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Rich Dad's Guide To Investing:
What The Rich Invest In, That the Poor and Middle Class Do Not


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Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money That The Poor And Middle Class Do Not by Robert T. Kiyosaki

Rich Dad, Poor Dad

What the Rich Teach Their Kids About Money That The Poor And Middle Class Do Not

By Robert T. Kiyosaki

With Sharon L. Lechter, CPA

With three books on the bestseller lists, I thought we should give one of Robert T. Kiyosaki's books a read. Rich Dad, Poor Dad was a very irritating book. On the one hand, there was some great information given. On the other hand, there also was some seriously flawed advice given, which could lead to becoming "broke" as Kiyosaki prefers to call it.

Kiyosaki says being "poor" is a frame of mind, while being "broke" is only temporary. Either way, following some of his advice could lead you there. Perhaps, fortunately, many people will read this book and feel positive about their financial potential ("financial genius" as Kiyosaki calls it), but will not follow most of the advice.

Rich Dad, Poor Dad starts off reading like a movie, "The Money Kid Part One." (wax on, wax off...If you don't get the joke, watch a video called The Karate Kid, Part II) Kiyosaki tells us that desiring to build wealth, so the other kids wouldn't pick on him by calling him poor, Kiyosaki, a nine-year-old financial wimp, seeks the help of his friend's rich dad.

The "Poor Dad" is Kiyosaki's own highly-educated, monetarily unenlightened father who works for a living. Kiyosaki just sort of adopts this rich guy as his financial dad. Too bad the inheritance won't work that way!

The Rich Dad says, "OK, Daniel Son, I'll teach you how to become rich. But, you must do what I say. It is a full commitment. Take it or leave it." (Kiyosaki didn't write that, but I really like the Karate Kid analogy)

Rich Dad promptly puts Kiyosaki to work for 30 an hour every Saturday. Kiyosaki even needed to miss baseball games, but the way of the rich demands total dedication. Rich Dad didn't talk to the young Kiyosaki, but Kiyosaki cleaned and cleaned and cleaned.

One day, Kiyosaki was fed up. He'd quit! The Rich Dad wasn't keeping his word. Kiyosaki went to see Rich Dad, who made him wait a long time. Then, he called the young Kiyosaki into his office.

Nearly in tears, young Kiyosaki demanded a raise and said Rich Dad had lied. He hadn't taught him anything. Rich Dad asked him again, "What have you learned? I teach not by the way of the lecture, Daniel Son."

Kiyosaki said that he learned what everyone said about Rich Dad was true. Rich Dad was a cheapskate who exploited his workers. Rich Dad broke into laughter. Rich Dad said, "I have taught you a great lesson, Daniel Son."

Rich Dad went on to explain that most people who work for a living resent doing so. These people work for money, which is doled out in meager fashion, and they blame their boss for their poor financial position. They work hard, but they don't think financially. The rich don't work for money, money works for the rich. Being an employee sucks.

"Most people live their lives chasing paychecks, pay raises, and job security because of emotions of desire and fear, not really questioning where those emotion-driven thoughts are leading them. It's just like the picture of a donkey, dragging a cart, with its owner dangling a carrot just in front of the donkey's nose. The donkey's owner may be going where he wants to go, but the donkey is chasing an illusion." writes Kiyosaki.

Lesson Two. Rich Dad puts Kiyosaki back to work. This time, Rich Dad tells Kiyosaki that he must work for free. I didn't quite get Lesson Two.

Kiyosaki writes that getting a good education, saving regularly, especially via mutual funds, is not a sufficient strategy to get rich. Further, it takes too long. It is too safe. Kiyosaki does mention he has a friend who retired early with $4 million dollars in his 401(k), but he needed to work until fifty to get there. Kiyosaki retired at age 47 and wrote that he couldn't afford to retire earlier.

So rather than getting a good education, saving, and investing conservatively, what does Kiyosaki recommend? He likes taking seminars on futures trading and real estate. He writes about buying a property and quickly reselling it for a large profit. Donald Trump is one of his heroes.

