By Kevin Doan
In 1997, Robert Kiyosaki published “Rich Dad Poor Dad,” a guide to financial literacy and intelligence, which chronicled the financial lives of his Poor Dad, Kiyosaki’s father, and his Rich Dad, a friend’s father. Kiyosaki recounts the lessons that both Dad’s preached and the ones that Kiyosaki eventually decided to act upon. Using his own life experiences as examples, we get a sense of Kiyosaki’s entire financial standing including many of his good and bad decisions.
Kiyosaki compares the conflicting advice that the two dads often gave as well as an account of the financial decisions that helped Kiyosaki escape the rat race. The rat race is the constant cycle of bills, loans, debt and financial angst that comes from financial illiteracy. Kiyosaki teaches you that if you understand how the sausage is made, you’ll escape.
Always pay yourself first
Eleanor Roosevelt once said, “Do what you feel in your heart to be right—for you’ll be criticized anyway. You’ll be damned if you do, and damned if you don’t.” This quote, Kiyosaki believes, is applicable to money.
In a personal anecdote, Kiyosaki describes an exchange with his Rich Dad about paying the bills. Poor Dad, he said, pays his bills on time but has little to nothing left afterwards to which Rich Dad quickly points out is an issue. Always pay yourself first, even if you are short on money, because if you don’t:
- Your inner voice that calls for an escape from the rat race will be drowned out by the creditors that you’re indebted to.
- You’ll be left with little money and no motivation to pay yourself after.
Paying yourself allows you to:
- Work towards escaping the rat race
- Grow personally.
- Have the much needed pressure to get creative with how to obtain money.
- Pay less taxes.
You’ll often hear that we need to tax the rich more but this doesn’t work because the rich always pay themselves first. Paying yourself works because corporate and personal taxes differ in when they happen. Personal taxes look like this:
- Income
- Taxation
- Spending
This leaves only whatever is left after taxation for use, as was in the case of Poor Dad who, despite being able to climb to high paying positions, was always stuck with little money after taxes. Corporate taxes happen at a different time. They look like this:
- Income
- Spending
- Taxation
The difference between the two is how much money is taken through taxes. The rich are able to spend their fortune and pay themselves. Then, once that fortune is spent, they must pay the government. Because they are able to control how much money is leftover, the rich are able to massively decrease their taxes.
Take Donald Trump as an example. Before Trump was in the White House, he was the face of the Trump Organization. Because manicuring his appearance was a company priority, Trump was able to write off a $70,000 haircut as a company expense that would be tax deductible.
Learn the difference between an asset and a liability
In another exchange, Rich Dad lectures that becoming rich is as simple as collecting assets. Where do people mess up then? Rich Dad explains. The lower and middle class become confused with the definition of what an asset is and what a liability is. Put simply, assets put money in your pocket and liabilities take money out. Kiyosaki later compiles a list of what he’d regard as assets (for brevity, this is an edited list):
- Businesses that don’t require personal oversight
- Securities
- Income generating real-estate
- IOUs
- Royalties
1. Businesses that don’t require personal oversight.
Obtaining complete or part ownership of a company that brings consistent and expected profits allows for you to make money without trading in time. This also allows you to explore other avenues for income.
2. Securities (stocks, bonds, etc.)
Purchasing stocks (and other equity securities) allows you to buy into a company, effectively owning a portion of it. If the company and economy see reliable growth, your money will grow. Your stocks portfolio won’t be taxed until you sell off and realize your capital gains or losses. At that point, any realized capital will be subject to taxation. Bonds (and other debt securities) allow for expected returns but these returns will take longer to realize than other securities.
3. Income-generating real estate
The keyword here is “income generating,” which rules out your main residence. Purchasing real estate in an appreciating or rebounding market and keeping that property overtime will allow the value of that property to appreciate. The property can be used to create a flow of income such as through renting or can be sold for a profit.
4. IOUs
Any amount that is indebted to you may serve as an asset. Bonds, as previously mentioned, are an IOU because when you purchase a bond, the issuer (ex. the federal government), must pay you back within a set amount of time.
5. Royalties
Allowing others, for a fee, the right to use your property is a risk-free way of bringing in money. Royalties are often applicable in the case of intellectual property. In publishing, a book royalty is percent that a publishing company might pay an author for the right to publish their works.
Why the rich get richer and everyone else struggles
If the rich obtained and are able to manage their fortunes through financial intelligence, there’s little in the way of them getting poorer or staying the same.
A large asset column creates plenty of income that can be reinvested into growing that asset column further. Creating a corporation to take advantage of corporate tax laws cuts down on the liabilities column. A combination of both gets the rich a ticket out of the rat race and a holiday vacation to never working underneath a boss again.
The lower and middle class keep their asset columns empty, their liability columns full and, with that combination, their after-tax income small. An employee, Kiyosaki says, in effect works for three parties:
1. Their company
This is where they earn the majority of their income. Although as an employee, the lower and middle class may make a lot of money, their efforts only serve to enrich their company. Their livelihoods depend on their employers, not themselves.
2. The government
Being an employee and working for a paycheck means most people will be forced to pay a cut of their income to the government. The more income they make, the larger amount of money they have to give the government.
3. Their bank
After paying off taxes, people have to make mortgage and credit card payments to their bank.
Financial education (or the lack of it) at FVHS
If you’re interested in furthering your financial education, Fountain Valley High School (FVHS) offers a few classes taught on campus.
AP Economics (Macro) and Economics—seniors are required to take one of the two—may provide the foundation for financial intelligence. Being able to identify the forces and factors that drive economic change are all vital to making good financial decisions and, more importantly, avoiding bad ones.
Through these economics classes, you can also gain a basic but important understanding of financial vocabulary and how different financial instruments work. Take taxation for example: if you know that corporate income is taxed after spending and personal income is taxed before spending, then you are in the position to learn how to legally cut down on your taxes.
Consumer Math, another course offered at FVHS, teaches the basics of personal and business finance as students study applicable scenarios such as purchasing a car or paying income taxes. This class is useful for similar reasons as Economics: it will help build a foundation for financial literacy.
For more information about these courses, see the FVHS course guide, and visit Amazon to buy Kiyosaki’s book “Rich Dad Poor Dad.”
