RICH DAD, POOR DAD

Unofficial disclaimer and credit:
Most of the Rich Dad concepts explained on this page of my site are pulled directly from RichDad's web site.  They just do a much better job of explaining the concepts than I could, so I just put the information all here in one simple, easy to read place.

As you begin your journey with Rich Dad, it's important to master the 'basics' of the Rich Dad messages and principles so that you have a solid and strong foundation upon which to build your financial future. Here are a few key concepts and Rich Dad's definitions for review.

Assets vs. Liabilities

Assets - something that puts money into your pocket

Liabilities - something that takes money out of your pocket

Is the home in which you live an asset or a liability?

In Rich Dad's world, your house is a liability. Even if you own the property with no mortgage, you still pay property taxes, utilities, maintenance, etc. Therefore: money is being taken out of your pocket. It is not until you sell that property – at a profit and realize capital gains – that it becomes an asset.

Types of Asset Classes

There are three types of assets:

1. PAPER ASSETS
   This includes stocks, bonds, mutual funds, insurance
   They create Portfolio Income

2. REAL ESTATE
   This includes residential properties you don't live in and commercial properties
   They create PASSIVE INCOME

3. BUSINESSES
   They create PASSIVE INCOME

The CASHFLOW Quadrant describes the four different types of people represented in the world of business: the employee, the self-employed, the business owner and the investor.

E - Employee
S- Self-Employed
B - Business Owner
I – Investor
 

Employees (E) and self-employed individuals reside on the left side of the CASHFLOW Quadrant. The right side of the Quadrant is for individuals who receive their income from businesses (B) they own or investments (I) the have/make/own.

Each of us resides in at least one of the four quadrants of the CASHFLOW Quadrant. Where we fall within the quadrant is determined by what types of efforts generate our income. What quadrant – or quadrants – generate your income?

Understanding the B-I Triangle allows a person to create an asset that buys other assets.

The B-I Triangle, as a whole, represents a strong system of systems – supported by a team with a leader – all working with a common mission toward common goals.

If one member of the team is weak or falters, the overall success of the business can be jeopardized. The B-I Triangle represents the knowledge required to be successful in the B and I quadrants on the right side of the CASHFLOW Quadrant.

Three important points in summarizing the B-I Triangle:

• Money always follows management. If any of the management functions of the five individual levels are weak, the company will be weak. Once you identify your weakness, you may then want to consider turning it into your strength or hiring someone with that strength.

• Some of the best investments and businesses are the ones you walk away from. If any of the five levels are weak and the management is not prepared to Strengthen them, it is best to walk away from the investment.

• Technology has leveled the playing field. The personal computer and the Internet have made the principles and applications of the B-I Triangle more available, affordable, and manageable for everyone. When a business fails, it is often due to failure in one or more sectors of the B-I Triangle. The B-I Triangle gives structure to your ideas. It represents the knowledge required to be successful in the B and I quadrants on the right side of the CASHFLOW Quadrant.

There are three types of income:

1. EARNED INCOME
   This includes income derived, generally, from a job or some form or labor. In its most common form, it is income from a paycheck. It is also the highest-taxed income, so it is the hardest income with which to build wealth. When you say to a child, "Get a good job" you are advising them to work for earned income.
    

2. PASSIVE INCOME
   This is income that is, generally, derived from real estate. It can also be income derived from royalties from patents or license agreements. In approximately 80% of passive income scenarios, the income is from real estate. There are many tax advantages afforded with real estate investments.
    

3. PORTFOLIO INCOME
   This income is generally derived from paper assets such as stocks, bonds and mutual funds. Portfolio income is, by far, the most popular form of investment income simply because paper assets are so much easier to manage and maintain than other types of investments.

By now you have a sense of how Rich Dad thinks…so it's time to get started and DO IT. As you lay the foundation for your financial journey you will ask yourself many questions. Your honest answers will help you visualize Your Dream, set Your Goals and craft Your Plan of action that will deliver the rewards you seek.

Getting started requires two action steps: First, you need to determine your general financial goal and, second, you have to become financially literate so that you learn to think like the rich.

