J.C.’s Money Blog

I have a “kiyosaki is dumb” category on my blog, so I thought it would be prudent to do a book review of his hugely successful book, Rich Dad Poor Dad. I actually read this book the first time about 5 years ago, after it had been recommended to me by two different friends. I have decided to reread it and review it here.

Five years ago, I felt like a sucker the minute I completed my $16.95 transaction at the bookstore, as the clerk gleefully said he was looking forward to me coming back to buy the rest of the series. Having a minimum wage employee mocking you as financial moron is a bit of a blow to your ego, but I eagerly drove home with my shiny new copy of this highly recommended best seller. I read the entire book in one afternoon, and I felt pretty inspired to start my financial education. I would even say I have been mildly obsessed with personal finance since reading this book 5 years ago. Within a month, I had opened a brokerage account and bought my first stock, which put me on the road to where I am today.

So the facet for this book review: This book made a big impact on me, despite it’s being moronic. Read on if you want the details.

Chapter One - Rich Dad, Poor Dad

In Chapter One Kiyosaki lays the groundwork of the story then ends it with the poem “The road not taken” by Robert Frost to give you the idea that you are about to learn how to do things differently, and that will make all the difference… Of course the irony is that since you are reading a NY Times best seller, by reading the book you are actually taking a path very much traveled by.

Chapter Two - The Rich Don’t Work For Money

The book begins as an autobiography of a young boy growing up surrounded by kids who were apparently much more well off than he and his friend. They were mocked by their friends for not having the latest clothes and toys, and they decided they needed to learn how to make money. Bob’s own dad was a government worker who didn’t earn a great salary, but his friend Mike’s dad was an entrepreneur who actually owned several businesses. For the rest of the book, Kiyosaki compares his own dad’s, “poor dad’s”, philosophies to Mike’s dad’s, “rich dad’s”, philosophies on money.

Rich Dad’s Lesson #1 “The poor and the middle class work for money. The rich have money work for them.”

The book actually starts off as a very interesting read, and it makes a very useful generalization as the fundamental difference between the three classes, poor, middle, and upper classes, based on the way each class spends money.

Kiyosaki says each group has income and expenses. The middle and upper classes have liabilities, but the defining factor of the upper class is that they have assets. Now the key factor in Kiyosaki’s success is his redefinition of financial terms. He makes the bold claim that a house is not an asset if it is your primary residence. Of course this flies in the face of conventional wisdom and makes Kiyosaki seem controversial, but all he has done is changed his definitions of assets and liabilities as follows:

• Assets put money into your pocket,
• Liabilities take money out of your pocket.

Your house costs you money each month, since you must pay utilities, taxes, maintenance, and generally a mortgage payment. Your house costs you money each month, therefore it is not an asset, it is a liability. Of course in accounting terms the house is an asset, but the mortgage is a liability, but Bob doesn’t go into such boring details.

While Kiyosaki gives you patently incorrect definitions for these financial terms, these definitions are actually incredibly useful in starting to think a bit more about money. Using your primary residence as your biggest investment is not a good idea, although it is a widely employed strategy.

Chapter Three - Why Teach Financial Literacy

Here Kiyosaki draws some diagrams, which he uses pretty much any time he talks. If you define assets and liabilities the way he does, then they are actually nice aids in thinking about growing your net worth. Kiyosaki draws boxes to represent your cash flow (income and expenses) and balance sheet (assets and liabilities). He shows the relative sizes of each of these for his three groups of people, but one picture in particular really struck a chord with me. It’s labeled as Why the Rich get Richer, and here is a simplified (and pretty ugly) version of it.

Now what was so exciting to me was the following thought: If you have an asset, then it is generating income for you. With this income you can buy more assets, which generate more income, so that you can buy more assets, which in turn generate even more income! Wow! This is what they taught us not to do in engineering school.It’s a system with positive feedback. Systems with positive feedback spin out of control. Like when you put the microphone too close to a speaker, and any little noise picked up by the microphone gets amplified out of the speakers and is picked up again by the microphone a bit louder and amplified louder out the speakers again and again, until that tiny noise becomes an irritating screech. But in this case, spinning out of control means creating massive amounts of wealth instead of intolerable noise, so let’s do it!

Chapter three concludes with the following observation:

• The rich buy assets
• The poor only have expenses
• The middle class buys liabilities they think are assets

Here Kiyosaki reemphasizes his main theme of the book, in order to be rich money has to work for you. In the last statement, Kiyosaki implies that middle class people buy things like a big house, nice cars, expensive home furnishings, boats, etc. because they think they are assets, but really they are liabilities because they cause ongoing expenses and do not generate any cash-flow for their owners. These generalization are technically incorrect, but they are useful as a financial paradigm.

