme poverty that lasts a lifetime.
In today's fast-changing world, it's not so much what you know that counts, because often what you know is old. It's how fast you learn. That skill is priceless.
Most people are waiting for the right opportunity to come along. That's why they're often waiting a long time. It's like waiting for all the traffic lights to be green for five miles before you start your trip.
My rich dad taught me that opportunities are not seen with your eyes but with your mind. Our minds are the greatest asset we have, but they can also be our greatest liability if we don't train them properly.
Financial intelligence is simply having more options. If opportunities aren't coming your way, what else can you do to improve your financial position? If an opportunity comes your way and you don't have the money, what else can you do to take advantage of that opportunity? If your hunch is wrong, and what you've done doesn't work out, how can you turn a lemon into millions?
My rich dad constantly taught us that financial IQ is made up of knowledge from four main areas:
- Accounting: Financial literacy. The ability to read and understand financial statements. This allows you to identify the strengths and weaknesses of any business.
- Investing: Strategies for making money with money. Creative investing.
- Understanding markets: The science of supply and demand. Knowing the technical aspects of the market, which are emotion-driven; and the fundamental aspects of an investment, which is the sense of it.
- The law: Utilizing tax advantages and legal protection. A corporation can help protect assets from creditors.
Financial intelligence is the synergy of many skills and talents. It's the combination of the four technical skills above that allows money to be made with money.
The problem with becoming an employee is that much of what you learn in school no longer applies. In school, you're typically punished for making mistakes. Yet it's through making mistakes and learning from them that we truly grow.
My rich dad often said, "The reason so many talented people are poor is because they focus on perfecting a single skill but neglect to learn how money works. A specialist needs a team to become financially successful."
To find million-dollar opportunities, you must train your mind to see the opportunities right in front of you. Most people are looking so far out into the distance that they miss what's right in front of them. Many people can't find financial opportunities because they're looking for money instead of opportunities.
I often tell the story of how I bought a small house for $20,000 that was worth $60,000 because I understood real estate and tax law. I later sold it for a significant profit because I had trained myself to see what others missed.
My rich dad taught me that money is only an idea. He would say, "There is a gold mine right in front of you. If you're not seeing it, you're not using your financial intelligence."
The rich often invent money through stocks, bonds, mutual funds, income-producing real estate, notes, royalties from intellectual property, and anything else that has value, produces income, appreciates, and has a ready market.
Rich dad also emphasized the importance of being able to sell. "The ability to sell is the number one skill of a successful entrepreneur. It's the ability to sell your ideas, products, or services that determines your success."
In the real world, it's often not the smart that get ahead, but the bold. Most people struggle financially because they're afraid to take risks. They stay in jobs they hate because they fear not having enough money. They buy investments they don't understand because some financial advisor told them it was safe. They never start businesses because they fear failure.
My rich dad used to say, "Just as a surfer needs to catch a wave before it crests, an investor needs to spot a trend before it becomes obvious to everyone else."
Lesson #6: Work to Learn—Don't Work for Money
In Hawaii, many highly educated people work for modest salaries. I've often heard the school administrators say, "I work here because I love the kids." But the painful truth is that they should love the children enough to get paid what they're worth.
Growing up, I had two influential fathers. One was a government employee who said, "Go to school, get good grades, find a safe secure job with benefits." The other encouraged me to study to become rich, to understand how money works, and learn how to make it work for me.
My highly educated father constantly warned me about specializing too much. "You need to know a little about a lot," he would say. My rich father encouraged me to do exactly the opposite, "You need to know a lot about a little."
That is why for years I worked in different areas of my rich dad's businesses. For a while, I worked in his accounting department. Although I would probably never have been an accountant, he wanted me to learn via osmosis. My rich dad knew I would pick up jargon and a sense of what is important and what is not. I also worked as a bus boy and construction worker, as well as in sales, reservations, and marketing.
When it came to professional education, my rich dad encouraged me to learn to be a salesperson, because that's the skill of communicating and selling. He also encouraged me to learn to be a writer, because writing helps you communicate more clearly. Both sales and writing are skills I work hard to improve.
My poor dad believed in the dogma: "Specialize, specialize, specialize." That is why he was thrilled when he eventually achieved his doctorate. He used to say, "The more specialized you become, the more money you make."
My rich dad had a different perspective. He encouraged me to study many areas rather than specializing in just one. That's why, after I finished college, my rich dad recommended I take a job with a company that would train me in various aspects of business.
"You want to learn how to sell. It's the most important skill for an entrepreneur. If you can't sell, you can't succeed." Rich dad insisted I learn sales and marketing skills.
Many people are afraid of being rejected or failing, so they avoid putting themselves in situations where these things could happen. My rich dad thought school was important, but he believed it wasn't connected to the real world. "I go to conventions and continuing education courses because that's where the real money is made," he would say.
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