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Category: Inspirational Current Grade: A+ Total Views: 3072 Member Comments: 0 |
Posted on: 11/06/2008 Posted by: Matt Miller - Content Director Blog Points: 3098 View all blogs >> |
Rich Dad, Poor Dad
and flourish," said rich dad. "Unfortunately, for many people, school is the end, not the beginning."
There was a long silence. Rich dad was smiling. I did not comprehend everything he said that day.
But as with most great teachers, whose words continue to teach for years, often long after they're
gone, his words are still with me today.
"I've been a little cruel today," said rich dad. "Cruel for a reason. I want you to always remember this
talk. I want you to always think of Mrs. Martin. I want you always to think of the donkey. Never
forget, because your two emotions, fear and desire, can lead you into life's biggest trap, if you're not
aware of them controlling your thinking. To spend your life living in fear, never exploring your
dreams, is cruel. To work hard for money, thinking that money will buy you things that will make
you happy is also cruel. To wake up in the middle of the night terrified about paying bills is a horrible
way to live. To live a life dictated by the size of a paycheck is not really a life. Thinking that a job
will make you feel secure is lying to yourself. That's cruel, and that's the trap I want you to avoid, if
possible. I've seen how money runs people's lives. Don't let that happen to you. Please don't let
money run your life."
A softball rolled under our table. Rich dad picked it up and threw it back.
"So what does ignorance have to do with greed and fear?" I asked.
"Because it is ignorance about money that causes so much greed and so much fear," said rich dad.
"Let me give you some examples. A doctor, wanting more money to better provide for his family,
raises his fees. By raising his fees, it makes health care more expensive for everyone. Now, it hurts
the poor people the most, so poor people have worse health than those with money.
"Because the doctors raise their rates, the attorneys raise their rates. Because the attorneys' rates
have gone up, schoolteachers want a raise, which raises our taxes, and on and on and on. Soon, there
will be such a horrifying gap between the rich and the poor that chaos will break out and another
great civilization will collapse. Great civilizations collapsed when the gap between the haves and
havenots was too great. America is on the same course, proving once again that history repeats itself,
because we do not learn from history. We only memorize historical dates and names, not the lesson.
"Aren't prices supposed to go up?" I asked.
"Not in an educated society with a well-run government. Prices should actually come down. Of
course, that is often only true in theory. Prices go up because of greed and fear caused by ignorance.
If schools taught people about money, there would be more money and lower prices, but schools
focus only on teaching people to work for money, not how to harness money's power."
"But don't we have business schools?" Mike asked. "Aren't you encouraging me to go to business
school for my master's degree?"
"Yes," said rich dad. "But all too often, business schools train employees who are sophisticated bean
counters. Heaven forbid a bean counter takes over a business. All they do is look at the numbers, fire
people and kill the business. I know because I hire bean counters. All they think about is cutting
costs and raising prices, which cause more problems. Bean counting is important. I wish more people
knew it, but it, too, is not the whole picture," added rich dad angrily.
"So is there an answer?" asked Mike.
"Yes," said rich dad. "Learn to use your emotions to think, not think with your emotions. When you
boys mastered your emotions, first by agreeing to work for free, I knew there was hope. When you
again resisted your emotions when I tempted you with more money, you were again learning to think
in spite of being emotionally charged. That's the first step."
"Why is that step so important" I asked.
"Well, that's up to you to find out. If you want to learn, I'll take you boys into the briar patch. That
place where almost everyone else avoids. I'll take you to that place where most people are afraid to
go. If you go with me, you'll let go of the idea of working for money and instead learn to have money
work for you."
"And what will we get if we go with you. What if we agree to learn from you? What will we get?" I
asked.
"The same thing Briar Rabbit got," said rich dad. "Freedom from the Tar Baby."
"Is there a briar patch?" I asked.
"Yes," said rich dad. "The briar patch is our fear and our greed. Going into our fear and confronting
22
Rich Dad, Poor Dad
our greed, our weaknesses, our neediness is the way out. And the way out is through the mind, by
choosing our thoughts."
