“We all work to make money” but instead “We should make money work for us”. Such a wonderful line and worth critical attention of our thinking. These lines by Mr Robert Kiyosaki and few principles to attain that ‘Money working for us’ feat, is appreciated and practiced all over the world in investing community. Mr Robert Kiyosaki, author of “Rich Dad Poor Dad”, the New York Times best seller book for over six years, has taught us how to get rich and more importantly taught us how not to be burdened for working extra hours at job to earn more salary and just to pay our increasing monthly expenses.
Author’s teaching like attaining financial education, learning new skills set, not chasing money, buying asset and not liabilities, managing personal expense and managing risk are few of principles that will help you in becoming rich and attain a financially independent life without needing to work at your own job.
If the paraphrase above excites you, then you should definitely read further to understand the golden principles taught by Mr Robert Kiyosaki in his book “Rich Dad Poor Dad”.
So…
Let’s understand in a very constructed manner. First, I will directly dive onto what author focuses and what I say is “The Most Important Concept”, and then will let you through the principles.
Passive Cash Flow Income – Most Important Concept
Cash Flow is simply the money coming in your pocket (inflow) and the money going out (outflow). But, the focus here is not on amount of money, instead focus here is where does it comes from and where it goes.
A typical person earns monthly salary income (inflow). He spends on food, light bill and other necessaries (outflow). After that, what is left, is usually saved in Bank A/c, earning interest which is possibly less than inflation rate. If not, at the most Fixed Deposit is made, which serves dual purpose of marginally beating inflation as well as a safer choice (less risk).
When such person gets married and have children, there is need for new house (mostly on loan). So, generally he has to earn a lot of money to finance the new house, to save for child’s future and also enjoy some luxuries.
This brings an added pressure (fear) to earn more to satisfy the desire (greed) of fulfilling luxuries and having own house. The added pressure of earning more, leads to working hard at job (probably overtime) to make more money.
But, the problem is, as our salary grows, our desire keeps on increasing (Car, international holidays, etc.). And to fulfil those desires (greed), we keep on working harder and harder (fear of making money) at our job. This pattern repeats over and over: increased desires, more income needs, more expenses, and more desires. This is what author calls as “Rats Race.” i.e. working harder at job to earn better, to fulfil desires.
But, thankfully you have this book, which explains how you would be able to better get control over your finances, and yet fulfil all those desires and still have enough money safe and saved under your belt. And that is where the concept of generating passive cash flow income becomes so important. Having a good hold and grip over this concept will build deep roots for your secured financially strong future. Make sure you grasp better.
So, let us understand the most important concept – Cash Flow (here, Income Statement).
Poor person’s cash flow, as taken from book, is as follows:
Middle class person’s cash flow (taken from book).
Rich People’s Cash Flow (Taken from Book).
If you observe carefully. Where does money come from? And where does it go?
Poor Man: Most of money comes from job (inflow) and it goes into expenses like rent, taxes, food, clothes and so on (outflow). The net result is almost no money left and so he is a hand to mouth earner.
Middle Man: He has better income from his salary (inflow). But in the desire to have better amenities for himself he has taken Home and Car on loan. We can see this as his income is used up to pay liabilities and expenses (outflow). Liabilities like mortgage payment, car loan, school loan and expenses like tax payment, food, clothing, light bill and other necessaries.
Rich Man: Obviously he has good source of income, but most of his income is derived from stocks, bonds, renting property and so on in the form of dividend, interest, rent, royalty, etc. (Inflow). This inflow is used to pay off all the expenses and loans (Outflow).
Now, you might observe that there is a simple pattern of Cash Flow from Poor man to Rich man. The pattern is, most of income derived by a rich man are from different Asset Classes (Property, Stock, etc.) and as we go down the line, we see more of salaried income as only source of inflow. And the expenses are paid from what is earned.
Here is what the author has to say on this pattern, the most important point:
“Rich people acquire Asset. Poor and middle class people acquire Liabilities which they think are Assets.”
