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- When I read Rich Dad, Poor Dad in my 20s, I took with me four lessons on building wealth that I had carried with me throughout my life and career.
- I learned that most people work for money, but the rich make money work for them; and IIt’s not how much you make — it’s how much you keep.
- I’ve also learned that the wealthy acquire assets while others acquire liabilities that they perceive as assets; and that financial distress often comes from a lifetime of working for someone else.
- SmartAsset’s free tool to find a financial planner to help you build wealth »
I became a fan of Robert Kiyosaki in my 20s. His book “Rich Dad, Poor Dad” opened my eyes to the world of wealth. Early in my life, I learned that rich people think and behave fundamentally differently about money compared to others. I started with the same ideas and strategies and found them exactly right.
There are four important lessons from “Rich Dad, Poor Dad” that changed my financial life:
1. Most people work for money – the rich have money to work for them
This lesson has become so cliché that many consider it a myth. But it’s absolutely true.
Talk to almost anyone about how to make money, the conversation will inevitably gravitate towards Work. It’s also not a wrong idea, at least not early in your life. The first step in building wealth is to create a basic income. If you have no assets and no skills that you can sell to the masses for money, then work is the easiest way to generate cash flow.
But the difference between the rich and the rest is that the rich don’t stay in the work phase for long. They realize early on that to get rich, they need to be the ones who hire others to work, not the job holders. By contrast, the rest of us typically spend our lives in the work phase. Once they believe work is the only way to make money, we’re in trouble. This will make you work for money your whole life.
But the rich learned early on the virtues of being a business owner. The most important thing about running a business is learning how to use your resources and people to make more money than ever before, by exchanging your own labor for wages.
For example, as a business owner, you can focus on your talents — those skills and abilities you possess that are most likely to make you big bucks. Once there, you can hire other people as employees or use subcontractors to do income-generating work. Essentially, you become an overseer of the business, not a front-line worker.
As the business becomes more profitable, you invest some of those profits into building your business and increasing your revenue.
2. It’s not how much money you make, it’s how much money you save
One of the things that the rich — especially the self-made rich — behave differently from everyone else is the emphasis on saving money.
For most people, one of the fundamental barriers is that budgets prioritize spending. Savings only get what’s left. For example, let’s say your household net income is $5,000 per month. After paying the necessary fees and some luxuries, you have $250 left to save.
This means that only 5% of your monthly net income goes into savings. In many families, even that money is eaten up by unexpected expenses. In other cases, the amounts seem so insignificant that saving efforts are abandoned altogether.
The situation is very different for the rich, especially those who aspire to be rich. While a financial planner might recommend saving and investing 10 or 15 percent of your income on a regular basis, the wealthy aspiring may save 30, 40, or even 50 percent or more of their income.
There is no doubt that saving so much money is only possible if you are able to successfully live below your own income level. This arrangement is usually temporary. As savings and investments grow, so do the income they generate (that’s what we’ll discuss in the next section).
Let’s use the same $5,000 monthly income we used above as an example. The only difference is that the person saves and invests 50% of their income or $2,500 per month. Assume that the average annual return on a stock and bond portfolio (but favoring stocks) would accumulate over $1,276,000 in just 20 years.
In other words, he will be a millionaire in 20 years. This doesn’t even reflect the fact that his income and his savings and investment contributions may increase over time. This shows that in the long run, how much you save has more impact than how much you earn.
3. The rich get assets — not liabilities they think are assets
One of the main misconceptions many people have about the rich is that they all inherit their money. But this belief is completely self-defeating. Look at any self-made millionaire, and chances are he or she has spent most of his or her life buying income-generating assets.
This is the exact opposite of what many others think. They embrace the consumer mentality of media and advertising culture and instead “invest” their money in personal property that they consider an asset. The best example is probably a family home. Most people consider it the biggest asset they own and even spend a disproportionate amount of their income on acquiring and maintaining it.
