One Simple Concept that Every Investor Needs to Grasp: Rich Dad, Poor Dad

Robert Kiyosaki is a best-selling author and successful entrepreneur. Years ago, he wrote his book Rich Dad, Poor Dad which paved the way for thousands upon thousands of entrepreneurs to break their way out of the so-called “rat race”, and begin accumulating real wealth.

If you decide to take away only one thing after reading Robert Kiyosaki’s Rich Dad, Poor Dad, then I recommend that this be the concept that sticks in your head.

That concept is the basis of why poor people stay poor, the middle class never has any money, and why the rich are getting richer. 

I can explain the concept by giving the attitudes of each class of people.

The Poor

People who are living in or below the poverty line in the United States are not financially literate in most instances, and even if they are, they more than likely don’t care much about saving money. They are trying to get to the next paycheck without going hungry. This leads to them making irrational financial decisions and being stuck in the “rat-race” that Kiyosaki referred to.

“Get Paid, Spend all of your money on things, Go Broke, then Wait to Get Paid Again”

Which is why poor people are known for poor buying stuff.

Poor people don’t buy fancy cars, or nice houses, or anything that would cost a substantial sum of money unless, of course, they take out a high-interest rate loan. So from month-to-month poor people accumulate things.

These things do not have much intrinsic value and tend to clutter up the homes of the poverty-stricken. They are usually one-time payments and can be something as simple as buying furniture, TVs, car detailing, and other lower-cost things that won’t appreciate in value over time.

They are not well financial planners and live to paycheck to paycheck, possibly working every day to earn an income, and if they don’t work they don’t get paid. When it is time for them to retire, they depend on the government to supply their finances. Which puts further strain on the already struggling Social Security and Unemployment Systems.

With an understanding of how the poor view money, now let’s move on what the Middle Class does with their money.

The Middle Class

People who are living in the middle class of the American economy can look a variety of different ways, however, the majority seem to have the same mindset of what they want to do with their money.

Middle-Class people accumulate liabilities. 

For those who have an accounting background, Robert Kiyosaki has a different take on the traditional definition of what a liability is. Kiyosaki defines a liabilityas a recurring expense. This can come in the form of a car payment, mortgage, or jewelry payment plan. Liabilities take money out of your pocket every month, resulting in a lower bank account balance.

What is difficult to determine about these middle-class people is that they look WEALTHY. From the outside looking in, you would think that these people had all that they needed in life. While, in reality, they are making more money each month, but they are also spending the same percentage of their income.

Essentially meaning that the Middle Class is living paycheck to paycheck as well.

They have the ability to make more, but their mindset says that if they get a raise, then they can go get that new car that they always wanted. This essentially puts their bank account at the same amount month after month, with no growth. They may have more experience with planning financially, however, they are content with owning a home and providing a comfortable life for their loved ones. They have a 401(k) and maybe other retirement funds set up, however, they will never truly be wealthy if they don’t change their mindset to think like the wealthy think.

The middle-class people are also using high levels of active income to fund their living expenses. Meaning that if they don’t work, they won’t get paid.

Now for the part, we’ve been waiting on. How the wealthy view and use their money..

The Wealthy

What makes the wealthy actually wealthy isn’t the amount of money that they have in their bank account, however, it is how they go about attaining their money.

The Wealthy are famous for their keen sense to accumulate assetsRobert Kiyosaki defines assets in the book as a purchase that provides you income without you having to work. Otherwise known as passive income. They use their money from their income today to invest in a better future. They are not concerned with how they look to their peers, the wealthy are focused on accumulating more money over time, and having their money accumulate money for them.

For those who may need a refresher on what passive income is.. Passive Income is defined as an income where active work in not constantly required. This can come in the form of stock dividends, real estate investment, or other interest-bearing accounts that allow for growth without constant monitoring.

Just as a poor person would go out and buy a pair of the newest Air Jordan shoes for $220, or the brand new iPhone for $999, whereas a wealthy person would instead take that $220 or $999 and invest in dividend-bearing accounts that allow money to be paid back to them in future periods.

Over time, these assets will begin to increase in value with the help of compounding interest and provide an income stream equal to or greater than what most people make in their 9-5 jobs.

Starting out with a $1,000 upfront investment, and leaving it in an investment account with an expected growth of 10% for 20 years would yield the following results.

$1,000 would turn into over $7000 without you having to lift a finger. By year 20,  you will end up earning more interest on your interest, than you do on the principle itself.

Now, how attractive does that brand new iPhone look now?

In Summary:

The Poor accumulate things.

The Middle-Class accumulate liabilities.

The Wealthy accumulate assets.

If you would like to read Rich Dad, Poor Dad by Robert Kiyosaki yourself, check out the link below!

Let me know what you think!