For author, asset means something which puts money into your pocket and liabilities are something that takes money out of your pocket.
Hence, owning a house, car, etc. takes money regularly out of your pocket in form of maintenance, petrol expenses and so on. Owning Assets like stocks, bond, notes, etc. puts money in your pocket in form of dividend, interest, etc. Owning house and car thinking them your asset have only one use, they make you appear rich but in reality you are just deeper in loans (debts). Hence, author says: “Poor and Middle class people acquire liabilities which they think are Assets.”
So, we need to learn from rich people, how they manage their money and utilise them to earn more and more income. I.e. Acquiring Income-generating Asset.
The wonderful line: “Make money work for you” hence, is very deep to understand and by now, you might know why. What rich people do is they put their excess money in different asset classes (stocks, bonds, notes, etc.). “Money makes more Money”, and hence when rich people earns, they first make a point to make their hard earned money work for them by investing into different asset classes which in turn earns more money in form of passive income.
And the funny part is, rich people earn income only from these asset classes (and not salary), it is just because they have built the income-generating asset so strong that they now don’t find the need to work hard to earn salary anymore. In fact, you will find them taking risk venturing into new investment and businesses by using the excess cash generated from these assets, which in turn helps them generate greater wealth. That is why we say, rich get richer.
And you know, the position at which these rich people are now, is just because there were able to build a very strong asset base. And the best part is even the poor and middle class can generate assets base this strong. How? By starting today and taking efforts. Whenever you get an inflow, try having the least outflow by avoiding unnecessary expenses. The excess which you save, should first (most important) go into your asset. As soon as you keep on adding your savings to asset column month by month, your asset will keep growing stronger. As your asset grows stronger, you will generate more and more income from it (for which you do not have to work). The more income your assets generate as compared to your expenses, you save even higher. Your salary and your passive income generated from assets are way to higher than your expenses. This leads to huge excess funds which will again be invested in income-generating assets. This cycle repeats and you will find yourself having a huge asset base and its income as compared to your expenses.
Now, when above process is followed religiously and you have enough assets generating passive income, it becomes the right time for you to look for luxuries like Home and Car, etc. You know that you have a huge asset base build up, you can now buy home. The idea is that “for ever additional expense, try to have passive income.” So, now that you have house, the expense of your house will be funded by income generated from your assets. Not only that, you will still have excess fund left with you. This excess funds will again be reinvested in income-generating assets. These assets start to generate even more income than before. This additional income can be again used to satisfy your desires like Car, etc. This is how the chain of fulfilling even greater desires go on amongst the rich.
This is how your asset base is built so strong that you now have more and more income being generated from these assets than even your salary. Now, with so much of passive income, you get the choice to quit the job and enjoy your life without working. Your excess funds saved will keep on working for you to generate more assets and more income. And this goes back to where we started i.e. Rich People making Money work for them. And yes, if you have successfully done this, congratulation rich man!
However, is it as easy as it seems? Definitely Not!
Upon attainment of this piece of knowledge, first thing you need to do is to put yourself in action. Being bold is what author has said as one of the principles to get you rich quicker. Being bold is acting on the information so that you enjoy the result sooner. Most people will do the math, find the asset class to invest, be ready to cut on expenses but, they will just be prepared to do that for the rest of their lives. We might only expect them to put it in action when it is too late that they have dug in a hole so deep for them to come out (a hole of expenses greater than income). Definitely, initial years will be more difficult specially on changing the habit to spend less and save more. But that is life, and that is how success stories are made. You need to work out, try hard, and play smart to build real wealth which can benefit you for long run. Chasing desires early in life will only give you satisfaction for short time, but in the long run you will be burdened by too much expenses. Author has rightly described the definition of being wealthy: Suppose you do not work at all, how many more months will you be able to survive with your expenses still running? Yes, when your passive generated is enough to pay for your expenses, you will never be in trouble and you are wealthy. But, where there is no source of income but salary, sooner your savings will erode and you will have nothing.
