Rich Dad Poor Dad – Robert T Kiyosaki (7/10)

 

A good introduction to personal finance and ways of thinking about money. Kiyosaki introduces the concept of the difference between Assets and Liabilities and how the rich acquire assets, while the poor and middle class acquires liabilities which they think are assets. He explains about the Rat Race and how people fall on this hedonic treadmill where things are never enough. He doesn’t give any direct methods for achieving financial freedom, just some principle to keep in mind. A quick read and one that will get you started in thinking about personal finance.

 

Peoples lives are forever controlled by two emotions, Fear and Greed. Offer them more money and they continue the cycle by increasing their spending.

Rule #1 Know the difference between an asset and a liability

  • An asset puts money in your pocket every month and a liability takes money out of it.
  • People work hard > Income increases > expenses increases
  • Most end up in making a decision to own a house rather than start an investment portfolio.
  • Investing in a house results in
    • loss of time, during which other assets could have increased in value.
    • loss of capital which could have been invested instead of paying for high maintenance.

Wealth is s person’s ability ot survive so many number of days forward, or if I stopped working today, how long could I survive?

Rule #3 Mind your own business

The rich focus on their asset column while everyone else focuses on their income statement.

Eg- McDonald’s is not a hamburger business but a real estate one.

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. Your business revolves around your asset column, not your income.

Start minding your own business. Keep your day-time job, but start buying real assets, not liabilities or personal effects that have no real value once you get them home.

Rich people build their asset column first and the income generated from the assets pays for their luxuries.

A government bureaucrat gets paid to spend money and hire people. The more he spends the more people he hires, the larger his organisation becomes. In the government, a large organization is a respected organisation.

The government ideal is to avoid having excess money, if you fail to spend the allotted funds, you risk losing it in the next budget. You would not be recognized for being efficient. On the other hand business, people are rewarded for having excess money and applauded for their efficiency.

A corporation is merely a legal document that creates a legal body with no soul. It was popular because the income tax rate of a corporation is less than the individual income tax rate. And certain expenses could be paid by the corporation with pre-tax dollars.

Knowledge is power, with money comes great power that requires the right knowledge to keep it and make it multiply. Without that knowledge the world pushes you around.

Financial IQ is made up of knowledge in four areas of expertise

  • Accounting
  • Investing
  • Understanding Markets
  • The Law

Tax advantage – A corporation can pay expenses before paying taxes.

A corporation earns, spends everything it can and is taxed on anything that is left. Its one of the biggest tax loopholes. Eg- by owning your corporation, your vacation can be a board meeting in Hawaii. But its done legally with pre-tax dollars.

The rich hide much of their wealth using vehicles like corporation and trusts to protect them from creditors. when someone sues a wealthy individual they are often met with layers of legal protection and often find that the wealthy person owns nothing. They control everything but own nothing. The poor and middle class try to own everything and lose it to government or to fellow citizens who like to sue the rich.

Often in the real world it is not the smartes who get ahead, but the bold

The hardest part of running a company is managing people. Leadership is what you need to learn, If you are not a good leader, you will get shot in the back, just like they do in business.

The primary difference between a rich person and a poor person is how they manage fear.

If you have little money and you want to be rich, you must first be focused not balanced.

“I can’t afford it”shuts down your brain. “How can I afford it?” opens up possibilities and excitement.

Do what you feel in your heart to be right, for you’ll be criticized anyway. You’ll be damned if you do and damned if you don’t.

Our culture has educated into believing that the love for money is the root of all evil. It encouraged us to learn a profession so that we can work for money but failed to teach us how money can work for us. It taught us not to worry about our financial future because our company of the government would take care of us when our working days are over.

One of the hardest things about wealth building is to be true to yourself and to be willing to not go along with the crowd. Its because in the market, it is usually the crowd that shows up late that is slaughtered. If a great deal is on the front page, then it’s already too late in most instances, look for a new deal.

Many middle managers remain, middle managers, failing to get promoted, because they know how to manage people under them, but not with people above them.

Move a sizable amount of money into a stock of a company that is about to release a product, that will add value to the stock, move your money in for a week to a month, and when the stock goes up, pull the initial amount out and stop worrying about fluctuations of the market, money goes in, money goes out, and you own an asset which was technically free.

Make lots of offers, people who are investors have no idea what it feels like to try and sell something. Always make offers with an escape clause. In real estate, make offers with language that details “Subject to”contingencies, such as the approval of a business partner.

“Profits are made in buying not in selling.”

The Three Income

  • Ordinary Income – earned income, taxed the most
  • Portfolio Income – income derived from paper assets such as stocks and bonds
  • Passive Income – income most derived from real estate.

Risk comes from not knowing what you are doing – Warren Buffet