Book Summary: “Rich Dad Poor Dad” Part-1

I happened to finish this great book on personal finance titled “Rich Dad Poor Dad” by “Robert T. Kiyosaki”. This book has loads of guidance on planning and managing our personal finance. I make this attempt to summarize the same so that the lessons reach everyone and which would instigate them to read the book.

Robert and Mike

The book starts out as a conversation between two young 9 year old boys Robert and Mike. They both come from a middle-class background. The rich students in the school never befriended them and these boys are never invited to rich kids' parties. Robert and Mike were determined to become rich and started coming up with their own ways to achieve their goal.

Robert's father, someone who was well educated and had a regular income, once saw these boys' dire attempt of becoming rich by producing nickel coins by themselves. He explained that it was illegal to create their own money and there are legitimate ways to becoming rich. He directs the boys to Mike's father, whom he thought to be a rich man in the making. Mike's father is the “Rich dad” as the author calls, runs several businesses and is a financial literate.

The lessons taught by Rich dad are being presented by Robert in this book which made him a financial literate too. He had the financial freedom to retire at the age of 47 still having income generated from various sources.

Income and Rat Race

“The poor and the middle-class work for money. The rich have money work for them”

Rich dad believes that there are three types of income. They are:

Earned income is derived from a regular job. This is the money that we work for. According to the author, many individuals spend most of their earned income for their consumption and not for investment. This cycle of earning and spending with 0 investments is what the author calls as the Rat Race. Those who are stuck in this sort of a rat race, generally hope that an increase in income would solve all their financial problems, which the author strongly dismisses. Because, an increase in income may just result in increased consumption and hence the cycle continues.

In order to get out of the rat race, the author suggests that, it is important to have portfolio income and passive income. Income derived from paper assets such as stocks and bonds is Portfolio Income. Income derived from real-estate investments is Passive Income. Earned income is where the we work for money and Portfolio & Passive income are where the money work for us. Rich people tend to have high passive and portfolio income thereby making the money work for them, while the poor & middle-class don't. Portfolio and passive income needn't and shouldn't require our presence, as our time is very precious and we must utilize it in acquiring further information and investments.

This game called Cashflow classic that accompanies the book, illustrates this phenomenon of rat race well. I recommend everyone to play it to understand the different incomes better.

Importance of Information

Information is Priceless

Another aspect that the author emphasizes is “Information”. He illustrates this with a few examples on how he created a lot of income opportunities just with the information he had. It is the information that creates business for us. It is also important for us to keep updated as new information keeps popping every minute now and then.

Liabilities pretending to be Assets

“Rich acquire assets but the poor and middle class acquire liabilities which they think to be asset.”

As the author suggests, becoming rich mainly depends on two things: One is Gaining Financial literacy and the other is Taking Risk. One can multiply his income only when he has financial literacy. It is the financial knowledge that gives the edge to the person compared to the other who does not know how to handle his money. Also, a person can become rich only when he is ready to take substantial risk. Unless the risk is high, the return can never be high.

He explains Assets & Liabilities in the following manner

Anything that puts money in our pocket is an asset and anything that takes away money from our pocket is a liability.

“Our own house is a liability.”

The author makes this ground-breaking statement by pointing out a major misconception. The middle-class usually consider their house to be the biggest asset that they possess, but it is not. A self-occupied house requires proper maintenance for which money is taken away from our pockets. This clears up the author's statement as to why our house is a liability. It is vital to understand this: “Asset is something that puts money in our pocket and liability is something which takes away money out of our pocket.” Simple formula to become rich is to keep accumulating assets.

Conclusion

The author has taught many lessons in his book “Rich Dad Poor Dad' which is a must read. This book serves a guide for those who want to manage their finance properly and come out of the rat race. So far we have seen a section of the book wherein the author has discussed about various types of income. In the next part we will get into the detail about various other aspects that has been discussed. Happy reading and happy learning until then.