I hope, I am able to clearly shout out loud, the secret (which is more of common sense, generally ignored) of becoming rich in the long run. Putting the knowledge attained into action is the key. And to know how to achieve the feat of becoming rich, author has guided us with many principles. I have tried to compile the principle in few head points. I will try to explain in a very short manner, and if you wish to know in detail, reading book is best recommended.
Principles to follow:
Author Mr Robert Kiyosaki, had mentioned in his book that he had two dads: the one which he called Rich Dad and one Poor Dad. Poor Dad was his real dad and he was highly educated and well earned, but because he did not follow the Passive Income principle, he never got rich but instead got burdened into too much of work to earn and match his increasing standard of living. Whereas, his Rich Dad was actually his friends dad. Rich Dad was good businessman and taught him and his friend the secret of getting rich. Author has explained what he learned throughout his life and experience from both the dads. I have explained them below compiling in form of few heads which I call principles to getting rich:
- Do not run after money, instead ‘Work to Learn’.
Running after money mean only one thing i.e. you will work harder and harder to earn more and more. And when this happens, your life will be like a Rat’s Race. If you work for money, your focus will only be on improving skills which will give you higher salary. And in reality, you will find these skills only useful in the company you work for and nowhere else. When this happens, even with higher skills, you are tied to one job and one company because no other company will give you same worth as the current one. And, this also means that the power of your earning will be in the hands of company you work for. You won’t be able to demand much and life your life principles on company’s terms.
Instead, you should first work to learn. And when you have learned enough in the particular area of your work, expand your learning skills to more of real life requirements. This includes like, learning regarding investments, business, managing people, communication, etc. This will help you to be strong overall in your life and not only at one thing. It will help you to easily switch from current job, help you to be independent enough to start your own business and help you get control of your actions better i.e. good decision making skills.
Hence, the bottom line is that, you should work not for only money but to learn things which will help you grow outside your work place. - Tackling Fear, Greed and Emotions.
Fear and Greed are mentioned before. Fear is the want to earn money to manage your higher expenses. And when you earn more money there comes Greed for luxury desires. When this happens, you fall into Rats Race i.e. the chain of Earning Money, More Desire, More Expense and More Earnings. And why this happens? It is only because of our emotions.
Take this as said by author: “Your house is not an Asset”. He says, when you buy home there comes added expenditure of maintaining it. But, when it comes to home, the emotions are so high that you will not be able to control it. The first thing you want to do in your life is to own a house. And this desire, backed by emotional mind makes you buy house on EMI’s and the fear to pay EMI makes you work even harder.
“Be truthful about your emotions and use your mind and emotions in your favour” and “Learn to use your emotion to think, and not think with your emotion.” You should learn to control your emotions so that your desires don’t run by you and fear of earning will not push you to work harder. It is also said “Emotional decision lacks financial literacy” and here comes the next, attaining good financial education and financial literacy which is important principle in helping you get rich quicker. - Possessing Strong Financial Education.
One part of learning is possessing a very strong financial education. If you are interested in Stocks, learn about stock market and its investment. Similarly, there are bonds, property market and many other markets. You should, along with your job, learn these things so that you can develop love for your own asset class. And when you get interested in any one asset classes, you will get better at investing in it and generating passive income through it. And hence “Invest in Income-generating Asset”, and these assets are the ones you love to invest in. Also, getting enough knowledge will also help you in discovering new opportunities for starting business. Business earning good returns is as good as any other asset class. What is more worth to focus is developing love for something which will help you generate passive income.
For any person to be able to manage money, he should learn four more important skill. These skills are referred as Financial IQ by author and they are 1) Accounting, 2) Investing 3) Understanding Markets and 4) Understanding Law.
> Accounting: Ability to read numbers to manage the finances better.
> Investing: Using strategies and formula to make more money i.e. “Money making Money”
> Understanding Markets: Timing the market through demand and supply forces and investing at the best time.