"Choosing our thoughts?" Mike asked, puzzled.
"Yes. Choosing what we think rather than reacting to our emotions. Instead of just getting up and
going to work to solve your problems, just because the fear of not having the money to pay your bills
is scaring you. Thinking would be taking the time to ask yourself a question. A question like, `Is
working harder at this the best solution to this problem?' Most people are so terrified at not telling
themselves the truth-that fear is in control-that they cannot think, and instead run out the door. Tar
baby is in control. That's what I mean by choosing your thoughts."
"And how do we do that?" Mike asked.
"That's what I will be teaching you. I'll be teaching you to have a choice of thoughts to consider,
rather than knee-jerk reacting, like gulping down your morning coffee and running out the door.
"Remember what I said before: A job is only a short-term solution to a long-term problem. Most
people have only one problem in mind, and it's short term. It's the bills at the end of the month, the
Tar Baby. Money now runs their lives. Or should I say the fear and ignorance about money. So they
do as their parents did, get up every day and go work for money. Not having the time to say, `Is there
another way?' Their emotions now control their thinking, not their heads."
"Can you tell the difference between emotions thinking and the head thinking?" Mike asked.
"Oh, yes. I hear it all the time," said rich dad. "I hear things like, `Well, everyone has to work.' Or
`The rich are crooks.' Or `I'll get another job. I deserve this raise. You can't push me around.' Or `I
like this job because it's secure.' Instead of, `Is there something I'm missing here?' which breaks the
emotional thought, and gives you time to think clearly."
I must admit, it was a great lesson to be getting. To know when someone was speaking out of
emotions or out of clear thought. It was a lesson that served me well for life. Especially when I was
the one speaking out of reaction and not from clear thought.
As we headed back to the store, rich dad explained that the rich really did "make money." They did
not work for it. He went on to explain that when Mike and I were casting 5-cent pieces out of lead,
thinking we were making money, we were very close to thinking the way the rich think. The problem
was that it was illegal for us to do it. It was legal for the government and banks to do it, but not us.
He explained that there are legal ways to make money and illegal ways.
Rich dad went on to explain that the rich know that money is an illusion, truly like the carrot for the
donkey. It's only out of fear and greed that the illusion of money is held together by billions of people
thinking that money is real. Money is really made up. It was only because of the illusion of
confidence and the ignorance of the masses that the house of cards stood standing. "In fact," he said,
"in many ways the donkey's carrot was more valuable than money."
He talked about the gold standard that America was on, and that each dollar bill was actually a silver
certificate. What concerned him was the rumor that we would someday go off the gold standard and
our dollars would no longer be silver certificates.
"When that happens, boys, all hell is going to break loose. The poor, the middle class and the
ignorant will have their lives ruined simply because they will continue to believe that money is real
and that the company they work for, or the government, will look after them."
We really did not understand what he was saying that day, but over the years it made more and more
sense.
Seeing What Others Miss
As he climbed into his pickup truck, outside of his little convenience store, he said, "Keep working
boys, but the sooner you forget about needing a paycheck, the easier your adult life will be. Keep
using your brain, work for free, and soon your mind will show you ways of making money far beyond
what I could ever pay you. You will see things that other people never see. Opportunities right in
front of their noses. Most people never see these opportunities because they're looking for money
and security, so that's all they get. The moment you see one opportunity, you will see them for the
rest of your life. The moment you do that, I'll teach you something else. Learn this, and you'll avoid
one of life's biggest traps. You'll never, ever, touch that Tar Baby."
23
Rich Dad, Poor Dad
Mike and I picked up our things from the store and waved goodbye to Mrs. Martin. We went back to
the park, to the same picnic bench, and spent several more hours thinking and talking.
We spent the next week at school, thinking and talking. For two more weeks, we kept thinking,
talking, and working for free.
At the end of the second Saturday, I was again saying goodbye to Mrs. Martin and looking at the
comic-book stand with a longing gaze. The hard thing about not even getting 30 cents every
Saturday was that I didn't have any money to buy comic books. Suddenly, as Mrs. Martin was saying
goodbye to Mike and me, I saw something she was doing that I had never seen her do before. I mean,
I had seen her do it, but I never took notice of it.
