Finthoughts

In the previous week's article we covered some essential teachings of Mike's Dad. Mike is the friend of the author, Robert. T. Kiyosaki. Mike's dad is referred to as Rich dad in the book “Rich dad Poor dad”. Rich dad doesn't have any official educational degree, but always stressed on gaining professional education. Nowhere in the entire book, author quotes any lesson from rich dad which defames the formal education. Speaking about the education, rich dad takes a good stand in the same. We will have this article which summarizes the lessons of rich dad regarding Education and Cashflow.

Education

The topic education is discussed a lot in the book and referred to in many places. The author clearly makes few statements regarding the same so that no reader is mislead. One of the fundamental ideology of rich dad is that, the school education must be the starting point for the knowledge hunt for everyone and not finishing point. He feels that many end up with the school knowledge failing to expand their knowledge from there. Schools must be the place where people should start gaining financial knowledge. Unfortunately it is not the case in contemporary scenario. The lessons about money, cashflow system, finance must start right from the schools. By this, everyone gets a good grip in handling their finance well, right from their childhood.

It is not just acquiring wealth makes a person rich, but the knowledge of managing them does. A small pot is much efficient than a big pot with a hole. The ignorance about the nature of money makes us the big pot with hole. To understand the nature of money, it becomes vital for us to understand the concept of cashflow.

Cashflow

In the accounting jargon, cashflow means the “inflow and outflow of cash, from and to a person/ business.” The same applies here. The author goes a step further and asks us to notice the source of our inflow and the way we expend it. As mentioned in the last week's article, we all have “Earned income” which comes from a regular job. Let's assume that this is our primary source of income that we have at our disposal. In general, money can be disposed in two ways:

• Consumption
• Investment

The money is spent for our needs and wants which doesn't result in further cash generation directly/ indirectly is known as “Consumption.” Every purchase we do for our personal use is a consumption. Whereas, the money spent on acquiring assets which results in further cash generation directly/ indirectly is known as “Investment”.

The nature of asset and liabilities was discussed in the last week's article. Anything that puts money in our pocket is an asset and anything that takes money out of our pocket is a liability. It is always important to keep in mind the nature of asset and liability in order to have thorough understanding of cashflow.

Having understood the concept of consumption & investment and asset & liability, we now get into the teaching of rich dad. The author makes a comparison of cashflow between a rich man, middle-class man and a poor man based on their income statement and balance sheet. Income statement shows the income and expenditure for a person. Balance sheet shows the financial position of a person. The asset acquired and liabilities accumulated are listed down in the balance sheet.

The inference is illustrated in the following diagrams:

Cashflow of a Poor Person

_{^{(Image as originally illustrated in the book. Credits: Author of the book)}}

It is evident that the earnings of this person is just enough to meet his consumption. The way out from this situation is to have multiple regular income temporarily. With the additional earned income, one may acquire assets which will gradually increase his passive and portfolio incomes.

Cashflow of a Middle-Class Person

_{^{(Image as originally illustrated in the book. Credits: Author of the book)}}

In the cashflow of a middle-class person, he purchases liabilities which he thinks to be asset. As we all know, liabilities take money out of our pocket. Since liabilities are purchased our expenses increase to a great extent. Due to ignorance of our financial knowledge, we tend to overlook such things. One such purchase is a house. A house bought for our personal living with 0 investments forms a big liability for us. In order to escape from this, the person must consider in acquiring assets. By acquiring assets, the passive and portfolio income will increase which should equal his other expenses. Once, the person achieves this stage, that is, having passive and portfolio income equal to that of his expenses, he is about to get out of the so called Rat-Race and can make proportionate consumption. Until reaching this stage, the person must watch out his spending and shape it well.

Cashflow of a Rich Person

_{^{(Image as originally illustrated in the book. Credits: Author of the book)}}

Rich person, in the earlier stage of the life tend to purchase assets to a great extent. This would have increased his passive and portfolio income. A rich man has sufficient income just from his acquired assets, to meet his expenses and still has money left for further investments. It is in this stage, the person is completely out of the Rat-Race. However, it should be noted that, even though a person is out of rat race, he should make proper investments and generate income out of that before making a lavish consumption.

Conclusion

Right knowledge acquired in finance with right action can make a person rich and get him out of the rat race. Having understood the author's take on financial education and the concept of cashflow, I hope everyone can now differentiate the assets and liabilities that we have acquired and accumulated in our lives till now. Let's have this lesson in mind while we make our further moves in wealth creation and consumption. We will cover some of the other teachings of rich dad in the next week's article. Happy reading until then.

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