Personal Finance Musing 10: Seven Key concepts from the book "Rich dad Poor dad"

PERSONAL FINANCE MUSING- 10

SEVEN KEY FINANCIAL CONCEPTS FROM

THE “RICH DAD POOR DAD”

Let me start by wishing a very Happy Mothers’ day to all of you- Mother, the very reason of our existence on this earth. The celebration of Mothers’ day on second Sunday of May is an American tradition started by Anna Jarvis in 1908. Ironically, Jarvis would later denounce the holiday’s commercialization and spent the latter part of her life trying to remove it from the calendar[1]. You can read more about the interesting aspects of the evolution of Mothers' day on the link provided at the bottom.

Implicitly or explicitly, our mothers did teach us lot of financial lessons, the biggest one, without fail, would have been the value of frugality- the cornerstone of wealth building. A big salute to all the mothers of the world.

The Second book on personal finance that I wish to recommend and share with you is “Rich Dad Poor Dad” by Robert Kiyosaki- as good as any on personal finance. However, after this book, Kiyosaki wrote some pretty ordinary stuff. This book though is profound and I will share my understanding of seven key concepts from it. So, here we go.

1.      Financial Education    

     

The personal finance is not taught to children in an institutional manner in schools or colleges in our country. Even at home, this subject is considered a taboo and even if discussed, is more in form of heated arguments about mismanagement of expenses by either of the spouses. Naturally, the children, who unwittingly end up listening to such negative conversation, develop a warped worldview about money. In any case, who is supposed to teach children about money at home? Their parents- but are they themselves qualified for it? The answer is an emphatic no. At the same time though, all of us can improve our financial situation by improving our “financial IQ”.

Remember, “Broke is temporary. Poor is eternal.”

          Kiyosaki suggests a number of ways to improve one’s financial education like going to seminars (he goes for at least two per year), listening to/watching CDs and audio books. Going to the bookstores and rummaging through books on different and unique subjects. Reading newspapers, magazines, and internet for interesting and thought-provoking articles. I myself have been following this strategy for years. While on my morning jogs, I listen to YouTube audiobooks on a variety of topics including financial. This otherwise "dead time" of 45 odd minutes is fruitfully utilized and I manage to finish one audiobook (duration normally between 6 to 9 hours) in a week or two- free of cost.

2.      Financial Intelligence        Develop a positive mindset about money. It should never be- “I can’t afford it” but rather “how could I afford it?” This mindset will trigger ways and means in your brain to make and multiply money. You will develop financial intelligence, so important to make and retain money. Bhagwan Dada, the iconic hero of Bollywood with hit songs like “Shola jo bhadke dil mera dhadke” to his credit, had a multitude of properties and seven cars at the peak of his success. Due to his lack of financial intelligence, however, all his assets had to be sold off and he died a poor and broken man. There are many such examples in history- we can make money sometimes by sheer providence, but to retain and multiply that money we must have financial intelligence.

“Money without financial intelligence is money soon gone.”

3.      Assets and Liabilities

“An asset puts money in my pocket. A liability takes money out of my pocket.”

          This book is priceless for just this one concept- clarifying the difference between assets and liabilities and how poor, middle class and rich go about viewing and acquiring these.

          “Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.”

          Assets are what will provide a cash flow to you after their acquisition and hence Stocks, Mutual funds, Real estate, bonds, Intellectual property etc. are assets.

 Liabilities will take money out of your pocket not only to be acquired but thereafter to be maintained as well. They will also depreciate in value over time. Car, consumer goods like Smartphone, Credit cards, and personal loan (and other consumer/student loans) are thus liabilities.

