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Rich Dad’s Guide to Investing Book Review

Updated on March 1, 2019
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I'm a big nerd. I used to play Duke Nukem with my buddy down the street via dial up modem! It was amazing. I'm here to share my experiences

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Introduction

This is the first “Rich Dad” series book that I have read. I completed the book a few weeks ago and feel there are a number of points that I’d like to point out here that are interesting and worthwhile. As a disclaimer, I have also been listening to the Rich Dad Podcast, so if I inject something from my memory that was not in the book, I may be simply confusing it with something I learned in the book.

Like most things you learn, you reflect to yourself and say “Well this concept is just common sense.” I ran into that a number of times in the book, but further into the reading I started to get the sense, that if I already knew something, why didn’t I recognize that in the past and make attempts to exploit that idea in order to make money? I concluded that individual ideas about how to make money come and go, but it’s not until you put together a big picture until you can determine how to exploit an idea.

Before getting into the details of the book, I will say that I found it interesting how Roberts “Poor Dad” sounds eerily similar to my parents, both government workers who worked their entire careers in order to earn that government pension which basically gives them a paycheck once they stop working. They however are living in a time when that pension exists and I’m not as confident that when I come of retirement age that the pension I am currently contributing to will actually exist. It’s pretty common knowledge at this point that the Social Security system that I am forced to contribute to will not benefit me at all when I come of age to need it. So it’s basically government sponsored stealing, but I’m not looking to get into that here.

I get the sense that if you read one of Robert Kiyosaki’s books; you probably get a lot of the same information in all the other books he writes. I certainly hear the echoing of some core concepts over and over again between this book and his podcast. I assume the reason for this is to allow readers to pick up any of his books and get the foundation in place before he goes into the more technical conversation.

What’s with the “Rich Dad” and “Poor Dad” titles?

As Robert explains in his book, he two males in life that he treats as his “Dads,” Poor dad is his biological father and rich is his best friend Mike’s father, who incidentally is Rich. How rich is hard to tell, but you get the sense that he is a wealthy business man who operates many businesses, including real estate businesses. So how did Mike’s dad get rich? The answer to this question was not in the book, but it’s something I learned. When Mike father was 13/14 years old, his father passed away and Mike’s father inherited the family business. Mike’s father dropped out of school and learned everything he needed to know about the family business from the team of attorneys, accountants, bookkeepers and executives in the business (his team). So since he learned business from a young age, he had a very different outlook that the kids these days who go to school and get a job. Mike’s dad was always and employer, not an employee, so his outlook on how to generate wealth was very different than the average person.

Poor dad was a public servant working for the government with the goal of retiring and getting that coveted pension after 30+ years of service. Poor dad always encouraged Robert to go to school, get good grades and get a good job. Poor dad didn’t know anything about starting a business or generating wealth, his values centered around being dedicated to his employer and working his way up the chain as the only means to make more money. Unfortunately, after all the years he dedicated to his employer, a few years before retirement, he was fired and found himself in a very hard position of figuring out how to survive.

Robert was a “C” student, he was not particularly fond of school and his grades reflected that. After graduating high school he served his county and eventually completed his service and came back home to reunite with his friend Mike, who had continued to work with his wealthy father building businesses and was at this point also very wealthy. At this point Mike and Robert were in very different financial situations. This intersection in Robert’s life was really where his lessons start. On one hand, he considered taking a job as a pilot for an airline and becoming an employee, or starting his own business and being a business owner. Using Rich dad as his mentor, he chose the business owner approach.

Getting started with some of the core concepts.

Rich Mindset

One of the first ideas is that you cannot just one day say, “OK, it’s time to get rich.” You have to start to think like a rich person, you have to KNOW you are going to be rich because you are going to start making decisions that are in line with the ideas of success. Part of this is goal setting. They point out that during this transition time, it’s not a great idea to quit your job or anything, but you need to start setting aside time to learn about and work on your goal. Whether that is sitting down and reading about being an entrepreneur or spending time outside your day job doing consulting type work (side hustle) and working to expand that into something that you do full time. This leads me into the next concept of financial education.

Another important point to the Rich mindset is the idea that there is abundance everywhere. The idea that all you have to do is figure out and provide something that people want and they will be happy to give you money for it. I suppose this is the hallmark of capitalism which is just a series of positive transactions where one party provides a product and the other party exchanges money for that product and the idea that the free market allows both parties to voluntarily participate in that transaction. People in our society have a tendency to view money as scarce, and with that mindset, they feel they are a victim of the people who have great wealth. The example I hear a lot is that because Bill Gates is very wealthy, people feel like he stole money from them. But the fact is, he got rich by inventing great products that you wanted to buy. And if you didn’t want to buy them, you could have just bought an Apple computer instead.