Mrs. Martin was cutting the front page of the comic book in half. She was keeping the top half of the
comic book cover and throwing the rest of the comic book into a large brown cardboard box. When I
asked her what she did with the comic books, she said, "I throw them away. I give the top half of the
cover back to the comic-book distributor for credit when he brings in the new comics. He's coming
in an hour."
Mike and I waited for an hour. Soon the distributor arrived and I asked him if we could have the
comic books. To which he replied, "You can have them if you work for this store and do not resell
them."
Our partnership was revived. Mike's mom had a spare room in the basement that no one used. We
cleaned it out, and began piling hundreds of comic books in that room. Soon our comic-book library
was open to the public. We hired Mike's younger sister, who loved to study, to be head librarian. She
charged each child 10 cents admission to the library, which was open from 2:30 to 4:30 p.m. every
day after school. The customers, the children of the neighborhood, could read as many comics as
they could in two hours. It was a bargain for them since a comic costs 10 cents each, and they could
read five or six in two hours.
Mike's sister would check the kids as they left, to make sure they weren't borrowing any comic
books. She also kept the books, logging in how many kids showed up each day, who they were, and
any comments they might have. Mike and I averaged $9.50 per week over a threemonth period. We
paid his sister $1 a week and allowed her to read the comics for free, which she rarely did since she
was always studying.
Mike and F kept our agreement by working in the store every Saturday and collecting all the comic
books from the different stores. We kept our agreement to the distributor by not selling any comic
books. We burned them once they got too tattered. We tried opening a branch office, but we could
never quite find someone as dedicated as Mike's sister we could trust.
At an early age, we found out how hard it was to find good staff.
Three months after the library first opened, a fight broke out in the room. Some bullies from another
neighborhood pushed their way in and started it. Mike's dad suggested we shut down the business.
So our comic-book business shut down, and we stopped working on Saturdays at the convenience
store. Anyway, rich dad was excited because he had new things he wanted to teach us. He was happy
because we had learned our first lesson so well. We had learned to have money work for us. By not
getting paid for our work at the store, we were forced to use our imaginations to identify an
opportunity to make money. By starting our own business, the comic-book library, we were in
control of our own finances, not dependent on an employer. The best part was that our business
generated money for us, even when we weren't physically there. Our money worked for us. Instead
of paying us money, rich dad had given us so much more.
CHAPTER THREE
Lesson Two:Why Teach Financial Literacy?
In 1990, my best friend, Mike, took over his father's empire and is, in fact, doing a better job than his
dad did. We see each other once or twice a year on the golf course. He and his wife are wealthier
than you could imagine. Rich dad's empire is in great hands, and Mike is now grooming his son to
take his place, as his dad had groomed us.
In 1994, I retired at the age of 47, and my wife, Kim, was 37. Retirement does not mean not
24
Rich Dad, Poor Dad
working. To my wife and me, it means that barring unforeseen cataclysmic changes, we can work or
not work, and our wealth grows automatically, staying way ahead of inflation. I guess it means
freedom. The assets are large enough to grow by themselves. It's like planting a tree. You water it for
years and then one day it doesn't need you anymore. It's roots have gone down deep enough. Then,
the tree provides shade for your enjoyment.
Mike chose to run the empire and I chose to retire.
Whenever I speak to groups of people, they often ask what I would recommend or what could they
do? "How do they get started?" "Is there a good book I would recommend?" "What should they do
to prepare their children?" "What is the secret to success?" "How do I make millions?" I am always
reminded of this article I was once given. It goes as follows.
