Rich Dad’s Guide to Investing Summary – In this article, I will present the five main takeaways from Rich Dad’s Guide to Investing, written by Robert Kiyosaki. This is my third book by Robert Kiyosaki, and it’s the third book in the Rich Dad series. I hope you will enjoy this one as much as the previous ones.
At the age of twelve, Robert walked with the man he calls his “Rich Dad”, along a beach. Suddenly, Rich Dad pointed at a piece of real estate by the ocean and said: “you see that large house?” “I just bought it.” At that point, Robert could not understand how his so-called Rich Dad could afford that seemingly very expensive piece of real estate. Because, at the time, Rich Dad wasn’t, well .. rich yet.
When Robert asked about it, he got the following answer:
“Well, I couldn’t afford it, but my company could.”
The teachings from this book originate from Robert’s Rich Dad, and with his guidance, Robert too was able to build great wealth. Let’s have a look at the takeaways and see if we can copy the formula as well.
Rich Dad’s Guide to Investing Summary by Robert Kiyosaki
1. Create assets that buy assets
Even though Robert’s real dad had a great job and a much higher wage than Robert’s Rich Dad, Robert knew that his real dad could never afford the beach house mentioned in the introduction. The explanation by Rich Dad was that Roberts’s real dad had spent his life working hard for the money that created someone else’s wealth, while Rich Dad himself had worked years at creating his wealth, in his own company. The lesson Rich Dad gives is that if you want to create big wealth, you need to create your asset.
Being paid by the hour will most likely not make you rich. As Warren Buffett puts it: “If you don’t find a way to make money while you’re sleeping, you will work until you die.” Once you successfully have created an asset that provides a positive cash flow, you can achieve the second kicker that will help you expand your asset column – that is – the acquisition of additional assets.
You should always aim to invest in assets that can help you strengthen your cash flow, so that the additional surpluses, yet again, can be used to acquire additional assets. This goes on and on and on and done correctly, you will experience a compounding effect. One of the main reasons to invest using the cash flow from your assets in a business, as compared to your paycheck, is that the cash flow can be spent as a gross income, as it hasn’t been paid out by the parent company to any individual yet.
Rich Dad got to buy assets with this gross income through his company, and paid taxes on the remaining net income, while Robert’s real dad paid taxes on gross income, and then tried to buy assets with his net income. There is also the dimension of safety. When owning and operating assets, there are always risks involved. These risks are the same, no matter if you operate the assets as an individual or through a corporation. However, would any risk materialize, you are much better protected personally if the assets are owned and operated through a corporation, instead of you as an individual.
2. Yse debt as a lever
There are many contradicting opinions regarding debt. In one camp, debt is considered bad, dangerous and something that should be avoided at all costs. On the other side of the spectrum, is a camp that views debt as something that can help you speed up your process to acquire great wealth. According to Robert Kiyosaki, there is bad debt, as the first camp suggests. However, there is also good debt, as the latter camp points out.
The difference lies in what the debt is used for, and how it affects your cash flow. Let’s start with bad debt. As people in the middle class climb up the corporate ladder and starts to earn more money, they also qualify to take on more debt. This debt is often used to buy a more expensive home, a new car, a nice boat, etc. This debt is bad because it weakens their cash flow and only makes them even more dependent on their next paycheck.
As time goes on, using this bad kind of debt is a death trap to anyone aiming at building wealth, as this behavior of spending cash and using debt to finance new fancy things, is addictive in its nature. So as their income increases, so does their bad personal debt, and it all continues in a vicious spiral. Good debt, however, results in the opposite – a stronger cash flow. This kind of debt is used by the rich. As their assets provide them with a strong cash flow, they’re qualified to take on more debt.
The new debt is not used to acquire additional liabilities but is instead used to leverage the current cash flow. This is done by either making current assets yield higher returns or by acquiring additional assets. This process is self-reinforcing too, but it creates a positive spiral instead of a vicious one.