Examine Your Long-Term Goals

If you're really serious about achieving financial freedom – about moving from the left to the right side of the CASHFLOW Quadrant and staying there – it's time to examine closely how you prioritize your long-term goals.

Determining what you value most will save you many agonizing decisions and sleepless nights later. A good way of getting started in goal-setting is to write down what you perceive as the pros and cons of each possible goal.

Depending upon how the pros weigh in against the cons, you may actually find yourself putting your goals in a new order. This exercise suggests possibilities that you might not have imagined and can be priceless in terms of the impact that it can have on your financial future. Often times when people try to live frugally – scrimping and saving – they think they're being financially smart. In truth, they're limiting themselves.

Most people spend their lives imprisoned by financial ignorance. It shows in their faces and in their attitudes, especially as they grow older. They begin to look like wild lions trapped in their cages, pacing back and forth while they mull over what happened to the life they once knew.

How can you escape this fate? Draft a series of personalized financial plans: One for security, another for comfort, and a third for rich. This will help you visualize the possibilities.

Step 1 - Write a Plan for Lifetime Financial Security

What does security mean to you? The absence of stress and worry? Few, if any, sleepless nights? Being in a better often? Determine exactly what you need to do to achieve your vision of security.

If you've decided that your first priority is to be rich, this step may see mechanical and boring - even unnecessary. Because when you plan for security, you're planning for a world of 'not enough.' One of the goals of this step is to motivate you to reach beyond a goal that might limit your potential.

Step 2: Write a Plan for Lifetime Comfort

What does comfort mean to you? A big house and two cars? A house, a vacation cottage and three cars? Obviously, this plan will be a little more aggressive than the first one. And it will be less boring because when you plan for a world 'enough,' there are more choices open to you. Your challenge will be to choose.

Step 3: Write a Financial Plan for Becoming Rich

This will be your most aggressive plan – and the most exciting. For, now, you are anticipating a world of 'more than enough.' You'll be faced with a myriad of choices, for opportunities to make money are all around you. As with the previous plan, your challenge will be coping with the abundance of possibilities. You don't want to wander through life like a kid in a candy store, so distracted by choices that you can never make one.

Think this plan through carefully and thoroughly. This exercise illuminates the fact that you have choices – more than you've ever imagined and that you need to make decisions about those choices. Too many people go from job to job or business to business without getting where they want to be financially. They wander through life without a plan and all the while their most precious asset – time – is fleeting.

This doesn't have to happen to you.

Rich Dad said, "The riskiest investor of all is a person who is out of control of his or her personal financial statement. These are people who have nothing but liabilities that they think are assets and as much in expenses as they have in income and whose only source of income is their labor."

Understanding your Financial Statement is the foundation for taking control of your personal finances. Rich Dad believes the relationship between the Income Statement and the Balance Sheet was everything. What is the first step to financial freedom? Take control of your Financial Statement.

Cash Flow Pattern of the Poor (or a young person still living at home): The poor spend every penny they make and they have no assets and only liabilities. The cash flow is limited to income and expenses and the cash flow pattern of the poor reflects income from a job that is used to pay expenses like rent, food, clothes, transportation and taxes.

Cash Flow Pattern of the Middle Class: Individuals in the middle class accumulated more debt as they become more successful. A pay raise qualifies them to borrow more money from the bank so they can buy personal items like bigger cars, vacation homes, boats and motor homes. Their wage income comes in and is spent on current expenses and then on paying off this personal debt. As their income increases, so does their personal debt. This is what we call the Rat Race.

Cash Flow Pattern of the Rich: The rich have their assets work for them. They have gained control over their expenses and focus on acquiring or building assets. Their businesses pay most of their expenses and they have few, if any, personal liabilities. An individual's cash flow pattern may show a combination of these three types. Which pattern does your financial statement reflect? What story does your financial statement tell? Are you in control of your expenses?

To learn more about cashflow, we recommend the following Rich Dad Bestselling book, Rich Dad’s CASHFLOW Quadrant