Personal Finance
Components of a Financial Plan
February 12, 2025
Most of the lessons taught in the “Rich Dad Poor Dad” book series are somewhat unique. This is because the book provides a new perspective of looking at finances. In this article, we will have a look at some of those lessons in order to explain the rich dad philosophy.
- High Incomes do not Equate More Wealth: In the book, Robert Kiyosaki has explained that most people spend their lives trying to increase their incomes. He calls it the “rat race” in which all people working nine to five jobs work hard and finally get nowhere. He believes that the answer lies in the spending pattern more than the incomes.
People who have a rich dad mindset invest a big chunk of money that they earn. Hence, essentially they turn cash flow into assets which in turn creates even more cash flow.
People with the poor dad mindset, on the other hand, use the increased cash flow to buy more liabilities. More liabilities can be seen in the form of a bigger car, bigger house, etc. Hence, their cash flow is depleted at the moment.
Robert Kiyosaki illustrates that a person does not get rich by earning more money if they spend all of it on liabilities and expenses.
Instead, a person becomes rich by investing their money in income-producing assets. This concept has been explained in other books in the form of a concept called “savings rate”. However, Robert Kiyosaki presents it in an easy to understand format.
- How Different Classes of People Make Money: Robert Kiyosaki also explains how different classes of people earn money. The poor dad mindset equates money with labor. He believes that this is the reason that the earning potential becomes limited.
After all, there is a limited number of hours that a person can work and hence their earning potential becomes limited.
On the other hand, the earning potential of business owners is not limited by the number of hours they work. They can earn as much money as the product that they sell. Also, at the same time, investors can also earn an unlimited amount of money based on the money that they have invested. This is the reason that Robert Kiyosaki from Rich Dad Poor Dad recommends that people should try to transition from employees to business owners in their life. This will help the people maximize their earning potential.
- Taxes Favour the Rich: Robert Kiyosaki explains that getting rich is easier as a businessperson. This is because firstly their wealth is not tied to the number of hours that they work and secondly they get a better deal on their taxes.
Rich dad poor dad explains how the tax system does not work the same way for everyone. The tax system favors the rich business owners. This is because business owners are allowed to deduct business expenses from their income before they have to pay taxes. On the other hand, this facility is not available to people who work jobs. They have to pay tax on their entire income and the effective tax rates tend to be higher.
This is in line with Robert Kiyosaki’s teachings that the amount of money that one can retain is more important than the amount that one can earn.
Robert Kiyosaki provides mathematical illustrations to explain how taxes are the number one expense in the life of any common person. He also explains that business owners and investors are able to avoid taxes whereas employees have no option but to pay it.
- Pay Yourself First: Robert Kiyosaki is a staunch believer of the pay yourself first principle. In his book, he has dedicated an entire chapter to how wealthy people regularly apportion a portion of their income towards savings before they start spending any money.
He echoes the belief of the personal-finance gurus that if savings are not made a priority it will never happen. This is the reason that he also recommends deducting a portion of the paycheck before the balance money is used to pay the monthly bills.
- Investing All Your Money: Robert Kiyosaki wants people to aggressively invest all the money that they have saved. He wants them to create a portfolio or passive income to supplement their regular income. He has dedicated a lot of pages in his book to explain how people who do not invest are actually losing money.
He explains how the savings interest rate provided by the banks is actually much less than the inflation rate. Hence, if the money is kept unutilized, it is simply losing its value.
He also explains how Richard Nixon took the world off the gold standard, which means that the government can now devalue the money faster than one can earn it. His recommendations for investment are considered to be extremely risky. This is the reason why Robert Kiyosaki is criticized by personal finance gurus.
The bottom line is that some of the lessons provided by Robert Kiyosaki are unique as well as valuable. This is the reason why many people follow his advice even though mainstream personal finance gurus have routinely discredited him.