This is my main objection with Rich Dad, Poor Dad. Kiyosaki likes writing about finding the one big financial deal making you a lot of money. That seems to be his focus. And, then trying to do it again. The serious problem with this advice is that many who follow it will never succeed. Not needing to save and invest conservatively, because their big "payday" is coming, they will never retire (i.e., they will remain an old donkey. And, without the education, they probably will be a donkey with a smelly old carrot-low wages). For a writer claiming to care about the growing gap between the rich and poor, I find this advice inexcusable. It's like telling a kid to work hard at becoming a professional basketball player and not do anything else to build his alternate future.

No doubt, many people enjoy reading about and imagining their big financial deals. They are "awakening their financial genius." Who is selling the illusion here?

Kiyosaki, himself, gives a great example of what I'm talking about. Kiyosaki friend's kid wanted to buy a car. Friend asks Kiyosaki what to do. He didn't want the kid dipping into savings (some of Kiyosaki's good advice: savings should only be used to create more money, not pay bills or buy new fun things). He didn't want to just give the kid the money (this obviously sends a bad message, as The Millionaire Next Door points out, giving older kids money correlates with their having less future wealth.)

The friend's solution was to give his kid $3,000 and a book about stock trading. Then, when the kid had made $6,000 via stock trading to buy the car, he was to put the original $3,000 back into savings. Kid traded like crazy, bought more books on stock trading. Kid's dad was happy because this was a good education for the kid. It would teach him to invest. The kid lost $2,000 of the $3,000.

However, assuming a reasonable investment rate of return of 10%, we can calculate that it would take 11.5 years for the kid to have $9,000. That's rather a long time to wait to get his first car! The fundamental problem is that because the kid is looking for a quick return on his money, he probably will ultimately fail as a successful stock investor. He is trying to invest as if investing were a winner's game. Even Peter Lynch, another of Kiyosaki's heroes, writes that seeking huge returns usually leads to huge losses (Kiyosaki briefly mentions Beating The Street by Lynch. I think One Up On Wall Street is a far better book by Lynch).

Trying to quickly trade $3,000 into $9,000 is not a viable way for the kid to get his car. Might I suggest... a Job.... It's hard to beat a job when it comes to immediate cash flow. If the kid really wants his car through investing, it will now take him about 23 years, if he earns 10% on his remaining $1,000 in the stock market. The kid would be nearly as old as Kiyosaki was when he retired at age 47! Assuming, of course, the kid sees the light and doesn't lose the remaining $1,000 trading stock options or something.

Apparently, the strategy worked for Kiyosaki. When he wanted to buy his Porsche, Kiyosaki was a bit short of money, so he bought and quickly resold a real estate property to come up with the cash.

Real Estate can be a wonderful investment. And, sometimes, a quick huge return can be earned. But, it doesn't always work that way! Remember the big real estate bail-out? No mention is made of how highly-leveraged investments can quickly go to zero in investor value. No discussion of real risk is addressed in Rich Dad, Poor Dad. Only successful examples of making a quick buck are given.

Further, Kiyosaki writes about buying his Porsche as a corporate expense. That way he'd use pretax dollars and save money. Hmm... now maybe I'm a "little chicken" to use Kiyosaki's term for people who fear the government and losing money and not being risk takers, but is that Porsche really a legitimate, business expense? If the IRS had audited him back then, would they have felt the Porsche was a necessary and justifiable business expense? Plus, for a guy not yet retired, a less expensive car would have not only been seen as a more reasonable business expense, but it would also have cost less money, allowing the difference to be invested.

Now, I'm in favor of intelligent tax planning, but I stop short of believing some fun purchases are business expenses. Kiyosaki's implicit message seems to be: "Buy things through corporations and use pretax dollars." He never mentions that the purchases must be legitimate business expenses or else you could be in real deep do-do with the government.

Even more confusing, Kiyosaki writes as if the corporate structure were some magical beast which deducts expenses before paying taxes, while people pay taxes and then deduct their expenses. He even draws some boxes to make his point. Yet, sole proprietors and partnerships can also deduct legitimate business expenses before being taxed on the net pre-tax profit.

Now, I'm a fan of the corporate business structure (primarily due to liability issues) but when Kiyosaki attributes this tax advantage to the nature of "corporations," he is simply incorrect. The tax deductions are attributable to trying to make a business profit and being able to deduct legitimate business expenses from your revenue before paying taxes on your business income.

Some people will read Rich Dad, Poor Dad and incorrectly believe that they will attain some big tax advantage if they start a corporation. They will believe there is a magical trick to save money, when, in fact, there isn't one. There is the possibility of incorrectly reporting personal purchases as business expenses, and upon an audit being hit with penalties, fines, back taxes, interest due on money not paid, future audits, etc...

