In summary, the end result in making a decision to own a house
that is too expensive in lieu of starting an investment portfolio impacts
an individual in at least the following three ways:
Loss of time, during which other assets could have grown
Loss of additional capital, which could have been invested
instead of paying for high-maintenance expenses related
directly to the home.
Loss of education. Too often, people count their house
and savings and retirement plans as all they have in their
asset column. Because they have no money to invest, they
simply don’t invest. This costs them investment experience.
Most never become what the investment world calls “a
sophisticated investor.” And the best investments are usually
first sold to sophisticated investors, who then turn around
and sell them to the people playing it safe.
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.
My educated dad’s personal financial statement best demonstrates the life of someone caught in the Rat Race. His expenses match his income, never allowing him enough left over to invest in assets. As a result, his liabilities are larger than his assets.
Rich dad believed in the KISS principle—Keep It Simple, Stupid (or Keep It Super Simple)—so he kept it simple for us, and that made our financial foundation strong.
So what causes the confusion? How could something so simple be so screwed up? Why would someone buy an asset that was really a liability? The answer is found in basic education.
We focus on the word “literacy” and not “financial literacy.” What defines something to be an asset or a liability are not words. In fact, if you really want to be confused, look up the words “asset”
Rich Dad Poor Dad
An asset puts money in my pocket. A liability takes money out of my pocket.
and “liability” in the dictionary. I know the definition may sound good to a trained accountant, but for the average person, it makes no sense. But we adults are often too proud to admit that something does not make sense.
To us young boys, rich dad said, “What defines an asset are not words, but numbers. And if you can’t read the numbers, you can’t tell an asset from a hole in the ground.” “In accounting,” rich dad would say, “it’s not the numbers, but what the numbers are telling you. It’s just like words. It’s not the words, but the story the words are telling you.”
“If you want to be rich, you’ve got to read and understand numbers.” If I heard that once, I heard it a thousand times from my rich dad. And I also heard, “The rich acquire assets, and the poor and middle class acquire liabilities.”
Here is how to tell the difference between an asset and a liability. Most accountants and financial professionals do not agree with the definitions, but these simple drawings were the start of strong financial foundations for two young boys.
Our school system, created in the Agrarian Age, still believes in homes with no foundation. Dirt floors are still the rage. So kids graduate from school with virtually no financial foundation. One day, sleepless and deep in debt in suburbia, living the American Dream, they decide that the answer to their financial problems is to find a way to get rich quick.
Construction on the skyscraper begins. It goes up quickly, and soon,
instead of the Empire State Building, we have the Leaning Tower of
Suburbia. The sleepless nights return.
As for Mike and me in our adult years, both of our choices were
possible because we were taught to pour a strong financial foundation
when we were just kids.
Accounting is possibly the most confusing, boring subject in the
world, but if you want to be rich long-term, it could be the most
important subject. For rich dad, the question was how to take a boring
and confusing subject and teach it to kids. The answer he found was to
make it simple by teaching it in pictures.
My rich dad poured a strong financial foundation for Mike and me.
Since we were just kids, he created a simple way to teach us.
For years he only drew pictures and used few words. Mike and I
understood the simple drawings, the jargon, the movement of money,
Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.
and then in later years, rich dad began adding numbers. Today, Mike has gone on to master much more complex and sophisticated accounting analysis because he had to in order to run his empire. I am not as sophisticated because my empire is smaller, yet we come from the same simple foundation. Over the following pages, I offer to you the same simple line drawings Mike’s dad created for us. Though basic, those drawings helped guide two little boys in building great sums of wealth on a solid and deep foundation.
“Remember what I said before: A job is only a short-term solution to a long-term problem. Most people have only one problem in mind, and it’s short-term. It’s the bills at the end of the month, the Tar Baby. Money controls their lives, or should I say the fear and ignorance about money controls it. So they do as their parents did. They get up every day and go work for money, not taking the time to ask the question, ‘Is there another way?’ Their emotions now control their thinking, not their heads.”
“Can you tell the difference between emotions thinking and the head thinking?” Mike asked.
Rich Dad Poor Dad
The absolute TRUTH! I’ve never heard it put so eloquently. A job is a short-term solution to a long-term problem. Genetics maybe? Mother did the same thing — work hard for a dead end check and pay all the bills.
Why Teach Financial Literacy
Whenever I speak to groups of people, they often ask what I would recommend that they do. “How do I get started?” “Is there a book you would recommend?” “What should I do to prepare my children?” “What is your secret to success?” “How do I make millions?”