Financial education

Robert drives home the idea that kids coming out of school know nothing about money. I can attest to this, as a college graduate, I would look for jobs and see the salary and think to myself that if I got this job, I could pay my rent/mortgage afford a car and maybe even afford grown up toys like a fishing boat. I never looked at a job posting and thought, “Will this job help me reach my goal of being rich?” Of course not, because that concept of turning my paycheck into positive cash flow assets was not in my vocabulary.

As I stated in the past, I have a Bachelor degree in the technology field, aside from taking accounting and some low level business classes in college, I learned nothing about investing or growing money. If it wasn’t for that short stint I had where I actually started and ran my own business, I probably would have fallen into the rat race from day one and never thought about how to get out of it.

When starting your financial education, you must start by evaluating yourself and your financial situation. You need to document your financial statement. And evaluate your cash flow. Cash flow is the understanding the money that comes into your account (usually a paycheck or interest paid on a checking account) and the money that flows out of your account (mortgage payments, rent, utilities).

Know your:

Income: Money that comes into your account

Expenses: Money that flows out of your account to other people (and companies)

Assets: Assets are things that create value or create cash flow. Examples of assets are stocks or bonds that pay dividends (the dividends flow into your “income” section of your financial statement.)

Liabilities: things that cost you money on a monthly basis. These items include rent or mortgage payments to your bank or landlord or utilities payments to the electric company. These items have a negative cash flow, or they are items that take money out of your account.

Once you sit down and document your current financial statement, congratulations, you have done more in understanding your financial situation than 90% of the population!

One thing Robert really drives into your brain is that your house is not an asset. Everyone always calls a house their “biggest asset” but the reality is your house is a liability until the time comes to sell it. The reason is, you pay your mortgage w/ mortgage interest (negative cash flow), pay for repairs and maintenance (negative cash flow) and taxes (negative cash flow.) Your house does not become an asset until you sell it, at that time you hope to make a profit considering all the money you put into it.

Setting your expectations

One of concept that really resonates with me is the idea that if you are working with the sole goal to earn enough to retire someday in the future, then you are planning to be poor. Robert points out in his 90/10 rule that 10% of the population controls 90% of the money. So, to simplify things, if you are regular Joe the plumber working for a business at $25 bucks an hour, then your retirement goal is likely to be to make enough money from your IRA or 401k that you can still get that $25/hour income without actually having to go to work. Which is a good goal, but it’s basically saying, I’m poor now, and when I retire my goal is to still be poor.

This comes back to goal setting. As an employee, you can make some sacrifices in order to meet your goals, but the best lesson is to get assets that generate wealth so you can buy more assets. Let’s say you saw a post on craigslist for a lawnmower, they are asking $200. Assuming you do a little due diligence and find out that model is two years old and sells for $1000 new. You could most likely buy that mower then without doing anything to the mower; repost it for sale on Craigslist for $500. That transaction represents a $300 dollar profit. Now here is where people make the mistake. They take that $300 and go out to dinner or buy a new amazon Fire to reward himself. But if you take that $300 (which was basically free money, besides the time you put into the transaction) and buy an index fund like “SPY” which has an average return of 19% (average yearly return per year last 10 years). You can turn that $300 into $600 in about 5 years. Not bad right? In 5 years, what will that Amazon Fire be worth?

You might ask yourself at this point, that all wonderful, but the stock market “could” crash, then I lose my money. #1 the likely hood of the stock market going to zero is an amazingly small probability. #2 you didn’t invest any of YOUR money in the market, so if it crashes, you don’t really lose YOUR money, you just lose some profits you made on a previous transaction. I actually utilize this approach for some of my investing, particularly if I get unexpected money from working some OT or if I get a refund from a manufacturer for sending in a coupon. It’s nice to watch that free money make more free money.

Don’t I need money to make money?

Not always. I’ve always used the availability of money to invest as a work stopping factor when trying to figure out where to invest. Most people, particularly those who have been working in a certain field for a long period of time have something very valuable, experience. Let say for example that you worked as a real-estate agent for 10 years, you know a great deal about the markets and can spot a good deal when you see one. If you do your due diligence on a property and want to buy it as a rental, you just need to either ask the bank to fully mortgage the property or you need to just find someone willing to let you borrow the money you need. If you are able to show that investor that you have a lot of experience with these types of properties, they will be more willing to invest. Remember, they are looking to make money too, so that angle is already in play for them.

