Why Teach Financial Literacy? (Rich Dad, Poor Dad Book Club Chapter2)

What assets do you have?

The main idea of this chapter, Chapter 2, is that if a person wants to be wealthy, he/she absolutely must know the difference between assets (defined as things that put money in one’s pocket after one has bought them) and liabilities (defined as things that take money from one’s pocket after one has bought them). Once a person knows the difference between assets and liabilities, one only has to buy assets and he/she will eventually be wealthy.

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What do you consider to be the best assets to acquire?

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Having just begun my financial journey, I put this question to you: What do you consider to be the best assets to acquire: real estate, rental property, stocks, bonds, crypto, etc.? I ask because I don’t fully understand what kind of assets actually exist. For those of you who are further along on your financial journies and for those of you who have better ideas about the various assets that are available, please leave your thoughts in the comments below.

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Chapter Two: Why Teach Financial Literacy?

The following quotes have been taken from the second chapter of Rich Dad, Poor Dad and form the foundation of the discussion points for this chapter. These quotes are not meant to be debated, which means that you are not supposed to agree or disagree with them. Rather, their meaning is supposed to be explored. What does Robert Kiyosaki mean by these statements.

I have written my thoughts about each quote below. If you would like, please look at the following statements first and formulate your own thoughts/responses to them before reading the ones I have written. Feel free to either leave your thoughts in the comments below, or turn your reactions into a post and share the link to your post with me here.

Quotations
1 It’s not how much money you make. It’s how much money you keep.
2 Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.
3 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 six-inch slab of concrete. Most people, in their drive to get rich, are trying to build an Empire State building on a six-inch slab.
4 Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.
5 If your pattern is to spend everything you get, most likely an increase in cash will just result in an increase in spending.
6 In 80 percent of most families, the financial story paints a picture of hard work to get ahead. However, this effort is for naught because they spend their lives buying liabilities instead of assets.
7 By not fully understanding money, the vast majority of people allow its awesome power to control them.

My Responses
1 It’s not how much money you make. It’s how much money you keep.

What Kiyosaki is saying here is simply that your income means nothing if there is nothing left of it at the end of the day.

Imagine if you were to lose your job, how long would you be able to continue your current lifestyle? How long would you be able to pay your current bills/expenses? If you make $1,000,000 a year and your answer to this question is that you wouldn’t be able to maintain your current lifestyle for more than a few months, you may appear to be rich, but in reality, you are in a poor financial situation.

Maybe you are fortunate enough to have an annual income of $1,000,000, and maybe you have saved a significant amount of your salary each year, so it appears that you are keeping your money and following the advice of this quote. However, I don’t think that Kiyosaki is referring to how much money you save here, I think he is referring to how much money you can keep without losing money it in times of hardship. I think he is referring to what might be called your base worth, the amount of money you have saved and are sure you will be able to keep even in times of financial hardship and/or unemployment. If financial hardship visits your door and suddenly you have to start selling the things you’ve invested in and start using your savings, you aren’t keeping your money.

With this quote, Kiyosaki is referring to his philosophy of using the extra income that you have to buy income-producing assets. That way, when you encounter times of hardship, you can survive the hardship with the income that is generated from your assets, and you can actually KEEP the money you have been saving.

2 Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.

The word intelligence in this quote isn’t referring to IQ. It is a reference to smartness, knowledge, and sharp thinking. Hardwork can solve some problems, but it can’t solve all problems. Sometimes, what is needed, as opposed to more work and labor, is an actual solution, and solutions require thinking.

When it comes to making money, Kiyosaki advises over and over again, yes, you can (and maybe should) work more. Yes, you will make more money if you work more. However, by working more, you are only producing more money. If you want to produce more money without working harder, or if you want your money to work for you (meaning that it is being used in a way to make more money) you have to think about your situation and come up with a solution. In this sense, making money requires thought or, as Kiyosaki says, intelligence.

The second sentence of this quote, Money without financial intelligence is money soon gone, I think, merely means that if you aren’t smart about the way in which you use your money, or if you don’t understand the complete picture of finance (how investment works and how money is lost to taxes, etc), your money will quickly be swallowed by taxes, expenses, and debt. In other words, if you don’t spend your money in a smart way (a way that either produces more money or preserves the value of your money), you will just be spending your money until it is gone.

