During one of my recent JC classes titled Building Wealth through Real Estate Investment, one of the students mentioned the New York Times bestseller “Rich Dad Poor Dad”. It turns out several of the students were reading the book. Since this one student made me a gift of the book, I decided to see what it was about.
The subtitle describes the underlying theme -“What the rich teach their kids about money – that the poor and middle class do not.” In other words, the path to financial independence lies in acquiring income-producing assets on which one can live, rather than relying on a salary. The book is clever in presenting two contrasting views toward building wealth, whether the example is true or not. It describes two young boys who want to make money, and whose fathers have differing views about the best way to direct a child.
One counsels getting a good education, then securing a good job. The other advises learning to acquire income producing assets, and building the asset base to where they achieve financial independence. This debunking of the common view about a education and jobs is the most striking theme, and the most important. The rich dad argues that after paying for all the living expenses and paying income taxes, little is left to create independence.
Other key themes that are good include:
* You must postpone consumption in order to create the capital to invest.
* You must plan your investment structure to minimize erosion from income taxes.
* You must work at learning about investments.
My only real complaint is that the author creates the impression that it requires superior financial insight to make the kind of investments that can lead to financial independence. Not only do I not believe this is true, but I fear that this impression will prevent many budding investors from investing because they don’t think they have the requisite expertise.
Other ideas are presented, but in a less than clear fashion. For example, the author spends lots of time talking about buying assets, not debt. He draws a stream of “balance sheets” to illustrate his point. The idea he wants to make is simple, and he almost loses me in his presentation, and fuzzy labeling. The point is, investment comes from savings, and savings is the alternative to consumption. You have a choice with every dollar you have, either to consume (i.e. spend it) or to save/invest it. If you cannot forego consumption, you will never achieve financial independence.
It’s my view that wealth can be created by anyone of average intelligence who is willing to postpone consumption to invest. While there are many investment strategies, it’s not a matter of one being the right one and the others being wrong. It’s far more important to get in the game than it is to pick just the right investment. My fear is too many investors never invest out of fear of making a wrong investment.