          Kiyosaki doesn’t rule out acquiring liabilities but he insists that money for the same must come out of the cash flow produced by assets. Take a moment to look at the cash flow diagrams given below:-

The above diagrams[2] clearly show the cash flow patterns of rich, middle class and poor persons. It is seen that the rich buy assets to generate an income stream and hence over a period of time stop depending upon their "regular income" like pay etc. A middle-class person (that’s where most of us are) ends up using his pay (read income) to acquire liabilities which further increase his expenses- a vicious cycle indeed. A poor person remains poor because his expenses equal his income and are sometimes more. Hence, he does not buy any assets. These diagrams are pretty self-explanatory and must be taught to our kids.

          I will deliberate on this concept at length in my next week’s post.

“If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities.”

4.      Spending Investing (SI) Balance.      

 

Please read my post on SI balance again. Kiyosaki emphasizes the same point giving an example of a young couple, who, as their income rises, keep increasing their expenditures- ostensibly to tell the world that they "have arrived". A bigger house, few more Credit cards, bigger cars, new furniture, and new appliances- the list is endless, but the money finite. Kiyosaki says, “I run into this young couple all the time. Their names change, but their financial dilemma is the same.”

Every pay raise, every bonus, every financial windfall is to be wisely invested to leverage the power of compounding. There is no need to “appear rich” for the sake of your friends, relatives, neighbors etc. They have their own life race to be run as you have your own- the tracks may appear to be the same but are not.

5.      Defining Wealth.   

    

Kiyosaki has a very interesting take on what is wealth? He defines it as, “Wealth is a person's ability to survive so many numbers of days forward— or if I stopped working today, how long could I survive?"

This point emphasizes the value of “liquidity” in your total net worth meaning if required, how much money you can muster at short notice for your essential needs. Let's say, 80% of your net worth consists of your house and car and you suddenly need money for a financial emergency. How soon and at what price will you be able to sell your house or car? It may be weeks or even months (especially for the house) before you can find a buyer who is not going to take advantage of your desperate situation.

The endeavor for us should always be to keep increasing our assets as they are our “cash flow generators” and will keep on fueling us in financially lean times- an ability that our liabilities like Smartphone or car sadly lack.

“The rich focus on their asset columns while everyone else focuses on their income statements.”

6.      Give and You Shall Receive.   

  

Most of us wish to contribute to some social cause or the underprivileged but wait for an opportune moment when we will have enough to contribute. In a way, we tell ourselves that we first have to look after our needs before thinking about others. Kiyosaki states and I endorse it, that you must first give in order to receive.

The manner of giving is entirely upon us but giving leftover food to the maid or discarded clothes to an NGO is not really giving. You are just disposing off what you don't need any longer. Instead, you must share something for which you have a need- a percentage of your income may be. This could go towards the education of a child through a bonafide NGO or such like cause.

“Whenever you feel short or in need of something, give what you want first and it will come back in buckets. That is true for money, a smile, love, or friendship.”

7.      Miscellaneous Issues

          Understand and don’t incur “bad debts”. We have discussed this issue in my earlier posts and need to scrupulously follow it. Generally, all consumer debts are bad and hence avoidable.

          Never “dip into your savings”. This is the single most pernicious habit a middle-class person has. The savings/investments are always goal based and should not be touched till the goal has been reached.

          Never buy luxuries on credit. This point is a corollary of the assets and liabilities point but needs reiteration. If you need a luxury, save for it. Ruthlessly curb the “present bias”.

          I stop with my seven key personal finance concepts here. Incidentally, this wonderful book is available for free both as an audiobook on YouTube and PDF file. I am providing links for both, hope you enjoy reading/listening to this classic. As stated earlier, next week we will plunge deep into the topic of “assets and liabilities”.

 https://www.pdfdrive.net/rich-dad-poor-dad-e18718212.html

https://www.youtube.com/watch?v=q0Dwa7Bh-zE

Signing off with the thought, “Should we require a special day to love our mothers?” Have a great Sunday.

---

[1] https://www.history.com/topics/holidays/mothers-day.

[2] https://improvingdaily.quora.com/Rich-Dad-Poor-Dad-by-Robert-Kiyosaki-2.