One thing I really liked which Robert said in one of his podcasts was that most often, he has to do something he hates to get things he loves. He was referring to his dislike for running businesses. He does not appear to enjoy that aspect of his work, but the wealth he generates from those businesses, allows him to buy assets (real estate) that he loves. So when people say things like follow your passion and you’ll never work a day in your life, that’s crap! Work to help as many people as possible, even if you don’t love it and the financial rewards that come with that will help to support or enable the things you love or have a passion for.

Cash flow Quadrants

Robert has speaks to length about the type of person your path aligns with. He draws a chart that looks similar to this.

E | B

--------

S | I


E: Represents Employee, this is someone who works for someone else in exchange for a predetermined compensation for their time.

S: Stands for Self-Employed. These are the people who got tired of working for someone else and decided to venture out on their own. These people tend to be one person shops or have only a few employees. The wealth they generate is usually a direct result of their efforts and ability to sell their products.

B: Business Owner, I thought I read that Robert defines this as a business owner with more than 100 employees, but I was not able to find that direct quote, so I think it’s fair to phrase it like this: A business owner is someone who creates a business that he/she can step away from and it will continue to generate cash without a significant effort from the business owner.

I: Investor, someone who makes money by investing in new/young businesses and selling their stake for a profit. Someone who finds success in this area is generally business savvy, able to analyze business operations, understands markets and can identify a good opportunity when one comes along. People who enter this category are usually people who have a great deal of money they acquired from being a business owner.

Robert points out in his book that people who follow the “go to school, get a job,” mantra tend to stay on the left side of the chart. They are constantly working for someone else or working for themselves and finding it very difficult to scale up to business owner.

Business Owners are people who typically have one or more “projects” going that are engines of capital, generating money at a high rate. They find themselves in a position where money is coming in and they dimply need to figure out what to do with it. I mean, you can’t just sit on cash, right? savers are losers (people who save cash in a savings account lose money because interest rates are always outpaced by inflation, so the longer you sit on money, the more money you lose.)

That’s not to say that sitting on cash occasionally is a bad idea. If you feel that the market is about to take a dump, or you want to have some cash on the ready for a real-estate, these are legitimate reasons to keep cash in a liquid state. If your strategy is to simply pile money into a bank money market account; that is a poor choice.

Investor Classifications

Robert further breaks down the investor category into 5 categories, the accredited investor, the qualified investor, the sophisticated investor, the inside investor and the ultimate investor. Each category has its own qualities that separate it from the others. He writes an entire chapter about each one, but a summary of each category is as follows.

Accredited investor: The SEC defines this as someone who earns $200,000 a year salary and has over $1,000,000 in assets. Scaling this wall opens up a variety of options for investment opportunities that are reserved for people who have a certain level of financial acumen. The SEC feels that people who meet these requirements are able to distinguish between good and bad investments.

Qualified investor: This category described people who are skilled at analyzing a company from the outside and making investment decisions based on publicly available information such as news and public financial statements. Stock traders are a good example of such people.

Sophisticated investor: This investment style requires someone who uses corporate law, tax law and securities law to their advantage to create and protect wealth. An example might be, if a change to tax law is likely to come down the pipe in the near future, a sophisticated investor would position themselves to take advantage of that change when it comes. The average Joe may not have the knowledge or resources to position themselves in such a way. To relate it to the stock market, I would assume these are the “smart money” people who position themselves ahead of time and when the stock market drops, they already sold at the top, while the retail (public) investor sells into the bottom. If you read this and think, I want to be one of these, you are a wise person.

Inside investor: This investment style focuses on generating money by creating assets that are engines for wealth generation. This type of inventing of wealth is typically accomplished at the “business owner” level where a product or service is invented that people pay money for, thereby creating money. People who invest in companies while they are young also meet this criterion. Generally people who invest in businesses while they are young are offered a stake in the business in exchange for cash.

Ultimate investor: this investor is a combination of all the above investors, but these investors usually take a large stake in a company before it goes Initial Public Offering (IPO.) People who are at this level will generally have a large number of shares in a company and when it goes IPO they either hold those shares or sell them to the public. People who invest at this level could easily have invested, for example, $50,000 in exchange for a 10% ownership stake of the company and when it goes IPO the entire company is valued at 5 billion. 10% of 5 billion is $500,000,000. Not bad huh? Don’t be delusional. At the infant stage of a startup, you assume a high risk, you could make out well, or you could lose it all. However, the ultimate investor does his/her homework and has a pretty good level of confidence before putting up the cash.

The BI-Triangle

The last Phase of the book talks about the BI triangle, which is a tool used to analyze various components of a business.
The outside of the triangle is comprised on the Mission, Team and Leadership or the business. The Mission determines the team of people needed to carry out the mission and the team is directed by the leadership. The leadership team leads based on the goals and definition of the mission. So as you can see it’s a dependent loop.