But even if a house can create value over time, it is not an income generating asset. Quite the opposite: it costs money to keep it. It’s really not an investment unless you sell it, take your cash, and invest it in something that will generate income.
To make matters worse, most middle-class households are well-funded. This may be understandable when buying a home for the first time. However, when there is sufficient equity in the home, many people do equity stripping by taking out a home equity line of credit and a second mortgage. Others engage in continuous refinancing, consolidating their first and second mortgages, or withdrawing cash every few years. The long-term result is that when home values rise, so does the amount of debt.
Other non-income-generating “assets” include automobiles, recreational equipment, furniture and recreational equipment, and vacation homes. All may feel good, but no one can generate any income.
Typical assets acquired by the wealthy include stocks, bonds, investment funds, income-producing real estate, REITs, and corporations. What all have in common is their ability to either generate steady income, or add value, or both.
Growth in income-generating assets leads to higher income over time. Ultimately, the income these assets generate may be enough for the owner to stop working and live comfortably.
4. A lifetime of working for someone else can lead to financial hardship
This is not to belittle anyone who has spent their whole life working for someone else. Rather, it’s to highlight the real potential of doing so has a lifetime of financial struggles for most people.The basic limiting factor for becoming an employee is you always trade time for money. And since you only have so much time to give your employer, it definitely limits your income.
But this is only the most obvious limitation. On a more basic level, your income is always less than what your efforts generate. For example, while your job might earn your employer $50 an hour, you can only earn $25 an hour. It must be because your employer cannot keep you working without profiting from your work.
There are also limits to what employers can pay for any position, regardless of the quality of your work. For example, let’s say you work in an occupation with a salary range of $50,000 to $75,000. Even if you exceed your best expectations for the job, you may never make more than $75,000.
In contrast, if you decide to start selling your skills on a business-to-business basis or to the public, you might find yourself making $50 an hour easily. As your skills and abilities improve, this may gradually increase to $75 an hour, $100 an hour, etc.
When you are self-employed, there is no cap on your income. The more you earn, the more you can save and invest for real wealth.
In my own business experience, I have also discovered a few other things. When you are self-employed, you are free to take your business in any direction. This means taking a more challenging and profitable business direction and even creating additional revenue streams.
Self-employment also brings other benefits. For example, there are retirement plans, like SEP IRAs and Solo 401(k)s, that allow you to earn a larger percentage of your income and build a larger retirement portfolio than typical employer plans.
In the case of a Solo 401(k), you can save up to $19,500 on the employee portion even if you’re self-employed. But the plan also allows you to save an additional 25% on your net business compensation, up to $56,000. Aside from the huge tax deductions you’ll get from this kind of plan, imagine how much money you could accumulate in 15 or 20 years? Seven-digit balances may be the rule rather than the exception.
Self-employment not only removes any income caps, but it also creates the ability to build assets faster than you can as an employee.
Building wealth may require some big changes
These lessons from Robert Kiyosaki are not meant to make you feel that if you’ve been handling your finances the way most people do, your situation is hopeless. Rather, it’s about giving you an idea of how the rich got rich. This involves significant behavioral changes. However, if you can make them part of your financial routine, the entire monetary dynamics of your life will be better.
Even if you can’t save and invest 50% of your income, set a more reasonable goal. 20% or 30% will take you longer to reach your goal, but it will eventually get you there. The point is, if you want to improve your finances in a meaningful way, you have to make bigger changes to the way you view and handle money.
Rich people already know that. You can be one of them by doing what they do.
Jeff Rose is an entrepreneur disguised as a certified financial planner, author, and blogger. Jeff is an Iraq combat veteran who served in the Army National Guard for 9 years, including a 17-month deployment to Iraq in 2005. He is best known for his award-winning blog GoodFinancialCents.com and book Financial Warrior: Take Control of Your Money and Invest in Your Future. He is also the founder of Wealth Hacker Labs, a movement to teach future generations of accelerated wealth-building strategies.