Book Review: Robert Kiyosaki and Sharon Lechter, Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money — That the Poor and Middle Class Do Not!

Rich Dad, Poor Dad became a phenomenon based largely on its simple allegorical concept: that the author had two dads, one rich and one poor, who gave him conflicting advice about how to achieve success.  The poor dad advised him to stay in school, study hard, get a good job, buy a house, and save conservatively to a moderate, safe retirement.  The rich dad advised him that the key to success was not in getting a job working for someone else, but to work for yourself and strive for financial independence.

The book’s been a huge success, probably because of its provocative title and message.  Certainly, it’s success doesn’t come from the nuts and bolts financial advice that Kiyosaki gives, since Kiyosaki does a better job of explaining his philosophy than illustrating how to put those philosophies to work for you.  For example, the thrust of his book is that you want to work for yourself, building assets that throw off positive cashflow to the point that your “passive income” covers your expenses.  That is, say, if you own an apartment building that throws off $100,000 of cash every year, and your personal expenses are under $100,000, then your passive income (assuming you don’t work full time maintaining the building) pays your expenses, giving you the ideal of financial freedom.  That’s essentially the point.  Sadly, how you get to the point in your life when you can buy an apartment building throwing off $100,000 of cash each year goes unexplained.

Lack of specifics notwithstanding, and putting aside some of the controversy surrounding whether Kiyosaki is basically a charlatan who made up his “rich dad” and made his money in multi-level marketing scams, the book provides some fundamental advice that’s at least worth repeating:

  • Pay yourself first.  This is a concept that comes from any number of financial planning books (all the way back to the Richest Man in Babylon), but it’s a worthwhile reiteration: always put a portion of your income into savings before you pay your bills, to give you the discipline to save.  If you pay yourself first, and don’t have enough money to pay your bills, you’ll either cut your expenses or you’ll find some way to scrape together more money.  Never shortchange your long-term future, which relies upon regular savings.
  • Separate your assets from your liabilities.  One of the more provocative, unconventional concepts of the book is that your personal residence is not an asset, it’s a liability.  Kiyosaki takes a narrow view of an asset, saying that an asset is something that puts money in your pocket, rather than taking money out.  A personal residence, according to Kiyosaki, is a liability, since it costs you money every month.  That’s an interesting concept, challenging the conventional wisdom that “your house is your greatest investment.”  Obviously, the point of the conventional wisdom is that you have to live somewhere, so you’re better off living someplace where your monthly payments build equity for you rather than your landlord (indeed, Kiyosaki’s fundamental tool for building wealth is to buy investment property).  But Kiyosaki makes a very good point that too many people sink too much of their money into their primary residence, when it might be better invested.
  • Invest instead of save. Kiyosaki takes a somewhat unconventional view of savings versus investment.  Essentially, the point would be that if you have, say, $10,000, you can do one of three things with it: (1) spend it on “doodads” like flat screen televisions that will depreciate in value, which is a waste of money in his eyes, (2) save it someplace where you can get a conventional rate of return, which is a waste of an opportunity, or (3) invest it in a business.  His orientation is to invest in business opportunities (or real estate) that will throw off positive cashflow to get you to the ideal of your passive income overcoming your expenses.  So if you want a $40,000 car, he would counsel to take the $10,000 you have to spend and invest it in a business that will throw off enough cash to cover your monthly payments on the car.  Thus, you’ll still have the $10,000, but you’ll also have the car.  That might seem oversimplified, but so is the book.

The bottom line on Rich Dad is that it understates the element of risk in investing, making it seem as if putting money into small businesses or investment real estate is a no-brainer way to make double-digit returns.  Most people following his advice without proper training will probably go broke, with just enough people muddling through toward success for him to use as “success stories” in follow ups or on his website.  I liked some of the philosophies in Rich Dad, and the premise is brilliant, but at its core the book is empty of practical advice.

Takeaway

Rich Dad Poor Dad is a great book.  Not “great” in that it’s a good read, because it’s not.  And not “great” in that the author actually provides any help in showing you how to become successful, wealthy, happy, or whatever.  But “great” in the sense that it evokes a simple aspirational message that we should all be focusing on our financial futures by creating investments and businesses that will generate sufficient income to cover our expenses.  This is most easily done, of course, with real estate, which is why real estate is always going to be such an attractive investment vehicle for everyday people.   The larger message should resonate with every real estate agent: if you want to build wealth, invest and build your business.

I can’t really recommend Rich Dad Poor Dad because I know too much about how Kiyosaki has tried to take the simple concept from the book and turn it into one of those financial coaching businesses that’s more exploitative than enriching.  And there’s certainly a lot of smoke about whether he has made up most of the story.  All that said, though, there’s a powerful and simple message in the book, which makes it a reasonable read if you’re willing to go elsewhere (and to more reliable sources) for your specifics.

David Bach, The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich (2004)

David Bach has created a cottage industry out of conventional financial planning wisdom artfully packaged.  The Automatic Millionaire is the core of that pursuit, a practical, simple, conventional guide to financial planning wrapped around the concept of “automaticity.”  Essentially, Bach points out that you can become a millionaire by incorporating automatic deductions from your income into savings and 401k accounts, which, by the magic of compound interest, will grow over your lifetime into a decent nest egg.

