Revisit Rich Dad Poor Dad – Lesson 2

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You can read about 1st lesson here. The 2nd lesson from the book Rich Dad Poor Dad is Why Teach Financial Literacy? Intelligence solves problems and produces money. Money without financial intelligence is money soon gone. Most people fail to realize that in life, it’s not how much money you but it is how much you can keep.

There are lots of stories of lottery winners who are poor, suddenly become rich, and then poor again. Money comes easy, goes easy as well. Professional athletes earn millions of dollars a year but become bankrupt after they stop their sports careers.

Hence, the key takeaway is the savings rate is very important. If you spend more than you earn, you will definitely become poor. Hence, if you want to be rich, you need to be financially literate.

Rule One. You must know the difference between an asset and a liability and buy assets. If you want to be rich, this is all you need to know. It is Rule No.1 It is the only rule. Most people do not know the difference between an asset and a liability.

Rich people acquire assets. The poor and middle class acquire liabilities but they think they are assets. If you want to become rich, you need to understand numbers. Assets put money in your pocket. A Liability is something that takes money out of your pocket.

You need to understand the story of where cash is flowing. This direction of cash flowing will determine whether the financial position will improve or deteriorate. In most middle-class and poor families, they will spend their lives buying liabilities. They will have income from paycheck coming in solely from a job, it will be taxed by the government, pay the monthly mortgage, fixed expenses, food, clothing, and entertainment. They incur consumer loans and credit cards debt. They buy a bigger house. All these liabilities add more to the expenses.

The rich will increase their income through dividends, interest, rental income, and royalties. They buy assets such as stocks, bonds, notes, real estate and acquire intellectual property.

It is the cash flow that tells the story. It is the story of how a person handles their money, what they do after they get the money in their hand. More money will not solve the problem. Money makes obvious our tragic human flaws. Money puts a spotlight on what we don’t know.

What is missing in our education is how to spend your money after you make them. This is called financial aptitude – what you do with the money once you make it, how to keep people from taking it from you, how long you keep it, and how hard that money works for you. Most people cannot tell why they struggle financially because they don’t understand cash flow. A person can be highly educated, professionally successful, and financially illiterate. They often work harder than they need to because they learned how to work hard but not how to have their money work hard for them.

Story of a financial nightmare

There is a recently married couple who move in together in a cramped rented apartment, saving money and living cheaply. They save money to buy their dream house so that they can have kids. They have dual-income and focus on their careers. Income increases, their expenses go up as well. They start to pay the high taxes due to the higher tax bracket.

As a result of income going up, they decided to go out and buy the house of their dreams. They buy a new car, new furniture and new appliances to match their new house. They wake up and their liabilities column is full of mortgage debt and credit card debt. They are now trapped in the rate race. A child comes along, they work harder and the process repeats itself. This is called lifestyle creep. With higher income, they incur more expenses and more debts. The financial struggle comes from financial illiteracy and not understanding the difference between an asset and a liability.

The poor and middle class all too often allow the power of money to control them. By simply getting up and working harder, failing to ask themselves if what they do makes sense, they shoot themselves in the foot as they leave for work every morning. By not fully understanding money, the vast majority of people allow the awesome power of money to control them. The power of money is used against them.

Why the Rich Get Richer?

The asset generates more than enough income to cover expenses, with the balance reinvested into the asset column. The asset column continues to grow and, therefore, the income it produces grows with it. Put it simply, with every single cent, you buy more assets. The assets generate more free cash flow which increases your income. With the increase of income, you pump back to buy more assets. This cycle repeats itself.

Why the Middle Class struggles?

The middle class finds itself in a constant state of financial struggle. Their primary income is through wages, and as their wages increase, so do their taxes. Their expenses tend to increase in equal increments as their wages increase, hence the phrase “the rat race”. They treat their home as their primary asset, instead of investing in income-producing assets.

The pattern of treating your home as an investment and the philosophy that a pay raise means you can buy a bigger home or spend more is the foundation of today’s debt-ridden society. This process of increased spending throws families into greater debt and into more financial uncertainty, even though they may be advancing in their jobs and receiving pay raises on a regular basis. This is high-risk living caused by weak financial education. A massive loss of jobs will wipe them out financially.

When genuine “deals of a lifetime” come along, those same people cannot take advantage of the opportunity. They must play it safe, simply because they are working so hard, taxed to the max, and are loaded with debt.

If you do what the masses do, you get the common outcome.

  1. You work for someone else. Most people, working for a paycheck are making the owner or the shareholders richer. Your efforts and success will help provide for the owner’s success and retirement.
  2. You work for the government. The government takes its share from your paycheck before you even see it. By working harder, you simply increase the amount of taxes taken by the government.
  3. You work for the bank. After taxes, your next largest expense is usually your mortage and credit card debt.

The problem with simply working harder is that each of these three levels takes a greater share of your increased efforts. You need to learn how to have your increased efforts benefit you and your family directly.

Most people, must keep their profession and rely on their wages to fund their acquisition of assets. As assets grow, how do they measure the extent of their success? When does someone realize that they are rich, that they have wealth?

Wealth is a person’s ability to survive so many days forward if I stopped working today, how long could I survive?

Hence, I have focused on building the asset column that made me financially independent. If I quit my job today, I would be able to cover my monthly expense with the cash flow from my assets. My next goal would be to have excess cash flow from my assets reinvested into the asset column. The more money that goes into my asset column, the more my asset column grows. As long as I keep my expenses less than the cash flow from these assets, I will grow richer with more and more income from sources other than my physical labor.

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