THE RICHEST BUSINESSMEN
In 1923 a group of our greatest leaders and richest businessmen held a meeting at the Edgewater
Beach hotel in Chicago. Among them were Charles Schwab, head of the largest independent steel
company; Samuel Instill, president of the world's largest utility; Howard Hopson, head of the largest
gas company; Ivar Kreuger president of the International Match Co., one of the world's largest
companies at that time; Leon Frazier, president of the Bank of International Settlements; Richard
Whitney, president of the New York Stock Exchange; Arthur Cotton and Jesse Livermore, two of the
biggest stock speculators; and Albert Fall, a member of President Harding's cabinet. Twenty five
years later nine of them (those listed above) ended as follows. Schwab died penniless after living for
five years on borrowed money. Instill died broke living in a foreign land. Kreuger and Cotton also
died broke. Hopson went insane. Whitney and Albert Fall were just released from prison. Fraser and
Livermore committed suicide.
I doubt if anyone can say what really happened to these men. If you look at the date, 1923, it was
just before the 1929 market crash and the Great Depression, which I suspect had a great impact on
these men and their lives. The point is this: Today we live in times of greater and faster change than
these men did. I suspect there will be many booms and busts in the next 25 years that will parallel
the ups and downs these men faced. I am concerned that too many people are focused too much on
money and not their greatest wealth, which is their education. If people are prepared to be flexible,
keep an open mind and learn, they will grow richer and richer through the changes. If they think
money will solve problems, I am afraid those people will have a rough ride. 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 make, it's how much money you
keep. We have all heard stories of lottery winners who are poor, then suddenly rich, then poor again.
They win millions and are soon back to where they started. Or stories of professional athletes, who,
at the age of 24, are earning millions of dollars a year, and are sleeping under a bridge by age 34. In
the paper this morning, as I write this, there is a story of a young basketball player who a year ago
had millions. Today, he claims his friends, attorney and accountant took his money, and now he
works at a car wash for minimum wage.
He is only 29. He was fired from the car wash because he refused to take off his championship ring
as he was wiping off the cars, so his story made the newspaper. He is appealing his termination,
claiming hardship and discrimination and that the ring is all he has left. He claims that if you take
that away, he'll crumble.
In 1997, I know so many people who are becoming instant millionaires. It's the Roaring '20s one
more time. And while I am glad people have been getting richer and richer, I only caution that in the
long run, it's not how much you make, it's how much you keep, and how many generations you keep
it.
25
Rich Dad, Poor Dad
So when people ask, "Where do I get started?" or "Tell me how to get rich quick," they often are
greatly disappointed with my answer. I simply say to them what my rich dad said back to me when I
was a little kid. "If you want to be rich, you need to be financially literate."
That idea was drummed into my head every time we were together. As I said, my educated dad
stressed the importance of reading books, while my rich dad stressed the need to master financial
literacy.
If you are going to build the Empire State Building, the first thing you need to do is dig a deep hole
and pour a strong foundation. If you are going to build a home in the suburbs, all you need to do is
pour a 6-inch slab of concrete. Most people, in their drive to get rich, are trying to build an Empire
State Building on a 6-inch slab.
Our school system, having been created in the Agrarian Age, still believes in homes with no
foundation. Dirt floors are still the rage. So kids graduate from school with virtually no financial
foundation. One day, sleepless and deep in debt in suburbia, living the American Dream, they decide
that the answer to their financial problems is to find a way to get rich quick.
Construction on the skyscraper begins. It goes up quickly, and soon, instead of the Empire State
Building, we have the Leaning Tower of Suburbia. The sleepless nights return.
As for Mike and me in our adult years, both of our choices were possible because we were taught to
pour a strong financial foundation when we were just kids.
Now, accounting is possibly the most boring subject in the world. It also could be the most
confusing. But if you want to be rich, long term, it could be the most important subject. The
question is, how do you take a boring and confusing subject and teach it to kids? The answer is,
make it simple. Teach it first in pictures.
My rich dad poured a strong financial foundation for Mike and me. Since we were just kids, he
created a simple way to teach us. For years he only drew pictures and used words. Mike and I
understood the simple drawings, the jargon, the movement of money, and then in later years, rich
dad began adding numbers. Today, Mike has gone on to master much more complex and
sophisticated accounting analysis because he has had to. He has a billion-dollar empire to run. I am
not as sophisticated because my empire is smaller, yet we come from the same simple foundation. In
the following pages, I offer to you the same simple line drawings Mike's dad created for us. Though
simple, those drawings helped guide two little boys in building great sums of wealth on a solid and
deep foundation.