3. Maximize expenses, minimize income
When Robert was nine years old, he was working for his Rich Dad, mowing the lawn and such. Robert made 10 cents per hour doing this work. One day, Robert asked his Rich Dad for a raise. Instead of raising, or even discussing the salary, Rich Dad removed it altogether. The reason was that Rich Dad did not want Robert to get addicted to an hourly wage, and he said:
“Paying people to do work is training them to think like employees”
What do employees think, you ask?
That to get ahead financially, you must maximize your income through your salary, and then live frugally by minimizing expenses.
However, Robert’s Rich Dad argues just the opposite: He says that, you shouldn’t aim to maximize your income, and that you should maximize your expenses instead.
Before you turn this article off in disbelief, allow me to explain. The first part, about minimizing income, stresses how you should not become dependent on a salary, just as Rich Dad tried to learn nine years old Robert. You should have your business reinvest all the surplus capital and minimize the personal income withdrawn.
The second part, maximizing expenses, is also quite counterintuitive. But that’s because you might think of the wrong type of expenses. The correct type of expenses, that should be maximized, are the ones that can help you excel in your business. Going to a seminar, buying a book learning a new skill, hiring more people to do work for you, acquiring new assets … these are all expenses that eventually will allow you to get ahead of the rat race.
As Rich Dad puts it:
“Most people eventually lose their money and go broke because they continue to think like a poor person, and poor people want high-income and low expenses.” If you never make that switch in your head, you’ll be stuck trying to live as cheap and frugal as possible, to make up for your fear of losing money. When you understand why a rich person would want high expenses and low income, you will begin to see that there’s another side of that coin.
4. Acquire the three E’s
Rich Dad believed that to become a successful investor and businessman, you would need to achieve three items: Education, Experience, and Excess cash. These three E’s are all needed if you want to be able to identify and seize the opportunities that are always present, and always in motion. Let’s start with the first one
- Education. This one is quite straightforward but essential. You need a sound understanding of business. This includes how they operate, dynamics within different industries, and perhaps most importantly, a good understanding of how to deploy the X-ray. That is, reading financial statements. Without education, anything you do will be just speculation, and the results will be thereafter.
- Experience. The next step is to get experience in the field of business. Rich Dad used to put down a blank financial statement in front of his son and Robert Kiyosaki and ask them to fill in the asset column with something. He did this because Rich Dad believed that the best way to get experience in business … is to create your own business. He didn’t care what his apprentices started, just that they started something. They were encouraged to create, to fail, to learn something from it, to adjust and create something else, to fail yet again, to learn something new, to adjust, and to create again until success.
- Excess cash. According to Rich Dad, excess cash doesn’t need the same focus as the first 2 E’s. This is because, once you have a solid education, and you have gained the required experience, excess cash will inevitably come. This is the part where you keep full control of your assets, use the cash flow to acquire additional assets, and soundly use leverage to speed up the creation of wealth. When people leave school, they generally look for jobs, not opportunities. And from there, the negative spiral takes off – turning cash into trash begins. Arm yourself with the 3 E’s, and don’t you EVER miss out on a great opportunity, just because it doesn’t involve a climb in the corporate ladder!
5. Start today
Rich Dad made Robert Kiyosaki start his first business as a part-time job. And this is now being recommended by Robert himself. Keep your normal job, if you need some money to put food on the table for yourself and perhaps for a family. But put all extra money, energy, and time into your business.
Create, explore, fail, learn and repeat, don’t wait! In the long run, after several attempts, failures, and lessons learned, it becomes more and more likely that your next attempt will work out. And as Rich Dad puts it: “As a business owner, you don’t have to be right 51% of the time. You need to be right only once.” However, make sure that you survive the worst-case scenario. You must be able to try again.
According to Rich Dad, most millionaires lose three companies before they win big. The average person has never lost a single one. That is why 10% of people control 90% of the money. Let’s have a recap before you go on to create your part-time business. Build your money machine by creating an asset that acquires additional assets.
Once you have a working formula, embrace debt as a friend and use it to leverage your cash flow. Minimize income withdrawn, and maximize expenses that can help you excel. To be able to seize financial opportunities, you need Education Experience and Excess cash. You must only be right once, start today!