Imagine you had two dads. One who was motivated by success, and one who wasn’t. Really, two fathers who were diametrically opposed in just about every way. Imagine the life lessons you would learn: what to do and what not to do.
Growing up in tropical Hawaii, Robert Kiyosaki had this exact experience. In his book Rich Dad, Poor Dad, he gives out some of the very best personal finance tips you will find anywhere! He learned these from his interesting childhood and from his own personal investing success. In this article, I discuss 30 of the most important lessons from the book. Robert’s book helped me personally get on the road to FIRE (Financial Independence Retire Early). I’m Shane, quant investor, CEO of Aikido Finance, and life-long-learner. So, let’s hop in an check out some of Robert’s life-changing financial advice.
The Key Message
Before we hop into the 30 individual lessons, I want to first give an overview of the 4 key points from the book
- Most people work for money — rich people have money work for them
- It’s not how much money you make that matters — it’s how much money you keep
- Rich people acquire assets — not liabilities they think are assets
- Working all your life for someone else can lead to financial struggle
1. Don’t work until you die.
A job is a short term solution to a long term problem.
These days, more people than ever are talking about passive income. Check out this chart for the number of Google searches for “passive income” since 2004.
It’s on the minds of many, especially millennials who are becoming disenfranchised by the traditional 9-5 life. Indeed, that’s why I live in my campervan full-time, travelling the world and working from awesome places.
“If you don’t find a way to make money while you sleep, you will work until you die”– Warren Buffett
There are many ways to disconnect from a job you hate. One of these is investing. Investing is something everyone should do, and from a young an age as possible. Check out this stat which Joel Greenblatt made famous:
If you invest $100 a month between the age of 18 and 25 and then stop contributing forever, you will have made more money than if you start investing at 25 and invest $100 a month until the age of 64.
2. Educate yourself.
Money without financial intelligence is money soon gone.
Question: How is it that New-money millionaires frequently go broke?
Answer: They don’t know how to use money correctly.
Did you know that Elton John spent £293,000 in less than 2 years on flowers? And during the same period spent £30M in total. 1% percent of his expenses during this time was spent on flowers!
It’s not how much you make, its how much you keep.
This is one of the core principles of FIRE (Financial Independence Retire Early). At the most most basic level, we need to save more than we make. But one must strive to take it further than this. Much further.
Check out these insane stats:
Scenario A: If you save and invest 25% of your income, you will be able to retire 17 years.
Scenario B: If you save and invest 50% of your income, you will be able to retire 11 years.
Scenario C: If you save and invest 75% of your income, you will be able to retire 5 and a half years.
– Assuming a 15% CAGR, 4% rate of withdrawal, Stable & sutainable Income
4. Acquire Assets, Not liabilities.
Be very conscious of what you buy. Ensure that >75% of it are assets. ie. things you can sell.
Note: A car is not an asset
5. Cash Flow > Revenue
This comes back to saving. Net income and cash flow is what really matters – ensure you keep as much of it as possible. Revenue (Top line) is the total of all your income (rental, job, dividends, side-hustles). Net Income (Bottom Line) is what is left after all your expenses. Ensure your Bottom line is as big as possible. Re-invest as much of that as possible. In order for the compound effect to take hold and be REALLY POWERFUL, you must reinvest your income.
6. Focus on Assets
The rich focus on assets, while everyone else focuses on their income statement. Focus on growing your assets even more than growing your pay cheque. Both are important but assets are more important. All think in the long-term. Think 20 years out, think financial independence. This can only be achieved by owning assets. It is one of my 16 Life Lessons Learned From Investing.
7. Avoid Tax
This is a whole book in itself, but avoid tax where possible. It is more important to invest tax efficiently than worrying about gettin from an 8% return to a 9% return. Tax is the biggest liability you have. Most people work from January to May just for the government!
Here are 2 quick tips for reducing tax:
- Start a company and work through it (EXPENSE AS MUCH AS YOU CAN)
- Max out your pension
8. No Risk, No Reward
The fishing is best where the fewest go.
Fear is the main reason people play it safe. Everyone who wants to make anything out of life must take risk. The questions is how much you are willing to take on. A more aggressive investment strategy is more volatile and more likely to have ups and downs, but if you have a long-term mindset, this should not matter. For instance, Aikido’s Microcap Momentum strategy has achieved a long-term return of 18.1% since 1965 in backtests. However, despite this performance it has had a max decline of 52% in the past – something an investor would have to invest through in order to get to the other side. It should be noted that the S&P500 also experienced a max decline of 55%.
“The best strategy is the one you can stick with”– Wesley Grey
9. Hire people who are smarter than you
An intelligent person hires people who are more intelligent than they are. As Jim Collins discusses in Good to Great, we must start with “who”? As early stage business owners, we must make sure that we have the right people on the bus. We want to avoid churn in every possible aspect of our life.
10. Avoid Lifestyle Creep
Just because you earn more does not mean you should buy more liabilities, instead buy income generating assets. As one earns more, there is a tendency to spend more. Avoid this at all costs.
11. Wealth = Security
Ask yourself: “If I stopped working now, how long could I live?” If the answer is 100 years old, you’re probably good.