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. This may sound
absurdly simple, but most people have no idea how profound this rule is. Most people struggle
financially because they 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"
When rich dad explained this to Mike and me, we thought he was kidding. Here we were, nearly
teenagers and waiting for the secret to getting rich, and this was his answer. It was so simple that we
had to stop for a long time to think about it.
"What is an asset?" asked Mike.
"Don't worry right now," said rich dad. "Just let the idea sink in. If you can comprehend the
simplicity, your life will have a plan and be financially easy. It is simple; that is why the idea is
missed."
"You mean all we need to know is what an asset is, acquire them and we'll be rich?" I asked.
Rich dad nodded his head. "It's that simple."
"If it's that simple, how come everyone is not rich?" I asked.
26
Rich Dad, Poor Dad
Rich dad smiled. "Because people do not know the difference
between an asset and a liability."
I remember asking, "How could adults be so silly. If it is that simple, if it is that important, why
would everyone not want to find out?"
It took our rich dad only a few minutes to explain what assets and liabilities were.
As an adult, I have difficulty explaining it to other adults. Why? Because adults are smarter. In most
cases, the simplicity of the idea escapes most adults because they have been educated differently.
They have been educated by other educated professionals, such as bankers, accountants, real estate
agents, financial planners, and so forth. The difficulty comes in asking adults to unlearn, or become
children again. An intelligent adult often feels it is demeaning to pay attention to simplistic
definitions.
Rich dad believed in the KISS principle-"Keep It Simple Stupid"-so he kept it simple for two young
boys, and that made the financial foundation strong.
So what causes the confusion? Or how could something so simple be so screwed up? Why would
someone buy an asset that was really a liability. The answer is found in basic education.
We focus on the word "literacy" and not "financial literacy." What defines something to be an asset,
or something to be a liability are not words. In fact, if you really want to be confused, look up the
words "asset" and "liability" in the dictionary. I know the definition may sound good to a trained
accountant, but for the average person it makes no sense. But we adults are often too proud to admit
that something does not make sense.
As young boys, rich dad said, "What defines an asset is not words but numbers. And if you cannot
read the numbers, you cannot tell an asset from a hole in the ground."
"In accounting," rich dad would say, "it's not the numbers, but what the numbers are telling you. It's
just like words. It's not the words, but the story the words are telling you.
Many people read, but do not understand much. It's called reading comprehension. And we all have
different abilities when it comes to reading comprehension. For example, I recently bought a new
VCR. It came with an instruction book that explained how to program the VCR. All I wanted to do
was record my favorite TV show on Friday night. I nearly went crazy trying to read the manual.
Nothing in my world is more complex than learning how to program my VCR. I could read the
words, but I understood nothing. I get an "A" for recognizing the words. I get an "F" for
comprehension. And so it is with financial statements for most people.
"If you want to be rich, you've got to read and understand numbers." If I heard that once, I heard it a
thousand times from my rich dad. And I also heard, "The rich acquire assets and the poor and middle
class acquire liabilities."
Here is how to tell the difference between an asset and a liability. Most accountants and financial
professionals do net agree with the definitions, but these simple drawings were the start of strong
financial foundations for two young boys.
To teach pre?teen boys, rich dad kept everything simple, using as many pictures as possible, as few
words as possible, and no numbers for years.
"This is the Cash Flow pattern of an asset."
+------------------------+
--------------->|Income |
| |-------------------------
| | Expense |
| +------------------------+
|
-----------------------------------+
| Assets | Liabilities |
| | |
|_________|____________|
The above box is an Income Statement, often called a Profit and Loss Statement. It measures income
27
Rich Dad, Poor Dad
and expenses. Money in and money out. The bottom diagram is the Balance Sheet. It is called that
because it is
supposed to balance assets against liabilities. Many financial novices don't know the relationship
between the Income Statement and the Balance Sheet. That relationship is vital to understand.