Within the triangle are five groups: Cash Flow, Communications, Systems, Legal, and Products. Someone may look the triable and think, why is “product” the smallest piece of the triangle when it’s the actual thing that sells and makes money. The answer is that all the other processes need to be in place in order to support the product. I’ll go into more here.

Cash Flow- Again, this is an understanding and a well-defined documentation of the money going into and out of the business to support the mission.

Communications- This is the ability to speak to the team and the leadership in a constructive way. It may take time and learning. In fact, Robert talks about how he specifically took a sales training class with Xerox in order to hone in on this skill. But, if you cannot sell yourself, how can you convince your team to work toward the mission?

Systems- Having systems in place are the glue between the team. A well-defined set of rules in the operation of the business helps to make sure everyone is performing tasks in the same way. When people are working using the same methods, it’s much easier to measure progress.

Legal- legal management is all about protecting yourself and your product. In the example from the book, Robert failed to patent his Velcro wallet products so his competitors were able to make copycat products and he had no legal right to force them to stop copying his designs. He failed to protect his product in this case, but legal management also means putting protections in place that protect the owners also, an example of this is called asset protection where the business is created in a way that keeps the owner personal assets out of the line of fire is a person or company files a law suit against the company. One such measure would be to create the business as either a Limited Liability Corporation or Corporation. The decision depends on the type of business, so having an attorney who is familiar with these matters is key.

Product- Finally the product is described; it’s at the very top of the triangle and also the smallest layer in size. The lower layers all work together to support the product and protect the product. Since it’s the smallest in size, it represents how the foundation must be strong in order for the product to be successful. Robert describes the product as the least important piece when evaluating a business.

Giving

The last topic discussed in the book is the importance of giving. Giving is an interesting subject because from the 10,000 foot view, some people have this preconceived notion that people who are rich are greedy and don’t care about the community, but I find that to be superficial. I personally never really thought about it myself, but after reading this book, I’ve noticed I’ve paid more attention to things companies do to give to the community that is sometimes masked. For example, I was at a birthday party recently at the local skating rink. As I skated around the rink, I started noticing the advertisements on the boards. One stuck out to me, it was for a local tree removal business of which I know the owner and our kids are friends.

I thought, well that’s cool, my friend is advertising at the local rink. As I continued to skate, I started thinking about how you can look at that sing in two ways. You can look at it as if he paid to put his sign there or you can look at it as, he donated money to the rink and they allowed him to put up a sign to honor his contribution. Either way, his donation is used to help keep the lights on and keep the rink open so my kids can come and skate for the day. So I liked to look at it from the donation angle because I think he did the community a service to give the ice rink money.

If my friend gets some more business as a result of having that sign there, that is also fine with me because he lives in my town and I want the people in my community to be successful in their ventures. Particularly because I know he is an expert at what he does and he I know ow hard he works to be the best in the area.

Conclusion

After completing this book and reflecting on what I learned from Robert, I can only explain it as a slap in the face that woke me up from the negative view I’ve had of making money in this world. For some reason I have this preconceived notion that the only people who are successful in business are scammers or thieves and that the mom and pop small business doesn’t stand a chance.

I feel like my eyes have been opened and that I’m just looking at business and investing with blinders on. I really liked Robert’s backstory and his fairly simple explanation of who gets rich and who stays poor. I almost feel richer already, not because I have more money in my pocket (yet) but because I gained a lot of knowledge capital from reading the information in this book.

Also, after reading this book, I’ve gained some confidence when it comes to approaching the unknown. I’ve always felt uncomfortable with trying to start a business while not knowing what issues I might run into. It’s not as scary as it seems as long as you have a few basic tools in your toolbox.

Lastly, some of the information Robert talks about regarding real-estate investing peeked my interest and I’ve began to do more research on the subject to see how I can get involved with that.

Recommendation

As I stated above, I feel like if you’ve read one of Roberts Rich Dad books, you’ve probably read much of what would be provided in the others as the foundation he builds is probably similar in each book. That is just an assumption and it’s not meat to take away from his books at all. One thing Robert talks about repeatedly on his podcast is that you learn by doing things over and over. That being the case, I would think that reading his other books and getting the same information over and over would strengthen that foundation.

I would recommend this book to anyone looking to get perspective in investing and learning about how rich people approach their financial decisions which help them get richer. In fact, I might even read it again. Unfortunately I have some other books to read right now. On Robert’s podcast, he mentioned that the book Blood in the Streets: Investing Profits in a World Gone Mad changed his life. So naturally, I want to know why.

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