Book Notes: Rich Dad Poor Dad

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Rich Dad Poor Dad, by Robert T. Kiyosaki is framed as a parable of the author as a boy taking financial advice from his friend’s rich dad (questions remain whether this relationship existed in real life). It discusses how the rich treat their money and look to make investments first before anything else.

This book can be a little polarizing in the financial advice it provides. Some people love it, others find much of the advice to be phony. The author is a bit controversial, particularly in some of his promotions outside this book. I found the book to have a mix of both valuable, and questionable ways to look at money.

How do the rich handle their money?

  • Rich don’t work for money. Money works for them.
  • Know the difference between assets and liabilities, then look to buy assets and avoid buying liabilities.
    • Book defines assets as things that make you money, whereas liabilities are things that cost you money.
  • Use cash earned from assets to buy luxuries. Avoid buying luxuries until you’ve purchased the assets that can generate the cash flows where you can afford those luxuries. Buy assets first and luxuries last.
  • The rich treat their finances like a balance sheet rather than an income statement. They look to focus on their asset columns instead of income vs expenses.
  • Pay yourself before paying others. Common advice in other personal finance books such as The Richest Man in Babylon, by George S Clason. Paying yourself first ensures you are investing and purchasing assets (thus generating subsequent cash flow for paying for your other bills).
  • Once you’ve accumulated enough assets that can pay for your expenses, then use those additional savings to purchase more assets. Continue this process to keep getting richer.
  • Wealth is not how much money you make, but how much you keep, or how much money your money is making.

What are the best things to invest in?

  • First, invest in your knowledge. Then use your knowledge to purchase the assets with the best ROI.
  • Get good at reading financial statements and understand the story they are telling.
  • Buy businesses that are run by other people—avoid running businesses yourself
  • Acquire assets you love (stocks in businesses you love, real estate you appreciate, etc)
  • The book suggests that safe and secure investments are for everyone, they’re already sanitized and won’t get you ahead.
  • The book also suggests you can yield much larger gains if you understand the markets better than others and know the right investment strategies to make.
    • This seems counter to most financial advice that you can’t beat the market. Very few can.
    • That said, investments can extend past the stock market
    • One investment strategy the book advocates for is using leverage (debt) to enhance gains. While this can certainly help you increase your gains, it drastically increases your risk/exposure.
    • The theory here is that if you know the markets well enough and know the right bets to make, leverage can be helpful. Still, proceed with caution.
  • Invest more in your financial education than in anything else, as you will use this knowledge to find good investments or put together deals that can yield greater cash flows.

What are the important things for you to learn to get rich?

  • Learn accounting – this will help you understand the story behind a company’s financial statements to know how healthy the company is, which will aid you in choosing investments.
  • Learn investments – know how to identify which investments will yield a good return. What is a good deal vs a bad deal? Which assets are undervalued, and thus make money when you buy the asset?
  • Learn markets – learning overall market and industry dynamics will help you draw connections to make better investment decisions. If you understand connections others don’t, you are better equipped to locate undervalued assets
  • Know tax liability – taxes will erode your returns. Know the tax law so that you can (legally and ethically) avoid paying unnecessary taxes.
  • Know a little about a lot – this will help you make connections across different disciplines that other people will otherwise miss. Charlie Munger calls this a latticework of mental models. This will help you involve the right experts when putting together a deal.
  • Get better at selling and marketing – you don’t have a business without revenue. The only means to generate revenue is through sales and marketing. Naval Ravikant suggests learning product as well, as those three things will “make you unstoppable”.

How do you increase your financial literacy?

  • Use your failures as learning moments. Don’t ignore them or be ashamed of them. Be proud of them, lean into them. But don’t repeat them.
  • Choose the people you spend your time with carefully. They will have a profound influence on you, your thinking, and your success. Choose people who will up-level your thinking, make you happy, give you a better perspective, energy and can learn from them.
  • “Master a formula, and then learn a new one”. Similar to Ray Dalio’s book, Principles. Understand the mechanics of a principle and master it, but then learn a new one and then another new one. Having multiple formulas will give you different tools to solve problems and locate better investments.
  • Either have tenants pay for your debt, or find new creative ways to make money to pay off your debt—again, pay yourself first and use the money from that to pay off your debt.
  • If you feel short on something, give something away—be it knowledge, networking, ideas, and it will come back to you “in buckets”.