Rating- 9/10
Date finished- March 23, 2021
Impressions
Wow, what a ride!. It really opened my eyes to the bigger picture when it comes to personal finance. I hadn't read any book on personal finance when I read this but it really made me interested in gaining financial intelligence. My goal is to start early and focus on increasing my assets.
Who should read it
Everyone should read this book. It has very important lessons on investing and finance.
📒 Summary + High Yield Notes
“There is a difference between being poor and being broke. Broke is temporary. Poor is eternal.”
Money is one form of power. But what is more powerful is financial education. Money comes and goes, but if you have the education about how money works, you gain power over it and can begin building wealth.
Lesson 1: The Rich Don't Work For Money
The rich have money work for them. The poor and the middle class work for them.
“The pattern of get up, go to work, pay bills; get up, go to work, pay bills. People’s lives are forever controlled by two emotions: fear and greed. Offer them more money and they continue the cycle by increasing their spending. This is what I call the Rat Race.”
“Unfortunately, for many people school is the end, not the beginning.”
Lesson 2: Why Teach Financial Literacy?
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. Its roots are implanted deep enough. Then the tree provides shade for your enjoyment.
In life, it is not how much money you make, it is how much money you keep.
“If you want to be rich, you need to be financially literate.”
The rich vs the poor- “Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets,”
Asset vs Liability- An asset puts money in your pocket. A liability takes money out of your pocket.
If you want to be rich, spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities.
Why the rich get richer- The asset column generates more than enough income to cover expenses, with the balance reinvested into the asset column. The asset column continues to grow and, therefore, the income it produces grows with it. The result is that the rich get richer!
Why the middle class struggle- The middle class finds itself in a constant state of financial struggle. Their primary income is through their salary. 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
What is wealth?- According to Robert, wealth is the measure of the cash flow fro the asset column compared with the expense column.
The rich buy assets. The poor only have expenses. The middle class buy liabilities they think are assets.
Lesson Three: Mind Your Own Business
"Start minding your own business. Keep your daytime job, but start buying real assets, not liabilities or personal effects that have no real value once you get them home. A new car loses nearly 25 percent of the price you pay for it the moment you drive it off the lot."
Keep expenses low, reduce liabilities, and diligently build a base of solid assets.
Examples of real assets
Robert says that real assets fall into the following categories:
Businesses that do not require your presence I own them, but they are managed or run by other people. If you have to work there, it’s not a business. It becomes your job.
Stocks
Bonds
Income-generating real estate
Notes (IOUs)
Royalties from intellectual property such as music, scripts, and patents
Anything else that has value, produces income or appreciates, and has a ready market
"Nine out of ten companies fail in five years. Of those that survive the first five years, nine out of every ten of those eventually fail as well. So only if you really have the desire to own your own company do I recommend it. Otherwise, keep your day job and mind your own business."
A true luxury is a reward for investing in and developing a real asset.
Lesson Four: The History of Taxes and the Power of Corporations
Don't work for money- If you work for money, you give the power to your employer. If money works for you, you keep the power and control it.
What is financial IQ made up of?
Financial IQ is made up of knowledge from four broad areas of expertise:
Accounting
Investing
Understanding markets
Law
The power of corporations
Business owners with corporations- Earn > Spend> Pay taxes
Employees who work for corporations- Earn> Pay taxes> Spend
Lesson Five: The Rich Invent Money
Financial intelligence is simply having more options- "If the opportunities aren’t coming your way, what else can you do to improve your financial position? If an opportunity lands in your lap and you have no money and the bank won’t talk to you, what else can you do to get the opportunity to work in your favor? If your hunch is wrong, and what you’ve been counting on doesn’t happen, how can you turn a lemon into millions? That is financial intelligence. It is not so much what happens, but how many different financial solutions you can think of to turn a lemon into millions. It is how creative you are in solving financial problems."
It is not gambling if you know what you’re doing. It is gambling if you’re just throwing money into a deal and praying.
Robert encourages us to invest more in our financial education than in stocks, real estate, or other markets.
The smarter you are(financially), the better chance you have of beating the odds.
"There are two kinds of investors:
The first and most common type is a person who buys a packaged investment. They call a retail outlet, such as a real estate company, a stockbroker, or a financial planner, and they buy something. It could be a mutual fund, a REIT, a stock or a bond. It is a clean and simple way of investing. An analogy would be a shopper who goes to a computer store and buys a computer right off the shelf.
