Originally posted on Money with Merne’s Facebook Page on June 12-15, 2017:
Years ago I read this popular financial book and I RE-read it last summer. Below I’ll share what I thought were the best tidbits and principles from Rich Dad, Poor Dad.
A lot of the book talks about how you should LEGALLY avoid giving your money to the government in the form of taxes so that you can build more wealth for yourself. You may think that’s cheating, but it’s really quite smart and there are many ways you can do it without being an expert in IRS loopholes. By contributing to a 401k, a flexible or health savings account (FSA and HSA), a dependent care savings account, and/or traditional IRA you are reducing your taxable income and allowing yourself to take home more of YOUR hard-earned money.
I was reading this book during election season amidst all the talk about Donald Trump not disclosing his tax returns and people speculating that he did not pay taxes. I am in no way advocating for Trump, but if you read this book, you wouldn’t think that was such a bad thing. You’d also learn that the author of this book is a huge fan and now a personal friend of Trump. But they both have great wealth so we can learn SOMETHING from them even if we don’t agree with them.
The book promotes starting your own corporation. I learned that most people who work to earn money have taxes taken off the top. Businesses and corporations are taxed on what’s left (aka their profit). If you have your own business and are smart about claiming applicable expenses, there will be less to tax. It’s more complicated than that, but it really got me excited about owning my own business! This is a good book to read if you’re very entrepreneurially-minded.
I learned the difference between an asset and a liability:
- Asset – provides income. Assets put money IN your pocket
- Liability – creates expenses. Liabilities take money OUT of your pocket
A common financial misconception is that your house or car is an ASSET. But by this definition, they are liabilities. A car is never an asset because it constantly depreciates in value, you have to put money into it for maintenance, and you will eventually need to buy a new one. The house you live in, that you pay a mortgage on, COSTS you money. Your mortgage takes money OUT of your pocket. You only make money from your house if you sell it and then you would have nowhere to live! A rental property, on the other hand, creates income because the renter pays the mortgage and then some. You get monthly income and eventually the house will be paid off and you could sell it for more income. So, to be rich, acquire assets and limit liabilities. Simple, right?
The Rat Race:
The book is aptly-titled because it features the author’s own father, the poor dad, and his friend’s father, the rich dad, from whom he received his financial education. The book explains the many ways the middle class and the wealthy upper class differ. The main way they differ is that the middle class are taught to get a fancy education so they can get a high-paying job so they can acquire lots of fancy things. But they are acquiring liabilities, not assets. When they run out of money, they have to work harder to earn more so they can spend more and it becomes a vicious cycle of hard work for no return in the long run. The author refers to this as the rat race.
On the other hand, the rich get money to work for them. They acquire assets and limit liabilities. Their assets provide income which in turn is invested into more assets and another vicious cycle is created – but this one is a lot sweeter because it just creates more and more money! When their assets create enough income to cover their living expenses, they can get out of the rat race! Just another source saying in a different way that you need to spend less and invest more to be rich and retire early.
My second reading of the book also convinced me to bite the bullet and INVEST $50 to purchase the author’s CashFlow game (if you watch the linked video, just an FYI that there’s a newer version than the one in the video and now you can actually use a free app to manage your money alongside the boardgame versus keeping the balance sheet by hand). I say invest because I’m giving myself an education which will make me more fruitful in the long run. This game is awesome! I’ve played it with a bunch of people now and it gets you so excited about investing! You can play with 2-6 people. The more people that play, the longer it tends to go (it can run several hours, but I promise it’s not boring). Let me know if you’re interested in playing and we can set up a game night!