The primary cause of financial struggle is simply not knowing the difference between an asset and a
liability. The cause of the confusion is found in the definition of the two words. If you want a lesson
in confusion, simply look up the words "asset" and "liability" in the dictionary.
Now it may make sense to trained accountants, but to the average person, it may as well be written
in Mandarin. You read the words in the definition, but true comprehension is difficult.
So as I said earlier, my rich dad simply told two young boys that "assets put money in your pocket."
Nice, simple and usable.
"This is Cash Flow pattern of a liability."
+------------------------+
|Income |
|-------------------------
| Expense |
+-----|\-------------------+
| \------------------------------>
---------------------------|--------+
| Assets | Liabilities |
| | |
|_________|____________|
Now that assets and liabilities have been defined through pictures, it may be easier to understand my
definitions in words.
An asset is something that puts money in my pocket.
A liability is something that takes money out of my pocket.
This is really all you need to know. 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. It's not knowing the difference that
causes most of the financial struggle in the real world.
Illiteracy, both in words and numbers, is the foundation of financial struggle. If people are having
difficulties financially, there is something that they cannot read, either in numbers or words.
Something is misunderstood. The rich are rich because they are more literate in different areas than
people who struggle financially. So if you want to be rich and maintain your wealth, it's important to
be financially literate, in words as well as numbers.
The arrows in the diagrams represent the flow of cash, or "cash flow." Numbers alone really mean
little. Just as words alone mean little. It's the story that counts. In financial reporting, reading
numbers is looking for the plot, the story. The story of where the cash is flowing. In 80 percent of
most families, the financial story is a story of working hard in an effort to get ahead. Not because
they don't make money. But because they spend their lives buying liabilities instead of assets.
For instance, this is the cash flow pattern of a poor person, or a young person still at home:
Job (provides income)-> Expenses(Taxes Food Rent Clothes Fun Transportation)
Asset (none)
Liability (none)
This is the cash flow pattern of a person in the middle class:
Job (provides income)-> Expenses(Taxes Food Mortgage Clothes Fun Transportation)
Asset (none)
Liability (Mortgage Consumer loans Credit Cards)
28
Rich Dad, Poor Dad
This is the cash flow pattern of a wealthy person:
Assets(stocks bonds notes real estate intellectual property)->income (dividends interest rental
income royalties)
Liabilities (none)
All of these diagrams were obviously oversimplified. Everyone has living expenses, the need for
food, shelter and clothing.
The diagrams show the flow of cash through a poor, middle class or wealthy person's life. 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.
The reason I started with the story of the richest men in America is to illustrate the flaw in the
thinking of so many people. The flaw is that money will solve all problems. That is why I cringe
whenever 1 hear people ask me how to get rich quicker. Or where do they start? I often hear, "I'm in
debt so I need lo make more money."
But more money will often not solve the problem; in fact, it may actually accelerate the problem.
Money often makes obvious our tragic human flaws. Money often puts a spotlight on what we do
not know. That is why, all too often, a person who comes into a sudden windfall of cash-let's say an
inheritance, a pay raise or lottery winnings-soon returns to the same financial mess, if not worse than
the mess they were in before they received the money. Money only accentuates the cash flow
pattern running in your head. If your pattern is to spend everything you get, most likely an increase
in cash will just result in an increase in spending. Thus, the saying, "A fool and his money is one big
party," I have said many times that we go to school to gain scholastic skills and professional skills,
both important. We learn to make money with our professional skills. In the 1960s, when I was in
high school, if someone did well in school academically, almost immediately people assumed this
bright student would go on to be a medical doctor. Often no one asked the child if they wanted to
be a doctor. It was assumed. It was the profession with the promise of the greatest financial reward.