The second type is an investor who creates investments. This investor usually assembles a deal in the same way a person who buys components builds a computer."
Robert says it is this second type of investor who is the more professional investor. Sometimes it may take years for all the pieces to come together. And sometimes they never do. It’s this second type of investor that his rich dad encouraged him to be. It is important to learn how to put the pieces together, because that is where the huge wins reside, and sometimes some huge losses if the tide goes against you.
Lesson Six: Work to Learn—Don't Work for Money
Job security meant everything to my educated dad. Learning meant everything to my rich dad.
Robert recommends to young people to seek work for what they will learn, more than what they will earn.
"Look down the road at what skills they want to acquire before choosing a specific profession and before getting trapped in the Rat Race."
The main management skills needed for success are:
Management of cash flow
Management of systems
Management of people
"The most important specialized skills are sales and marketing. The ability to sell—to communicate to another human being, be it a customer, employee, boss, spouse, or child—is the base skill of personal success."
Overcoming Obstacles
The solution to the phobia of losing money- “If you hate risk and worry, start early.”
If you start young, it’s easier to be rich. There is a staggering difference between a person who starts investing at age 20 versus age 30.
"If you have any desire to be rich, you must focus. Do not do what poor and middle-class people do: put their few eggs in many baskets. Put a lot of your eggs in a few baskets and FOCUS: Follow One Course Until Successful."
“Cynics never win,” said rich dad. “Unchecked doubt and fear creates a cynic.” “Cynics criticize, and winners analyze” was another of his favorite sayings.
Rich dad forbade the words, “I can’t afford it.” In my real home, that’s all I heard. Instead, rich dad required his children to say, “How can I afford it?” He believed that the words “I can’t afford it” shut down your brain. It didn’t have to think anymore. “How can I afford it?” opened up the brain and forced it to think and search for answers.
Pay yourself first- Rich dad: “So you see, after paying myself, the pressure to pay my taxes and the other creditors is so great that it forces me to seek other forms of income. The pressure to pay becomes my motivation. I’ve worked extra jobs, started other companies, traded in the stock market, anything just to make sure those guys don’t start yelling at me. That pressure made me work harder, forced me to think, and all in all, made me smarter and more active when it comes to money. If I had paid myself last, I would have felt no pressure, but I’d be broke.”
Rich Dad: “What I know makes me money. What I don’t know loses me money. Every time I have been arrogant, I have lost money. Because when I’m arrogant, I truly believe that what I don’t know is not important.”
Getting Started
"I’ve learned that, without a strong reason or purpose, anything in life is hard."
"Financially, with every dollar we get in our hands, we hold the power to choose our future: to be rich, poor, or middle class. Our spending habits reflect who we are. Poor people simply have poor spending habits."
"Invest first in education. In reality, the only real asset you have is your mind, the most powerful tool we have dominion over."
"In today’s fast-changing world, it’s not so much what you know anymore that counts, because often what you know is old. It is how fast you learn. That skill is priceless."
"To successfully pay yourself first, keep the following in mind:
Don’t get into large debt positions that you have to pay for. Keep your expenses low. Build up assets first. Then buy the big house or nice car. Being stuck in the Rat Race is not intelligent.
When you come up short, let the pressure build and don’t dip into your savings or investments. Use the pressure to inspire your financial genius to come up with new ways of making more money, and then pay your bills. You will have increased your ability to make more money as well as your financial intelligence."
Use assets to buy luxuries
"I have found that the more I teach those who want to learn, the more I learn. If you want to learn about money, teach it to someone else. A torrent of new ideas and finer distinctions will come in."
"Money is only an idea. If you want more money, simply change your thinking. Every self-made person started small with an idea, and then turned it into something big. The same applies to investing. It takes only a few dollars to start and grow it into something big."
The three different types of income:
Ordinarily earned
Passive income
Portfolio income
Passive income, in most cases, is income derived from real estate investments.
Portfolio income is income derived from paper assets such as stocks and bonds. Portfolio income is the income that makes(made) Bill Gates the richest man in the world, not earned income
The key to financial freedom and great wealth is a person’s ability to convert earned income into passive and/or portfolio income.