3 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 six-inch slab of concrete. Most people, in their drive to get rich, are trying to build an Empire State building on a six-inch slab.

What Kiyosaki is saying here is that most people don’t have the financial knowledge/understanding that it takes to build wealth. Just like it takes a deep hole and a strong foundation to build a skyscraper, it takes a deep financial knowledge base and a strong foundation of financial habits to be able to truly protect one’s money and build wealth.

Without having the proper financial knowledge base and monetary habits, many people rush into their plans for creating wealth, only to find that the amount of money they can acquire is similar in size to a house in the suburbs, rather than being comparable in size to the skyscraper they had envisioned.

4 Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.

Here, Kiyosaki is saying that he thinks poor and middle class people, and I would argue some moderately wealthy people as well, don’t have a proper understanding of what a real asset is.

I would say that Kiyosaki is pointing out a common belief here that any kind of investment, regardless of what it is, is automatically an investment in something that is an asset. Kiyosaki constantly refers to the idea that buying a house for one’s personal use is considered by many (if not most) people to be an asset whereas, in actuality, (in his opinion) buying a house for one’s personal use is a liability because, for most people, buying a house produces a long-term, continuous drain of income.

What many people don’t consider when spending their money is that the things they buy, even if they are high quality goods, in most cases, cannot be sold for as much as or more than they were bought for. In that sense, these purchases are simply taking money out of people’s pockets and, by doing so, are liabilities as opposed to assets.

According to Kiyosaki, rich people buy assets, things that either produce income for them or appreciate in value. That’s why they are rich. From the income that their assets produce, the rich continue to grow their wealth.

People who are middle class or poor, on the other hand, merely spend their money. They don’t buy true assets. They spend all or most of their money on things that either don’t produce income, or that decrease in value rather than increase. That’s why they are middle class or poor.

5 If your pattern is to spend everything you get, most likely an increase in cash will just result in an increase in spending.

I think this quote speaks for itself, but if I were to unpack it a little more, I would say that it refers to the strength and power of established habits and patterns. When a person is already in the habit of spending all of his/her income, giving that person more money will not help him/her to break his/her habit. Correcting that poor financial habit will take effort, practice, and a plan to address the behaviors and reasoning that have produced that habit. Because more money cannot correct these behaviors and thought patterns, increased cash flow will just lead to increased spending. This type of person will have no end to the things that he/she desires and will simply use his/her increased revenue to buy any and everything that is on his/her wish list.

6 In 80 percent of most families, the financial story paints a picture of hard work to get ahead. However, this effort is for naught because they spend their lives buying liabilities instead of assets.

The key to this quote is Kiyosaki’s definition of what a liability is, which is something that takes money out of a person’s pocket rather than putting money in it. According to this definition, no matter how long or hard one works, and no matter how much money one makes, it is always moving in a one-way direction, and that direction is out of one’s wallet. As a result, if a person only buys liabilities, he/she can work and work and work, but at the end of the day, the money will either be gone or disappearing, and that is why Kiyosaki says that their effort is for naught. It doesn’t produce any lasting wealth.

7 By not fully understanding money, the vast majority of people allow its awesome power to control them.

To be honest, I’m really not sure what this quote is referring to in Kiyosaki’s book. However, if I think about the patterns and themes that he continuously refers to, I would say that this quote is probably referencing the idea that most people misunderstand their true financial standing and are persuaded by popular financial misconceptions and a false sense of security (provided by their income statement) to spend themselves into debt, at which point they have little to no control over their financial situations. When one has spent him/herself into debt, he/she is now in the Rat Race and is now under the control of the awesome power of money.

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This concludes the first half of the study session for chapter two. Thank you for joining me.

If you would like to participate in this book club, buy or download a copy of Richard Kiyosaki’s book, Rich Dad, Poor Dad, and read it along with me. Each chapter is followed by a study session. I plan to read this book slowly, and to thoroughly explore each study session. I would love to do so in the company of others.

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Good discussion promotes deeper understanding and helps to reveal new and original ideas.

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I hope to write a post that explores the second half of the study session for Chapter 2 some time this week. If you would like to know when that post has been published, please let me know in the comments below and I will send you a link to the new post.

For those of you who missed the study sessions for chapter one, you can find them by following the links below.

Chapter One: Part 1/2 | Chapter One: Part 2/2