Chapter Four - Mind Your Own Business

Kiyosaki starts off the chapter with a story about Ray Kroc, the founder of McDonald’s, stating that his business was not selling hamburgers, but rather holding real estate. Kiyosaki argues that the problem many people have is that they focus too much on generating income instead of focusing on buying income generating assets. Kiyosaki states that you should separate your job from your business. I.e., keep your day job doing whatever it is you do, but focus your free time on building your assets, which are your “business”.

Chapter Five - The History of Taxes and the Power of Corporations

Here Kiyosaki begins to go into his hatred of taxes, often mentioning Robin Hood socialist taking from the rich and giving hand outs to the poor. I think it’s a bit simplistic on his part to focus solely on the social safety net aspects of taxes. Unless he would rather do without a national defense system, public education, roads, police and fire departments, and few other things I would deem worthwhile.

Kiyosaki ends the short chapter explaining some of the advantages of forming a corporation, namely tax advantages and protection of personal assets.

Chapter Six - The Rich Invent Money

Chapter six is the most ludicrous part of the book. Basically Kiyosaki goes into details of lots of deals he has made over the years, not to show off, but to show how easy it is to “invent money”, once you are “financially literate”. I remember thinking these deals he made seemed a bit optimistic, but now I think they are downright lies. Let’s take a look:

Buying a house with no money:

• Kiyosaki finds house worth $75,000 under bankruptcy
• Kiyosaki borrows $2,000 from friend as down payment on house, agrees to repay friend in 90 days plus $200 interest.
• Kiyosaki runs ad in paper for house for $60,000 and no money down in paper and has frenzy once house available for sale. House sells in minutes including a $2,500 loan processing fee he charges borrower.
• Kiyosaki has made $40,000 while only working 5 hours.

This story is BS. Why would the bankruptcy attorney sell the house for $20,000, when Kiyosaki could sell the house in minutes at $60,000. Kiyosaki makes a very complicated example here, when the essence of the story would be, this dumb bankruptcy attorney sold me a house for less than 1/3 of its value. I bought it and sold it in minutes and made a killing. This story here is proof enough to me that Kiyosaki is a liar.

Also, why would Kiyosaki borrow money at 10% in 3 months. That’s an APR of 46%! Unless he had terrible credit, he could get a cash advance from his credit card for much less. I guess when you can create money out of thin air, then you don’t need to worry about controlling your expenses.

After spinning this tall tale, Kiyosaki claims he did this with 6 other properties for a total of $190,000 in his spare time. That sure beats working for the man like a chump and trying to save up that much money.

Kiyosaki then talks about how he grows his real estate investment portfolio by trading up through some more ridiculous deals:

He buys a house for $45,000 that is really worth $65,000, except that no one else wanted to buy it (Uh, how is it worth $65,000 then Bob?) . But anyway, Bob buys this house for less than $0.70 on the dollar and a college professor moves in as his first tenant.

A year later the market picks up and he sells the house for $95,000 (The couple is from California, so they think it is cheap). Bob makes 120% on a house in a year. Bob is pretty lucky.

Then Bob makes a great discovery, a 12 unit apartment complex worth $450,000, but the owners lived in Germany, so they didn’t know what it was worth and just wanted to get rid of it, so Bob was able to pick it up for $300,000. Two years later he sells it for $495,000. Only a 65% gain in two years. I guess Bob’s luck was starting to run out.

Bob and his wife move to Phoenix to get out of the rain and promptly buy a 30 unit apartment for $875,000. Some undisclosed time later, a Colorado investor is offering $1.2 million for the property. Bob has the Midas touch.

Next Kiyosaki says he makes money buying private companies just before they go public. He gives the example of buying shares at $0.25 just before the company is going public at $2 a share, and from there they could even go to $20 or more!

Ok, Bob, a company is about to start offering shares at an IPO of $2, but they decided to sell to you for 1/8 of what they are about to make? These companies that are trying to raise capital just want to donate to the Kiyosaki charity fund or what?

Kiyosaki finishes the chapter with another ridiculous deal where he finds an apartment complex worth $2 million but manages to set the price at $1.2 million. He never bothers to raise the capital act on it, because another friend takes it and pays him a finder’s fee of $50,000. Bob walks out on a nearly finished $800,000 profit, because he doesn’t feel like it. Dude, what? Why am I taking financial advice from a guy who is either too lazy to rake in the dough, or too stupid to realize $800,000 windfall profits are good.

By the way, you can read a very good analysis of Robert Kiyosaki at John T. Reed’s homepage, where he gives much more detailed analysis and research into the fact that Kiyosaki is a fraud.

Phew, glad to have that off my chest. Let’s move on.

Chapter Seven - Work to Learn - Don’t Work for Money

By far the most boring chapter of the book, Kiyosaki makes the argument, that you should choose jobs based on what you can learn from them, not how much money you can make. Being really good at what you do is not the best way to make money, but rather having skills such as sales and marketing can make a real difference to your bottom line. Kiyosaki sort of makes fun of a guy unwilling to take the time and pay the money for seminars on marketing, and he also mentions that he himself buys tapes and attends courses to improve in these areas, since it is so important to invest in this “intelligence” that schools don’t teach.

