Why Teach Financial Literacy?

This is a summary of Rich Dad Poor Dad Chapter 3

In this chapter, Robert Kiyosaki provides a simple explanation of how to become rich. The main idea behind this chapter is that you need to be financially literate. To be financially literate, you have to be able to read numbers. Just as in reading words, it is not the numbers themselves but the story behind the numbers that you need to be able to extract and understand. This is where knowledge of accounting can be extremely helpful. Though accounting is perceived as one of the most difficult and boring subjects to master, as a trained accountant, I have to say that the basics of what you need to know to be rich aren't that hard to understand at all. In fact, Kiyosaki has the best basic explanation that I have ever seen in terms of accounting!

Before I go into a more in-depth discussion, I don't want you to be suprised by the simplicity of Robert Kiyosaki's view on becoming rich. It's easy for people, especially adults, to view something profound as unimportant or insignificant just because it is simple. That is why so many people have missed this concept entirely. I will try my best to explain this concept, but this is just a summary of Rich Dad Poor Dad. I am not capable of explaining this better than Kiyosaki in the short amount of space that I have. If you truly want to grasp the full meaning of these concepts, you need to read the book in its entirety. So, here it goes! According to Robert Kiyosaki, this is Rule #1 of the rich:

"You must know the difference between an asset and a liability, and buy assets. If you want to be rich, this is all you need to know. It is Rule No. 1. It is the only rule. This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability."

It is really that simple. So, what is the difference? An asset is something that puts money into your pockets, and a liability is something that takes money out of your pockets. Robert Kiyosaki explains this concept and other cash flow issues very effectively with pictures.

Many people do not understand Balance Sheets or Income Statements, but this understanding is necessary if you want to become rich. Think of your Balance Sheet as an asset column and a liability column. Your Income Statement consists of the money you earn and the expenses you have to pay. The goal is to use your net income to buy as many assets as you can while limiting your liabilities. That is the most simple way to become rich.

Some examples of assets are stocks, bonds, notes, real estate, intellectual property, and anything else that brings in a continuous flow of wealth. Assets can also be created. Think about an author who writes a good book and receives royalties on every sale. The content that this author created is an asset.

A major problem arises when liabilities are mistaken for assets. Liabilities are things such as mortgages, credit card debt, school loans, car loans, etc... These liabilities make for a continuous hole in your pocket through which your hard earned money escapes you every month. Again, you have to look at the numbers and realize that it is a liability if it takes money out of your pocket. Robert Kiyosaki brought up a controversial issue when it comes to this subject. He said that when a person goes to purchase a home, their home is a liability. This is ironic because most people see their home as their greatest and only asset. However, you have a major problem if your home is your only asset. According to Kiyosaki, the decision to own a home that is too expense instead of starting an investment portfolio early effects an individual in the following three ways:

1. They lose time during which other assets could have grown in value
2. They lose additional investment capital on high-maintenance expenses
3. They lose the education necessary for them to become a sophisticated investor

The fact of the matter is that it takes time and experience to become a sophisticated investor. It is normally the sophisticated investor who makes good investments and sells the bad ones off to others. If too much of your money is tied up in your mortgage payments and home maintenance expenses, you will not have the additional cash to try your hand in the investment world. And it is only through investing that a person can become truly wealthy.

There are many definitions for wealth, but this is the one that is supported by Robert Kiyosaki in Rich Dad Poor Dad: "Wealth is a person's ability to survive so many number of days forward... or if I stopped working today, how long could I survive?" Now, of course you can try to stack up as much cash as possible and survive off of a huge lump sum of money. However, that is the type of thinking that you should try to avoid. Remember that becoming rich is not all about how much money you can make. It's about how much money you keep to invest in assets that provide continuous cash flow. So, the idea is that you should look at wealth from a cash flow perspective. Wealth is a measure of your cash flow from your assets compared to your expenses. The goal is to build up that asset column to receive income from dividends, royalties, rent revenue, etc... If you can get your monthly income from assets to cover your monthly expenses, you can live indefinitely into the future without a job. That is what you call wealthy!

Note: Remember that this is just a summary of Rich Dad Poor Dad. I try my best to explain Kiyosaki's concepts in the short amount of space that I have, but I probably cannot explain it as thoroughly as you need to understand it. You need to read the book for yourself. This summary is only meant to give you an overview of the main concepts. Click Here to find Rich Dad Poor Dad on Amazon.