How do you accomplish this? Well, Bach makes it seem easy, but essentially you need to adopt frugality as your core value: save instead of spend, and do without.  It’s not exciting, but it’s obviously effective so long as you don’t read the book after already running up $25,000 in credit card debt.  The key points of the book are as follows:

  • It doesn’t take a lot of money to be rich, just a little money saved every week for a looooong period of time.
  • Pay yourself first, the familiar advice that you need the discipline (Bach downplays the difficulty of this) to take a portion of your income and direct it to savings.  The automatic aspect of this is Bach’s focus, the idea that it is easier to do this if you set up automatic diversions of a portion of your bi-weekly paycheck to your savings or investment accounts.  He argues that you’ll get used to the diversion, and learn to live within the means of what you have left.
  • Own your own house, and pay down the mortgage as quickly as possible to free up more money to eventually save (he advocates paying your mortgage every two weeks rather than once a month, to get an extra payment in every year).
  • Incorporate the “Latte Factor” (a registered trademark, no less!) into your life, the idea that going without a $4 coffee every day can ultimately be a huge financial savings (i.e., $4 a day, times 365 days a year, is $1500 a year saved, over 30 years with compound interest is something like a gazillion dollars…).

The key insight, and main focus, of the book is the need for an automatic system of taking money out of your paycheck into your investment or savings account before you can touch it.  Bach argues that you don’t need discipline to save if the money is taken out of your paycheck automatically.  He further persuasively argued that time spent on budgeting is a waste, because most people can’t stick to it.  Rather than budget, set up a system so you never get your sweaty, greedy hands on your own money, but instead have it diverted to savings or investment to build your retirement accounts.  As Bach says, “Automation plus compound interest equals serious wealth.”

Another helpful part of the book is the explanation of the “rainy day fund,” the amount of money you put away to cover monthly expenses in the event that your family has no income coming in for an extended period.  Bach advocates figuring the amount you’re comfortable with on your own, by figuring out how much you need every month to maintain your lifestyle, and then figuring out how much you need in a money market reserve account to cover at least three, and preferably as much as twelve, months of expenses.

Bach’s book is a very good articulation of the “frugality” approach to financial planning, wrapped around the appealing notion of automaticity.  It’s also a good introduction to the various retirement savings vehicles that are available (IRAs, etc.), and the extent to which a reader is a novice to financial planning the book helpfully demystifies a lot of the concepts and provides phone numbers and links to other resources.

Takeaway

Real estate agents are not generally good budgeters or financial planners, and this is a great book for providing a foundation of sound financial planning.  The basic idea: don’t set a budget, but keep some of your money from getting to you so that you don’t spend it.  The other basic idea: buy a house, live it in for a long time, and pay it off.  That’s a pretty good message for us, and our clients.

Book Review: Thomas J. Stanley and William D. Danko, The Millionaire Next Door

The Millionaire Next Door is an insightful study of millionaires in America and the characteristics they share in common.  The book is based on a set of research surveys conducted by the authors combined with interviews and other research.  The findings of the studies, and the book, are counter-intuitive insofar as they point out that most millionaires do not live in the fashion that we would normally associate with great wealth – indeed, the point of the book is that living below your means is the essential ingredient in amassing great wealth.

The authors distill the findings of the book in the introduction, identifying seven common denominators among people who successfully build wealth:

  • They live well below their means.  The authors advocate frugality as the cornerstone of building wealth, pointing out that most millionaires don’t spend on depreciating assets like clothes, cars, watches, and that in fact most of them live in homes that are less expensive than they can afford.  The authors present a rule of thumb that if you are not yet wealthy you should purchase a home that requires a mortgage note that is less than twice your total annual realized income (that is, if you make $100,000 a year, you should never take out more than a $200,000 loan to buy a house).
  • They allocate their time, energy, and money efficiently, in ways conducive to building wealth. The authors note a strong correlation between investment planning and wealth accumulation: people that plan their financial future are going to do a better job of accumulating wealth, particularly if they start early.
  • They believe that financial independence is more important than displaying high social status.  They don’t spend money to show off, and indeed might seem to make far less than they actually do.
  • Their parents did not support them financially in their adulthood, so they became self-reliant.  People who get gifts from their parents tend to spend them, rather than save them, and get locked into a spiral of consumption.
  • Their adult children are economically self-sufficient.  The section on raising financially independent children is a great primer for wealthy parents, with the following guidelines: never tell children that their parents are wealthy, always teach children discipline and frugality, minimize discussions about inheritance, never give cash or other gifts as part of a negotiation/coercion, etc.
  • They are proficient in targeting market opportunities.  In this section, the authors discuss industries and occupations that are likely to be profitable in the next century.
  • They chose the right occupation.  The authors note that a disproportionate number of millionaires are small business owners, although they counsel that this fact can be deceiving: in fact, most small businesses fail, and few small business owners become wealthy. That is, a disproportionate number of millionaires are small business owners, but that doesn’t mean that owning a small business is a guarantee of wealth-building.  (Part of the reason, the authors point out, is that small business owners start accumulating wealth at an earlier age than graduate school professionals.)  The authors also point out the value of going into a “dull” industry that elicits little strong competition.

The author’s also present an interesting insight about how you calculate your net worth, and how much of your net worth you pay each year in taxes.  The key point: once you’re in a high-income bracket, it matters less how much more you make than what you do with what you already have; try to limit your realized income, and allow your wealth to grow without incurring taxes.

Takeaway

This book is not a terribly easy read, but it is a terrific eye-opener for most people in a consumpionist culture.  The book presents the irresistible premise that you can incorporate its principles into your life, and act more like a real millionaire than a perceived one.