Today, doctors are facing financial challenges I would not wish on my worst enemy; insurance
companies taking control of the business, managed health care, government intervention, and
malpractice suits, to name a few. Today, kids want to be basketball stars, golfers like Tiger Woods,
computer nerds, movie stare, rock stars, beauty queens, or traders on Wall Street. Simply because
that is where the fame, money and prestige is. That is the reason it is so hard to motivate kids in
school today. They know that professional success is no longer solely linked to academic success, as
it once was.
Because students leave school without financial skills, millions of educated people pursue their
profession successfully, but later find themselves struggling financially. They work harder, but don't
get ahead. What is missing from their education is not how to make money, but how to spend
money-what to do after you make it. It's 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. These people often work harder than they need to because they learned how to work hard,
but not how to have their money work for them.
The story of bow the quest for a Financial Dream turns into a financial nightmare. The
moving-picture show of hard-working people has a set pattern. Recently married, the happy, highly
educated young couple move in together, in one of their cramped rented apartments. Immediately,
they realize that they are saving money because two can live as cheaply as
one.
The problem is, the apartment is cramped. They decide to save money to buy their dream home so
they can have kids. They now have two incomes, and they begin to focus on their careers.
Their incomes begin to increase.
As their incomes go up...their expenses go up as well.
29
Rich Dad, Poor Dad
The No. 1 expense for most people is taxes. Many people think it's income tax, but for most
Americans their highest tax is Social Security. As an employee, it appears as if the Social Security tax
combined with the Medicare tax rate is roughly 7.5 percent, but it's really 15 percent since the
employer must match the Social Security amount. In essence, it is money the employer cannot pay
you. On top of that, you still have to pay income tax on the amount deducted from your wages for
Social Security tax, income you never receive because it went directly to Social Security through
withholding. Then, their liabilities go up.
This is best demonstrated by going back to the young couple. As a result of their incomes going up,
they decide to go out and buy the house of their dreams. Once in their house, they have a new tax,
called property tax. Then, they buy a new car, new furniture and new appliances to match [heir new
house. Ail of a sudden, they wake up and their liabilities column is full of mortgage debt and
credit-card debt.
They're now trapped in the rat race. A child comes along. They work harder. The process repeats
itself. More money and higher taxes, also called bracket creep, A credit card comes in the mail. They
use it. It maxes out. A loan company calls and says their greatest "asset," their home, has
appreciated in value. The company offers a "bill consolidation" loan, because their credit is so good,
and tells them the intelligent thing to do is clear off the high-interest consumer debt by paying off
their credit card. And besides, interest on their home is a tax deduction. They go for it, and pay off
those high-interest credit cards. They breathe a sigh of relief. Their credit cards are paid off. They've
now folded their consumer debt into their home mortgage. Their payments go down because they
extend their debt over 30 years. It is the smart thing to do.
Their neighbor calls to invite them to go shopping-the Memorial Day sale is on. A chance to save
some money. They say to themselves, "I won't buy anything. I'll just go look." But just in case they
find something, they tuck that clean credit card inside their wallet.
I run into this young couple all the time. Their names change, but their financial dilemma is the
same. They come to one of my talks to hear what I have to say. They ask me, "Can you tell us how
to make more money?" Their spending habits have caused them to seek more income.
They don't even know that the trouble is really how they choose to spend the money they do have,
and that is the real cause of their financial struggle. It is caused by financial illiteracy and not
understanding the difference between an asset and a liability.
More money seldom solves someone's money problems. Intelligence solves problems, There is a
saying a friend of mine says over and over to people in debt.
"If you find you have dug yourself into a hole... stop digging."
As a child, my dad often told us that the Japanese were aware of three powers; "The power of the
sword, the jewel and the mirror."
The sword symbolizes the power of weapons. America has spent trillions of dollars on weapons and,
because of this, is the supreme military presence in the world.
The jewel symbolizes the power of money. There is some degree of truth to the saying, "Remember
the golden rule. He who has the gold makes the rules."
The mirror symbolizes the power of self-knowledge. This self-knowledge, according to Japanese
legend, was the most treasured of the three.
The poor and middle class all loo 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 nioney, the vast majority
of people allow the awesome power of money to control them. The power of money is used against
them.
