In 1994, Robert Kiyosaki invented a board game called Cash Flow.  The name of the game is to get out of the “rat race” and onto the “fast track” by buying assets.  The person that makes it out of the rat race soonest wins the game.  While it sounds like good investment advice more than a board game, Cash Flow is a game designed for children.

In his book Rich Dad Poor Dad, Kiyosaki tells the fable-esque story of his childhood in Hawaii, where he was financially educated by two fathers – his own (aka Poor Dad) and the father of a grade school friend (aka Rich Dad).  Through the advice of these two characters, Kiyosaki shares the differences between the financial education of the rich and that of the rest of us.

The underlying concept of Rich Dad, Poor Dad is Kiyosaki’s firm belief that financial education (or Financial IQ) is more valuable than strictly money itself.  As he puts it,

“There is a difference between being poor and being broke.  Broke is temporary, poor is eternal.”

Rich Dad, Poor Dad, page 16

Financial IQ is really made up of four broad categories of understanding – Accounting, Investing, Markets, and The Law.  Kiyosaki is now responsible for 28 books that cover one or more of these four key areas.  As Rich Dad Poor Dad is really the introduction to Kiyosaki’s teachings, he spends only a few pages on each of the four categories.  Instead, most of the book is centered on the one, core concept that he learned as a nine year old boy.

The Big Idea

Live by Rule One.

According to Kiyosaki, there is one fundamental rule that separates the rich from the poor and middle class.  Financial IQ begins with this –

“Rule One:  Know the difference between an asset and a liability”

Rich Dad, Poor Dad,  page 58

Like most great lessons, the simplicity of the statement is deceptive.  So here’s the question – How do you define an asset?  For most people, an asset is anything they own and has value to the outside world (house, car, big screen TVs, etc.)

Here are Kiyosaki’s definitions:

An Asset is something that puts money in my pocket

A Liability is something that takes money out of my pocket

A big house then, becomes a liability.  In addition to larger mortgage payments, you have higher property taxes, heat and electrical bills, etc. etc.  Having a rental property however, is an asset as it puts money into your pocket.

And that’s it; that’s Kiyosaki’s primary tool that separates the wealthy from the masses.  There are definitely some advantages to learning these things as a child; simplicity is a wonderful thing.

Insight #1

The Power Under the Golden Arches

For most people, their profession, or “day job” is their main (or only) source of income.  The goal of your business is to build assets that can support (and/or potentially replace) your professional income.  A clear distinction between the two looks like this:

In your profession, you are paid for your time and energy.

In your business, your assets generate income regardless of your time and/or energy.

During the height of his corporate success, if you asked Ray Kroc, the founder of McDonald’s Restaurants what his business was, you might have been surprised by the answer.  Professionally, Kroc was a salesman.  He sold milkshake machines until he saw an opportunity to sell franchises.  In regards to his business however, Kroc was a real estate giant.  As it turns out, Ray Kroc was not in the business of selling hamburgers.  While he did manage to build McDonalds into an internationally recognized brand, what Kroc was really after was the land under each set of golden arches.  And the result?  McDonald’s is currently the single largest landowner in the world, followed in second place by the Catholic Church.

Kiyosaki uses Ray Kroc’s story to provide a great example of the distinction between a “profession” and a “business”.   Kroc understood the value of investing his money into a vehicle that would continue to generate income, regardless of his physical presence.  Kroc’s rental income from the properties he owned was not dependent on the success of the franchisee, as he could easily replace that tenant with another.

Insight #2

Bucky’s Wealth Equation

How do you measure wealth?  When is someone worthy of the title “wealthy”?

Amongst a great many other accomplishments, Buckminster Fuller, one of America’s more colorful inventors and philosophers from the 20th century, was responsible for coining a new definition of wealth.

Rather than simply comparing the value of your assets and liabilities (net worth), a task which is typically full of guesswork and approximations (how much is that big screen TV worth today, anyway?) Fuller defined wealth as “a person’s ability to survive so many number of days forward…” (page 80) or, as Kiyosaki puts it, “if I stopped working today, how long could I survive?” (page 80)

An example:

I have $1,000 in savings (bonds, stocks, etc.)

My monthly expenses are $2000

Therefore I have a Fuller Wealth Factor of ½ month.

If you only have a safety net of 15 days, how dependent are you on your job?

Here is the true value of building assets (according to Kiyosaki’s definition of the term):

I have $1,000 in savings (bonds, stocks, etc.)

My monthly expenses are $2000

My assets generate $1500/month

Therefore I have a Fuller Wealth Factor of 2 months.

And the ultimate goal (asset revenue exceeding monthly expenses):

I have $1,000 in savings (bonds, stocks, etc.)

My monthly expenses are $2000

My assets generate $2000/month

Therefore I have a Fuller Wealth Factor of infinity, and am officially “wealthy”.

At this point your savings become “nice to have”, but basically irrelevant, as your income-generating-assets provide you complete freedom.  Not a bad place to be.

The point is this – you have a decision to make with every dollar that you bring home from your profession.  Is that dollar going to go towards buying assets?  Or is it going to buy something that increases your monthly expenses?  In other words, is that dollar going to get you closer to the fast track, or further entrenched in the rat race?  Make the choice.  Make your business all about making your profession something you choose to do, rather than something you have to do.

While this has the potential to be a dry finance book, keep in mind that everything covered in the pages of Rich Dad, Poor Dad are concepts taught to Robert at a very young age.  They are intuitive and extremely easy to grasp.  In addition to being full of great financial direction, Rich Dad, Poor Dad acts as a powerful reminder that childlike simplicity can be a beautiful thing.