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Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! Mass Market Paperback – August 16, 2011
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Personal finance author and lecturer Robert T. Kiyosaki developed his unique economic perspective from two very different influences - his two fathers. This text lays out Kiyosaki's philosophy and his relationship with money.
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I think that if you were someone who was just making ends meet, using all of your salary to support your lifestyle (in Kiyosakian parlance, buying "liabilities") and doing little to save and invest (buying "assets"), I can see that this book might serve as a wake up call and can inspire and motivate people to look for ways to possibly change their situation. Furthermore, the book's various claims, (however misleading or unrealistic as I point out below) plays right into such people's desires to learn the "secret of success" of the rich that if only they knew, they could quit (or abandon their plans) to go to school, quit their jobs and just invest and live off of investments the rest of their lives without working.
OTOH, if like many of us, you were making a good salary WORKING but spending responsibly (i.e. limiting "liabilities) and meanwhile trying to invest aggressively as much as we know how to do based on our unique circumstances and preferences (buying "assets"), the book really provides no substance and stretches credibility. For us, you don't need inspiration and what specific info the book provides is either dated, incorrect, or misleading. Also for many of us, we didn't read it realizing ahead of time that it was entirely a motivational book rather than a "methods" book since the title alludes to "methods" that that rich possess that we of humbler backgrounds lack.
This book makes fantastic claims. There is a quick and easy "secret of success" that "the rich" (always treated as a monolithic group) know and the rest of us don't; this "secret information" is far more important than hard work, getting a good education, investing wisely, or any traditional method to become rich and successful; and if you only learn "the secret" (translation: buy Kiyosaki's book) you, too, will be rich.
According to Kiyosaki, "the rich" become rich by using three different strategies: 1). They form and own corporations, thus paying less taxes than people who get their income as employees. 2). They invest in real estate in certain "secret" ways that let them earn a lot of money with little risk or tax liability; 3). They use tips from friends for insider's trading to make a killing in the stock market. Kiyosaki's advice, in essence, is to suggest to the reader to emulate "the rich" by using the same tax-avoidance strategies, real-estate schemes, and insider's trading "they" supposedly use to get rich.
There are only two tiny problems with Kiyosaki's advice. First of all, these "secret strategies" are NOT the way the rich actually make money; it is rather the LAYMAN'S IMPRESSION of how the rich make money, an impression based mainly on numerous TV shows and movies which portray "the rich" in this way. As the (excellent) book "the millionaire next door" shows, this description bears no more relation to how the rich actually make money than James Bond films have to actual espionage work.
Second, not surprisingly, the "strategies" Kiyosaki proposes could work only in the movies - where, of course, the government and police are all in the millionaire's pocket, and let him "get away with it". If you actually try them in the real world, you will be laughed at, waste your time and money, get audited by the IRS, or worse.
For example, in reality, coroprations are *not* good tax shelters. In reality, you *cannot* deduct your personal expenses as "business expenses", or have your corporation give you "tax-free gifts" such as trips to Hawai or Rolex watches, as Kiyosaki claims. Doing so would get you audited and stiffly fined (or worse.) Also, in reality, "insider's trading" is a felony which could land you in jail. Finally, in reality, Koyisaki's real-estate advice is either illegal (as in his claim of using his cat as a "business partner"), immoral (as in getting "good deals" from unsophisticated sellers, apparently based on the principle of "it is immoral to let a sucker keep his money"), or doesn't work in the real world (such as his claims that he offered 275K for a 450K building and "they agreed to 300K", or that a bank agreed to take 50K instead of 60K for property he bought "simply because it was a cashier's check.")...This book, in summary, paints a fantasy picture of the world, and gives "financial advice" that will make you a laughing stock at best and put you in jail for insider's trading or tax evasion at worse.
If you have dreams of being the next Gates, Trump, etc, I'd say go for it. But don't give up your day job just yet based on Kiyosaki's fantasy notions because the real world doesn't work that way. The bottom line is that whether you work hard at a profession as an employee or whether you work hard to invest and build businesses, you will need to work. It is safe to say that while a few people will be able to invest and build businesses and live off of their assets without working, many of us won't be able to pull it off. There's nothing wrong with trying but don't do it with the mistaken notion that you'll automatically be better off than if you kept your job and invested carefully over a lifetime because you probably won't be.
* Probably the greatest insight is how to think about assets and liabilities. A million accountants scream in anguish, but a primary residence, with a large mortgage, high taxes and high fixed costs to top it off, is not an "asset" for Kiyosaki because it doesn't produce a positive cash flow. Instead, he lists several items, such as rental property, stocks, bonds, mutual funds, business partnerships with limited involvement, promissory notes and royalties (p. 89), that generate money and should be invested in.
* Don't get into large debt positions for non-necessities. Buy your luxury items for cash (p. 176). This is part of any sound financial planning and is taken to its logical endpoint by the authors of "The Millionaire Next Door."
* Watch out for the tax effect of your sales of real estate. In this sense, the book is out of date, since the tax laws were changed in the late 90s to permit up to $250,000 in capital gains ($500,000 for married couples) from the sale of a primary residence be exempt from federal tax, under certain circumstances. No longer must you rely on the 1031 "trading up" provision he describes, at least not exclusively.
* Fear can be utilized as a great motivator to act, as opposed to fear causing you to be a deer in the headlights of life.
However, before we all run off to leverage real estate to become gentlepeople of leisure, let's try to remember a few things.
* This book is written for one reason: to be earn the author money. Kiyosaki is even somewhat up-front about it, noting that royalties are one of the best assets for a person to have (p. 89). Therefore, you should be skeptical -- not cynical but merely skeptical -- about the advice he gives.
* For every Kiyosaki there's a multiple of people who crashed and burned in stock and real estate speculation, and the difference between the author and those people is due in some measure to chance.
* It is much easier to invest in undervalued, illiquid assets in downturns when you're already sitting on a pile of cash.
* Dropping our current jobs to do Kiyosaki's kind of analysis and investing does not make sense for most of us. After all, our jobs are, in Kiyosaki's sense, an "asset" because they generate positive cash flow.
* The principle of "paying yourself first" (p. 172) is not something to be applied inflexibly. Kiyosaki is giving everyone advice from a position that may not be applicable to everyone (p. 176). Yes, the idea of saving a portion of your income is a good idea, even an outstanding idea. But stiffing the tax man and your creditors is not, and unless you operate a business or are engaged in a profession where you can rapidly earn extra cash, it's not a good idea to try to scare yourself into coming up with a brilliant plan to pay them off. You might wind up with a solution like George Segal and Jane Fonda in "Fun With Dick and Jane."
* Beware the author's personal biases. If he truly believed that America is "on the course" to collapsing because the difference between the haves and have-nots is widening (p. 48), he'd be investing in foreign real estate, in gold and would hold a lot of money in cash. He's not. In fact, he does the exact opposite. He bets on American's long-term stability by purchasing real estate.
* The author casually talks about extremely risky investments, such as $5,000 investments returning $1,000,000, as if these were almost ordinary (p. 78). That's highly misleading. He does mention in the book that out of ten limited investments, a preponderance of his business investments "go nowhere" or completely fail, but that should be highlighted when those stratospheric returns are mentioned.
Overall, Kiyosaki has some good advice. However, do not think that you are likely to duplicate his personal experience to success. If you look at how he made his money, he essentially got rich holding real estate in the 70s, in Hawaii, as well as being one of the state's best salesmen. He was at the right place at the right time, with a particular important skill. He then had sufficient money in the 80s and 90s to be able to invest in real estate in the economic downturns. So his position does not correspond to most of ours.