Whenever I hear one of these questions, I’m reminded of the
The Richest Businessmen
In 1923 a group of our greatest leaders and richest businessmen held a meeting at the Edgewater Beach hotel in Chicago. Among them were Charles Schwab, head of the largest independent steel company; Samuel Insull, president of the world’s largest utility; Howard Hopson, head of the largest gas company; Ivar Kreuger, president of International Match Co., one of the world’s largest companies at that time; Leon Frazier, president of the Bank of International Settlements; Richard Whitney, president of the New York Stock Exchange; Arthur Cotton and Jesse Livermore, two of the biggest stock speculators; and Albert Fall, a member of President Harding’s cabinet. Twenty-five years later, nine of these titans ended their lives as follows: Schwab died penniless after living for five years on borrowed money. Insull died broke in a foreign land, and Kreuger and Cotton also died broke. Hopson went insane. Whitney and Albert Fall were released from prison, and Fraser and Livermore committed suicide.
I doubt if anyone can say what really happened to these men. If you look at the date, 1923, it was just before the 1929 market crash and the Great Depression, which I suspect had a great impact on these men and their lives. The point is this: Today we live in times of greater and faster change than these men did. I suspect there will be many booms and busts in the coming years that will parallel the ups and downs these men faced. I am concerned that too many people are too focused on money and not on their greatest wealth, their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer despite tough changes. If they think money will solve problems, they will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.
So when people ask, “Where do I get started?” or “Tell me how to
get rich quick,” they often are greatly disappointed with my answer.
I simply say to them what my rich dad said to me when I was a little
kid. “If you want to be rich, you need to be financially literate.”
That idea was drummed into my head every time we were together. As I said, my educated dad stressed the importance of reading books, while my rich dad stressed the need to master financial literacy.
“Because it is ignorance about money that causes so much greed and fear,” said rich dad. “Let me give you some examples. A doctor, wanting more money to better provide for his family, raises his fees. By raising his fees, it makes health care more expensive for everyone.
It hurts the poor people the most, so they have worse health than those with money. Because the doctors raise their fees, the attorneys raise their fees. Because the attorneys’ fees have gone up, schoolteachers want a raise, which raises our taxes, and on and on and on. Soon there will be such a horrifying gap between the rich and the poor that chaos will break out and another great civilization will collapse. History proves that great civilizations collapse when the gap between the haves and have-nots is too great. Sadly, America is on that same course because we haven’t learned from history. We only memorize historical dates and names, not the lesson.”
“Aren’t prices supposed to go up?” I asked.
“In an educated society with a well-run government, prices should actually come down. Of course, that is often only true in theory. Prices go up because of greed and fear caused by ignorance. If schools taught people about money, there would be more money and lower prices. But schools focus only on teaching people to work for money, not how to harness money’s power.”
“But don’t we have business schools?” Mike asked. “And haven’t you encouraged me to go for my MBA?”
“Yes,” said rich dad. “But all too often business schools train employees to become sophisticated bean-counters. Heaven forbid a bean- counter takes over a business. All they do is look at the numbers, fire people, and kill the business. I know this because I hire bean-counters. All they think about is cutting costs and raising prices, which cause more problems. Bean-counting is important. I wish more people knew it, but it, too, is not the whole picture,” added rich dad angrily.
“So is there an answer?” asked Mike.
“Yes,” said rich dad. “Learn to use your emotions to think, not think with your emotions. When you boys mastered your emotions by agreeing to work for free, I knew there was hope. When you again resisted your emotions when I tempted you with more money, you were again learning to think in spite of being emotionally charged. That’s the first step.”
Being a product of two strong dads allowed me the luxury of observing the effects different thoughts have on one’s life. I noticed that people really do shape their lives through their thoughts.
For example, my poor dad always said, “I’ll never be rich.” And that prophecy became reality. My rich dad, on the other hand, always referred to himself as rich. He would say things like, “I’m a rich man, and rich people don’t do this.” Even when he was flat broke after a major financial setback, he continued to refer to himself as a rich man. He would cover himself by saying, “There is a difference between being poor and being broke. Broke is temporary. Poor is eternal.”
My poor dad would say, “I’m not interested in money,” or “Money doesn’t matter.” My rich dad always said, “Money is power.”