> Understanding law: To work out legally to save tax, plan efficiently, keep legally strong people for good advice, etc. - Focus on Minding your own Business.
When you work for others, you work to expand their business. When minding your own business is said, it means you should also work for managing your own money (Business). Work for yourself and work to understand how to make money work for you. When you mind your own business, you will also learn to not depend on your employer for earning salary or to ask for any other financial favours. This will make you stronger financially and also generate passive income apart from the regular salary. Hence, when you mind your own business it means developing skill in generating passive income and attaining a better financial independence. - Being Bold and Risk Management.
Usually people are smart enough in understanding what needs to be done and what not. They understand many aspect of finance and investing very thoroughly, it is just that they have never tried their hands on it which prevents them from taking action. So, author says that you have to be bold enough to put your intelligence in action. If you understand something and have complete knowledge of it, it is only put to perfect use if you take right action on it. “Knowledge is power but without action is useless.” And so, you should be bold and courageous enough to act on the information you have.
But, only taking action all times is not required. There comes risk attached when you do something. You should well understand the pros and cons of the action you take. Say for example, investing in share market involves lot of risk. But when you are aware that how much risk is involved in particular trade along with the amount of your investment at risk, you would still want to play the odds if you have higher probability of winning over losing. This is what called as Risk Management. You should take odd risks with your money, when it works it gives you good money but when it doesn’t it will take only a portion of your excess fund (which you accept risking it). - Pay Yourself First.
Whenever you receive your pay check, the very first thing you do ‘wrong’ is to pay your expenses and get free from the burden. And that is ‘a not recommended thing’. Whenever you have creditors, bankers, government taxes, electricity bills, landlords etc. yelling at you asking for money, you should simply pay them last.
“Pay yourself first”. Foremost, invest in your own income generating assets and wherever possible put money which benefits you in any way possible. When this happens, you will only have the balance money left to be paid for expenses. This way, you will automatically be forced to pay only those expenses which are most important i.e. electricity bills and bankers loan. And when you do not have enough money to pay all your expenses, you will ask your debtors to pay earlier and also ask for more time from creditors, landlords and pay taxes a little late. And this habit is actually a very good thing. It benefits you in multiple ways. Firstly, you will get extra credit period to pay and there is no extra interest levied whereas the invested money in asset are still generating passive income. Secondly, when you have pressure to pay for expenses, you will get innovative ideas to earn more income to pay these expenses. Ideas like use of credit card for emergency funds, credit cards do not charge interest for certain time period and ultimately beneficial.
These small innovatively ideas will bring the best in you at managing the money efficiently. - The how? Instead I can’t.
Always be motivated to work for ‘desired goals’ rather than saying it is not possible for me to achieve. Goals like buying “dream car”. Whenever you say “No, I won’t be able to buy this.” Your mind will stop thinking and working towards finding a way to achieve it. And when this happens, instead of putting your mind to work, it will be relaxed and free. And so you start wasting more time doing nothing instead of looking for ways to achieve your target and putting your mind to work for searching extraordinary opportunities.
Keep your mind busy and exercising. Want to buy that car? And you can’t get from your inflows? Instead of saying “Buying this car is not possible for me?” say yourself, how can I buy this car? The moment you ask question to yourself, your mind works in finding ways to achieve it. When your mind is at work, you will look for ways to earn more and earn smart. Keeping your mind actively involved will explore you new opportunities to earn, improve your intelligence and increase your learning skills. Hence, this will help you in finding ways to make extra passive money. But here, when doing this, you should manage your risk as well as your emotion. Buying car does not mean putting your net worth into it, the main recipe should be kept in mind, i.e. having enough income-generating assets to fund the luxury items.
Closure and Disclaimer:
Well, I have tried to just give a brief of what author Mr Robert Kiyosaki has said in his book “Rich Dad Poor Dad”. I could only compile and explain to you in brief, but the ideas are well explained by author himself. I might have interpreted some things in different way than the author, but the gist of the book remains intact as explained.
Thank you all for attentive reading my content.