Updated: Apr 29, 2021
A friend recommended a book to me the other day called 'Rich Dad, Poor Dad', and having come across it a few times over the years I have to admit to being a bit sceptical about investing the time in reading it - I'd always dismissed it as just another self-help book from one of the myriad US self-help gurus.
Now I really wish I'd read this book 20 years ago!
It's a surprisingly good read, and the author Robert Kiyosaki uses a number of personal stories to deliver his lessons. His core message is a simple one - he believes that the lower and middle classes are never taught how to create wealth, and instead are subjected to an education system that produces employees for the rich owners class. And his core lesson is also pretty simple - you should convert your earned income into passive income from assets as quickly as you possibly can!
It's a very compelling narrative, and there are some high quality lessons in there that I want to share here, but first off a summary...
It's not rocket science - spending all your earned income (wages) on your living expenses with nothing to spare every month will not build any wealth. In fact you'll be a slave to your wage and the hopes of a decent pension one day. (He doesn't address the mental health consequences, but being a 'slave to a wage' is a key cause for a lot of people these days).
The rich don't do that, and they don't encourage or teach their kids to do that, instead they convert their earned income (wages) into passive income from assets as quickly as they can, and of course that income flows in perpetuity.
The goal for the rich classes (and what they teach their kids) is to build their assets to a level that provides enough passive income to cover their living expenses - so they don't have to work for money any more, instead they have money working for them.
The key assets they invest in are property and stocks & shares.
A few nuggets:
- Once you've invested in an asset, you should never touch it unless you're liquidating it to invest in another. You should only ever use what you must from the income that asset generates (and reinvest the surplus).
- Your home is not an asset, it's a liability. The reality is that as you live in your home, it generates no income and instead comes with huge associated expenses in the form of mortgage interest, council taxes, energy bills, etc, etc (and most of these remain even after you've paid off your mortgage). We all need a home to live in, so the key message here is that the bigger the house, the bigger the liability. If you can, stay in a house that is just big enough to work, and use the cash you would have pumped into a bigger one to invest in assets that generate income. Once the income generated from the assets would cover the additional expense of a bigger house, you're good to go.
- Earned income is better coming from self-employment than employment. This is primarily due to (a) lower taxes payable as you can first claim expenses and (b) the fact there is no owner/employer taking a chunk of the value you create for themselves.
- The foundation for your asset portfolio should be property, and "always remember that profit is made when you buy, not when you sell". This is an interesting mindset point - most people will buy a property at market price and wait for house prices to rise while trying to maximise rent. Robert advocates against that, instead insisting you only invest when you find/develop a great deal. Examples being properties bought at foreclosure auctions, or from sellers who need to sell quickly and will accept a lower price for cash in their pocket.
- The last point I'm sharing here is Robert's most controversial opinion - holding a balanced portfolio is a bad investment decision and will not generate the growth or returns that will make you rich. His view is that balanced portfolios are simply too safe, and cater to the majority of the population who are so risk-averse they will not accept even a tiny downside risk. He believes that instead investing in a few (well chosen) small cap stocks each year will provide far greater upside potential, but without a great deal more risk. The key here being the words 'well chosen' and he equates this to having strong expert advice from a stock broker and/or having strong personal knowledge of the companies and market environment of the stocks you invest in.
I should close by making it clear I'm not recommending any of the approaches outlined above, rather I'm sharing as I found it a particularly thought provoking read that will have a very real impact on my own attitude and approach to money and investments. And I'd also recommend speaking to a good financial advisor before making any investments of your own.