One of these men was his father, the other was his best friend’s father. Rich Dad, Poor Dad, gives incredible insight into how two nine year old boys learned at a young age the value of generating residual income through assets, and that being rich isn’t the same as being wealthy.
The Concept of Financial Freedom and Residual Income
Robert Kiyosaki explains in his book Rich Dad, Poor Dad that a large income isn’t the solution to financial freedom. The real freedom from finances is when the residual income an individual earns outweighs their expenses. That is, the assets owned by the individual are generating an income of their own accord. What he doesn’t mean is that the worker’s wage increases due to a promotion, working harder or more hours.
The problem in a consumer society is that as the wage increases, so too do the taxes, wants and other suddenly ‘necessary’ expenses. For example:
- the car needs an upgrade
- the kids must go to a private school
- university fees should be payed up front rather than on a fee help basis
- the credit card should have a higher limit
- the house isn’t big enough and needs to be replaced with a larger mortgage
Robert teaches the value of assets and the convicting difference between an asset and a liability. He comments on the middle class purchasing a house and seeing the mortgage as an investment rather than a liability, which is how the wealthy would view it. Not advocating renting instead, Robert challenges the reader to find ways to make the liability of purchasing a house less of a risk. This may be by:
- having a larger deposit
- borrowing funds from someone other than banks at a lower interest rate
- searching around for deals that are within ones financial threshold or even below so that they can be paid off that much quicker
- purchasing a property that can in the short term be sold for a much larger sum of money
He states, “The poor and middle class work for money. The rich have money work for them.” Rather than working to earn an income, the bigger picture should be to work to learn skills that will create a highly employable person. Learning to generate an income via other means leaves the employee able to work because they want to. Having a residual income also affords the chance to invest as opportunities arise.
Pay Yourself First
Robert tells the reader of an interesting concept that his rich dad suggested. The idea is that when the pay arrives, the earner first takes out money for themselves and then pays bills, fuel, food, etc.
Initially lost on this way of thinking, Robert questioned if he didn’t have enough money for that week, did he then ignore important bills because he’d paid himself first? Rich dad responded with a definite no. He suggested instead that because the bills were so pressing, the earner would be obligated to find some way to pay them, putting the mind to work to find a solution.
The result can often be that the earner still gets paid and finds another way to generate enough money to pay their bills. Rich dad argues that if this doesn’t happen, it’s all too easy for the earner to pay their bills and not worry about the fact that there wasn’t any money left over for them to use to invest and further generate income.
If paying self first becomes a habit, it becomes easier to find other ways to generate income and as more is able to be put aside, this can be invested and further generate income. For those wanting to get out of the 'rat race' of working to earn, Rich Dad, Poor Dad is well worth the read.
Chris Thomas - C. Thomas has studied and worked with horses since 2001. She teaches horse studies part time and is undertaking an Equine Science ...
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