Funny, he doesn’t say he goes to the library to read about these topics for free, could that be because Kiyosaki sells tapes and seminars?

Chapter Eight - Overcoming Obstacles

Chapter eight is standard self-help filler. He gives five reasons why people don’t get rich:

1. Fear
2. Cynicism
3. Laziness
4. Bad habits
5. Arrogance

There is plenty of standard stuff here, stories of the Alamo, Edison, and Colonel Sanders, etc.

Chapter Nine - Getting Started

Kiyosaki gives 10 steps to develop your financial genius:

1. Have a reason greater than reality. Getting rich is tough, so you need unreasonable reason to do it. Huh?
2. Choose daily. Kiyosaki advocates stuff he sells like audio tapes and weekend seminars.
3. Choose friends carefully. This is good advice, since you tend to drift towards acting like those you associate with.
4. Master a formula and then learn a new one. I don’t get this one. If you have mastered a formula, stick with it! Warren Buffet didn’t become the world’s richest person by learning new formulas.
5. Pay yourself first. Yup, you have got to have assets, and if you don’t stash away the cash right as soon as you get it, you will probably spend it.
6. Pay your brokers well. Kiyosaki says having well paid professionals working for him pays for itself. This is probably true once you have a huge balance sheet and your time becomes very valuable, but noone is going to care more about your bottom line than you, so starting off with no brokers makes sense to me.
7. Be an Indian giver. Here Kiyosaki is advocating investing and pulling out your investment amount as soon as possible, leaving only the gains invested. Psychologically this makes sense. You go in make money and get your initial investment back out, and you look for the next investment. The future gains made by your profits are then gravy. This is simply stupid. Whether an investment makes sense going forward has nothing to do how much you put in back in the past. Whether I bought shares of Microsoft in 1982 for $2 or $3 a share has absolutely no bearing on whether I should sell the stock today.
8. Assets buy luxuries. Kiyosaki is simply advocating delayed gratification, waiting until your assets generate enough money to pay for the luxuries, instead of buying them right away when you want them.
9. The need for heroes. Kiyosaki says his heroes are golf players and financial top dogs, and he follows their stats like he used to follow baseball players as a kid.
10. Teach and you shall receive. I think this is probably the best advice of the chapter. When you try to teach a subject, you are forced to think more deeply about it. When you can’t explain something and are faced with honest probing questions, you realize exactly where the weak points in your understanding are. The best reason to teach is really to learn.

Chapter Ten - Still Want More? Here are Some To Do’s

In the final chapter Kiyosaki urges you to take action now, and once again he advocates going to seminars and buying tapes.

The book even ends with some advertisements for more of Kiyosaki’s products, which I remember as being pretty disturbing to me the first time I read the book, but even so, I was really motivated to go out and learn more and start buying assets.

Several times throughout the book, Kiyosaki mentions his CASHFLOW board game, which is meant to teach the basics of financial literacy through simulation. However, this board game costs $195.00!

My final thoughts on Rich Dad Poor Dad

My second reading of this book raised my animosity towards this fraud even more, and I find myself wondering how this book temporarily resonated with me 5 years ago, and I would say it is for the following reasons:

1. Kiyosaki makes you feel like you are beginning to go against the flow of society. Everyone likes to feel like they are individuals that don’t act like the sheep in the mainstream. By recognizing with Kiyosaki that a house is not an “asset” (at least the way he defines it), you feel like suddenly you are more financially enlightened than accountants!
2. Kiyosaki hounds on the idea that financial education is inadequate in the school system. I agree 100%, in fact I think I’ll write up an article about my experiences with finance taught to me in my public school days.
3. Kiyosaki makes everything sound so glamorous. Kiyosaki doesn’t advocate saving, he advocates buying assets. Buying assets sounds like so much more fun than saving for retirement.

The book has some major flaws though. First, it is a transparent advertisement for more of Kiyosaki’s products. I never bought any of his other 18 books, overpriced board games, seminars, or audio tapes. I did thumb through his books on investing at the library enough to see that he never seems to give any concrete advice, and he finds ways to repackage the same old topics over and over again.

 

As I pointed out earlier, the stories he tells about the financial gains he has consistently made are obviously fabrications. Kiyosaki makes it clear once a month or so in his Yahoo! articles that he has no real financial acumen, but that he is indeed a master salesman and marketer.

 

All in all, this is a terrible book. While I attributed my initial motivation to focus on my personal finances to this book, I am certain that almost any other personal finance book would have had the same effect.

 

I give this book a 4/10. It’s more of an advertisement than a book, its not very well organized, but it is very motivating.