Although both men had tremendous respect for education and learning, they disagreed about what they thought was important to learn. One wanted me to study hard, earn a degree, and get a good job to earn money. He wanted me to study to become a professional, an attorney or an accountant, and to go to business school for my MBA. The other encouraged me to study to be rich, to understand how money works, and to learn how to have it work for me. “I don’t work for money!” were words he would repeat over and over. “Money works for me!”
At the age of nine, I decided to listen to and learn from my rich dad about money. In doing so, I chose not to listen to my poor dad, even though he was the one with all the college degrees.
The next morning, I told my best friend, Mike, what my dad had said. As best as I could tell, Mike and I were the only poor kids in this school. Mike was also in this school by a twist of fate. Someone had drawn a jog in the line for the school district, and we wound up in school with the rich kids. We weren’t really poor, but we felt as if we were because all the other boys had new baseball gloves, new bicycles, new everything.
Mom and Dad provided us with the basics, like food, shelter, and clothes. But that was about it. My dad used to say, “If you want something, work for it.” We wanted things, but there was not much work available for nine-year-old boys.
“So what do we do to make money?” Mike asked. “I don’t know,” I said. “But do you want to be my partner?” He agreed, and so on that Saturday morning, Mike became my
first business partner. We spent all morning coming up with ideas on how to make money. Occasionally we talked about all the “cool guys” at Jimmy’s beach house having fun. It hurt a little, but that hurt was good, because it inspired us to keep thinking of a way to make money. Finally, that afternoon, a bolt of lightning struck. It was an idea Mike got from a science book he had read. Excitedly, we shook hands, and the partnership now had a business.
Although both dads worked hard, I noticed that one dad had a habit of putting his brain to sleep when it came to finances, and the other had a habit of exercising his brain. The long-term result was that one dad grew stronger financially, and the other grew weaker. It is not much different from a person who goes to the gym to exercise on a regular basis versus someone who sits on the couch watching television. Proper physical exercise increases your chances for health, and proper mental exercise increases your chances for wealth.
I had two influential fathers, I learned from both of them. I had to think about each dad’s advice, and in doing so, I gained valuable insight into the power and effect of one’s thoughts on one’s life. For example, one dad had a habit of saying, “I can’t afford it.” The other dad forbade those words to be used. He insisted I ask, “How can I afford it?” One is a statement, and the other is a question. One lets you off the hook, and the other forces you to think. My soon-to-be-rich dad would explain that by automatically saying the words “I can’t afford it,” your brain stops working. By asking the question “How can I afford it?” your brain is put to work. He did not mean that you should buy everything you want. He was fanatical about exercising your mind, the most powerful computer in the world. He’d say, “My brain gets stronger every day because I exercise it. The stronger it gets, the more money I can make.” He believed that automatically saying “I can’t afford it” was a sign of mental laziness.
My two dads had opposing attitudes and that affected the way they thought. One dad thought that the rich should pay more in taxes to take care of those less fortunate. The other said, “Taxes punish those who produce and reward those who don’t produce.”
One dad recommended, “Study hard so you can find a good company to work for.” The other recommended, “Study hard so you can find a good company to buy.”
One dad said, “The reason I’m not rich is because I have you kids.” The other said, “The reason I must be rich is because I have you kids.”
One encouraged talking about money and business at the dinner table, while the other forbade the subject of money to be discussed over a meal.
One said, “When it comes to money, play it safe. Don’t take risks.” The other said, “Learn to manage risk.”
One believed, “Our home is our largest investment and our greatest asset.” The other believed, “My house is a liability, and if your house is your largest investment, you’re in trouble.”
Both dads paid their bills on time, yet one paid his bills first while the other paid his bills last.
One dad believed in a company or the government taking care of you and your needs. He was always concerned about pay raises, retirement plans, medical benefits, sick leave, vacation days, and other perks. He was impressed with two of his uncles who joined the military and earned a retirement-and-entitlement package for life after twenty years of active service. He loved the idea of medical benefits and PX privileges the military provided its retirees. He also loved the tenure system available through the university. The idea of job protection for life and job benefits seemed more important, at times, than the job. He would often say, “I’ve worked hard for the government, and I’m entitled to these benefits.”
The other believed in total financial self-reliance. He spoke out against the entitlement mentality and how it created weak and financially needy people. He was emphatic about being financially competent.
One dad struggled to save a few dollars. The other created investments. One dad taught me how to write an impressive resumé so I could find a good job. The other taught me how to write strong business and financial plans so I could create jobs.