12. Keep the day-job
For a time. It puts food on the table after all. While you do so, start buying income-generating assets! Rental property, dividend-paying stocks, assets that accrue in value. You could also put side-hustles in here (though this could be at the cost of your precious time)
13. The assets that Robert Kiyosaki looks for
Robert looks for businesses that do not require his attention. He wants hands-off and he wants passive. Examples:
- Real Estate
- IP Royalties
14. Investing in small caps
Small companies can be a dangerous beast – than are frequently very volatile. However, Size is a well-established investing factor at this stage. Investors are rewarded in the long-term for investing in smaller companies.
Here is the returns of all companies in the USA since 1965 when split by decile (ie. the largest 10% to the smallest 10% of companies)
However Robert advises to be out a small-cap stock within a year. He views them as a swing-trade.
15. Don’t climb the ladder, own it
Be a business owner. Have people working for you. Eventually take your foot off the gas, outsource, and have an autonomous business. Tim Ferriss discusses this a lot in the 4 Hour Work Week.
16. Start a company (tax)
Tax-savvy people know the power of a corporation. Start one today! Understand tax and how to avoid it. There are many corporation loopholes that exist. You can expense you car, vacation (board meeting), and even food. This is all done with pre-tax dollars and will save you THOUSANDS.
17. Don’t let opportunity pass you by
Sometimes luck comes your way. It is infrequent, so be sure to use it. Don’t miss the opportunity of a lifetime when it lands in your lap.
Ultimately timing is everything for a startup or a new idea. Don’t miss a chance, be prepared to jump on something that comes your way.
“If you’ve got time, get ready”An Astronaut’s Guide to Life on Earth – Chris Hadfield
18. Learn > Earn
Seek a job more for what you will learn rather than what you will earn. This seems unintuitive, but is imperative to long-term success. I used to work for a big-tech Silicon Valley company, it was an awesome place to work and it paid very well, but I was learning very little. So I left, started Aikido Finance, hired a bunch of insanely smart people, and am learning more than words can express every single day
19. People skills are everything
The most important specialised skill is sales and marketing. You can be extraordinarily technical and super smart, but if you can’t get people to buy from you, it’s not going to happen. The great thing is these are learnable skills! There are plenty of great books (eg. The 22 immutable laws of marketing) out there to learn from. You could even check out the amazing youtuber Charisma On Command to learn how to nail any social scenario. I would also suggest Never Split the Difference by Chris Voss – a terrific book on negotiation and dealing with people.
20. Stay out of debt
Don’t go in to debt. One very simple rule. A house being the single exemption to this rule if absolutely needed.
In particular stay out of high interest debt such as short term credit card loans.
21. Pay yourself first
This is one of the most famous phrases in finance. Though it’s exact origins are unknown, it is thought to be from The Richest Man in Bablyon by George Classon. What does it mean? It means that when you get your pay cheque (revenue), the first thing you should do is take a potion of it and put it into savings/investing. The rest… well do as you like – I recommend things that primarily aid your survival. In fact, my advice would be to save as much as you possibly can, Get to FIRE!
22. Minimise your income
Sounds weird right? Start a corporation, then spend as much of the revenue (top line) that you can, in order to minimise your Net income (bottom line). You are taxed (corporation tax) on your bottom line. Everything above that line is tax deductable.
23. Don’t be tempted to dip
When things are going awry and getting hard, don’t be tempted to dip into assets or savings. Use that pressure to inspire work. However, to safe-guard against this further, it is generally recommended to have a 6 month emergency fund.
Dipping into savings is a common bad habit. Eliminate it. Your savings/investments are untouchable until you reach Financial Independence. Remember this.
24. Make connections
Find someone who has done what you do and take them for lunch. Learn from others. You are not the first to tread your path, though you may like to think so. There are always others.
25. Make Offers First
A few years ago I watched The Long Way Round with Ewan McGregor. Ewan and his buddy Charlie motorbike the whole way around the world, from London to New York. One of the things I learned I noticed from charismatic Ewan was that he was always the one to stick out his hand for a handshake. The scarrier the individual, the more likely he was to smile and stick out his hand quickly. It was a universal symbol of I mean you no harm. It always worked. He always made friends.
That analogy fits well with Kiyosaki’s principle that we should always try and make the first move. It comes across well and seem to be the alpha of the situation. Make offers, don’t wait for someone to sell.
26. Profit = Sale + Change
Improve. Its the only way to increase prosperity. You have to try new things. you have to take some risk for greater reward.
27. Looks out for Sales
If a For Sale sign is up for a while, the seller might be more willing to make a deal. This is particularly relevant to property, though can be used in any situation. Trading cards, startup acquisition, etc.
28. The 3 incomes
There are 3 types of income:
Convert 1. into 2. and 2. into 3.
And that’s just about all the important lessons I learned from Rich Dad, Poor Dad. Truly, there was a lot of learning from the book.
However, my view on the book is slightly different from most. See, the book is held in very high regard by many people – and you can see why. But if I’m being honest, I thought that Robert put too high a value on money and success and not enough on a peaceful and happy life. He seemed to completely disregard many of his own fathers opinions simply because he was not successful.
With that being said, it is a must read. There is a lot in there, so take some time to digest. At Aikido, we’re all about long-term investing success and rules-based thinking. You check out some of our long-term quantitative investment strategies here.
Until next time,
Take it easy.