If they used the power of the mirror, they would have asked themselves, "Does this make sense?"
All too often, instead of trusting their inner wisdom, that genius inside of them, most people go along
with the crowd. They do things because everybody else does it. They conform rather than question.
Often, they mindlessly repeat what they have been told. Ideas such as "diversify" or "your home is
an asset." "Your home is your biggest investment." "You get a tax break for going into greater
debt." "Get a safe job." "Don't make mistakes." "Don't take risks."
It is said that the fear of public speaking is a fear greater than death for most people. According to
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Rich Dad, Poor Dad
psychiatrists, the fear of public speaking is caused by the fear of ostracism, the fear of standing out,
the fear of criticism, the fear of ridicule, the fear of being an outcast. The fear of being different
prevents most people from seeking new ways to solve their problems.
That is why my educated dad said the Japanese valued the power of the mirror the most, for it is only
when we as humans look into the mirror do we find truth. And the main reason that most people say
"Play it safe1' is out of fear. That goes for anything, be it sports, relationships, career, money.
It is that same fear, the fear of ostracism that causes people to conform and not question commonly
accepted opinions or popular trends. "Your home is an asset." "Get a bill consolidation loan and get
out of debt." "Work harder." "It's a promotion." "Someday I'll be a vice president." "Save money."
"When ! get a raise, I'll buy us a bigger house." "Mutual funds are safe." "Tickle Me Elmo dolls are
out of stock, but I just happen to have one in back that another customer has not come by for yet."
Many great financial problems are caused by going along with the crowd and trying to keep up with
the Joneses. Occasionally, we all need to look in the mirror and be true to our inner wisdom rather
than our fears.
By the time Mike and I were 16 years old, we began to have problems in school. We were not bad
kids. We just began to separate from the crowd. We worked for Mike's dad after school and on the
weekends. Mike and I often spent hours after work just sitting at a table with his dad while he held
meetings with his bankers, attorneys, accountants, brokers, investors, managers and employees. Here
was a man who had left school at the age of 13, now directing, instructing, ordering and asking
questions of educated people. They came at his beck and call, and cringed when he did not approve
of them.
Here was a man who had not gone along with the crowd. He was a man who did his own thinking
and detested the words, "We have to do it this way because that's the way everyone else does it." He
also hated the word "can't." If you wanted him to do something, just say, "I don't think
you can do it."
Mike and I learned more sitting at his meetings than we did in all our years of school, college
included. Mike's dad was not school educated, but he was financially educated and successful as a
result. He use to tell us over and over again. "An intelligent person hires people who are more
intelligent than they are." So Mike and I had the benefit of spending hours listening to and, in the
process, learning From
intelligent people.
But because of this, both Mike and I just could not go along with the standard dogma that our
teachers preached, And that caused the problems. Whenever the teacher said, "If you don't get good
grades, you won't do well in the real world," Mike and I just raised our eyebrows. When we were told
to follow set procedures and not deviate from the rules, we could see how this schooling process
actually discouraged creativity. We started to understand why our rich dad told us that schools were
designed to produce good employees instead of employers.
Occasionally Mike or I would ask our teachers how what we studied was applicable, or we asked
why we never studied money and how it worked. To the later question, we often got the answer that
money was not important, that if we excelled in our education, the money would follow.
The more we knew about the power of money, the more distant we grew from the teachers and our
classmates.
My highly educated dad never pressured me about my grades. I often wondered why. But we did
begin to argue about money. By the time I was 16, I probably had a far better foundation with money
than both my mom and dad. I could keep books, I listened to tax accountants, corporate attorneys,
bankers, real estate brokers, investors and so forth. My dad talked to teachers.
One day, my dad was telling me why our home was his greatest investment. A not-too-pleasant
argument took place when I showed him why I thought a house was not a good investment.
The following diagram illustrates the difference in perception between my rich dad and my poor dad
when it came to their homes. One dad thought his house was an asset, and the other dad thought it
was a liability.
I remember when I drew a diagram for my dad showing him the direct