As I mentioned in Thinking Like An Entrepreneur doing this is simply bad risk-return decision making (never mind the legality!). It's like robbing a bank. Maybe you make a few bucks, if you don't get shot. And, anytime down-the-road, if your secret to success (bank robbery) is discovered, you could still lose it all. It is building your financial house on a weak foundation.

I guess this is my second big gripe with Rich Dad, Poor Dad. While, Kiyosaki writes that the rich play by a different set of financial rules, I tended to feel that Kiyosaki is implicitly saying that to be financially successful, a person must be unethical to a degree. Maybe people like reading that insinuation. If they aren't rich it makes them feel they aren't rich because they are honest. Or, else, it inspires the mercenary-minded to say to themselves, "I can do that. I can be shrewd. I can be financially ruthless. I can hold the carrot. I can find ways to dodge taxes." Of course, these people will probably not succeed in today's business environment, but they will feel they are "awakening their financial genius."

I strongly agree with Kiyosaki that a big difference between the rich and non-rich is that the rich use their money to buy things which generate future wealth-stocks, real estate, etc. The non-rich tend to buy personal things which depreciate in value and have no ability to earn future wealth.

To illustrate his ideas, Kiyosaki draws these half-assed financial football coach diagrams with arrows (representing "cash flow") in and out from boxes representing "Income and Expenses" and "Assets and Liabilities." He essentially defines a "Liability" as something that costs you money and doesn't generate future wealth. A Porsche would be one example. An "Asset" is something that can create future value. A rental property would be one example. It would be nice if Kiyosaki expressly stated the accounting definition of assets and liabilities, as he harps upon the need to understand accounting and financial topics if you are to become rich! Then he could explain why he used modified definitions which more correspond to non-accounting, colloquial use of the terms.

When Kiyosaki writes that a house is not an "asset," but a "liability," he is correct in that homeownership won't generate future cash flow to you. But, it will redirect money you would have paid in rent into buying an asset which tends to appreciate in value. Often, the difference between someone who has rented for 30 years and someone who has been making payments toward ownership, is that the homebuyer owns a home and the other person must still pay rent into the future and owns nothing. I'm a big fan of homeownership. Yet, I don't recommend overspending in home buying! A $400,000 home is often just as homey as a $1 million home! And, you could invest the difference in things which do generate future cash flow.

I like what Kiyosaki writes about people who say, "I can't afford this." He writes that saying this leads to a closing of the mind. You stop thinking about your options for financing the item in question. He says you should say, "How can I afford this?" That will lead you to consider options you have for generating that level of wealth. I'd also toss in the question, "Do I want to afford this?" Many of the things you "can't afford" aren't really worth buying.

Finally, I strongly agree with Kiyosaki about the key to personal success. He writes, "In the real world outside of academics, something more than just good grades is required. I have heard it called 'guts,' 'chutzpah,' 'balls,' 'audacity,' bravado,' 'cunning,' 'daring,' 'tenacity,' and 'brilliance.' This factor, whatever it is labeled, ultimately decides one's future much more than school grades."

Success demands action Kiyosaki writes. That is very correct. I also like what Kiyosaki says about taking jobs to learn and not to earn. Do things which enhance your potential. For example, before starting a software company, it is best to work within a well-managed one to get an idea of how things best work (hint: Unless you are already a great programmer, they probably won't hire you unless you have a college degree).

With this review, you might assume I don't recommend reading Rich Dad, Poor Dad. However, if you take out all of the above criticisms (Higher education is valuable and you can become very well off by saving within a 401(k) and just working as an professional employee. Don't try to deduct personal, luxury items as business expenses. Stock trading won't make you rich quickly. Don't think of your employees as donkeys. Etc.), Rich Dad, Poor Dad is still worth reading. It will provoke you to think about money, investing, and how to become rich. As you read it, hopefully, your "financial genius" will at certain points in the book say, "This is B.S." Read around the B.S. for the value. Get your copy from the local library. It's a one-time read. Also, we probably wouldn't buy Kiyosaki's Cash Flow Game. If Monopoly was good enough for Bill Gates, it's good enough for us!

Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money That The Poor And Middle Class Do Not
Rich Dad, Poor Dad

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