- Aug 3, 2020
Educated Dad's Financial StatementThis is interesting. In this section, Robert offers an illustration of his real (educated) father's financial statement. At the top, there are two equally sized boxes with labels of Income and Expense. Basically, this means that every penny that educated dad makes, he spends. Below these boxes are two additional boxes with labels of Asset and Liability. The Asset box is about one-fifth of the size of the liability box. This means that Robert's educated dad doesn't have much in the way of assets, but has a lot of liabilities. I'm guessing the assets are his retirement and the liabilities are his credit card bills, mortgage, insurance, car loans, etc... The way things are currently set up with his father, he'll never accumulate any wealth. Sure, if he retires and has his house paid off, he can downsize and move to Florida or something. He can also live off his retirement, which is what it was intended for. The question is, what did this man have to do to get to that position? He struggled, that's what. He was forced to fully entrench himself in the rat race, to work every day, to live on the edge, all the while, never accumulating any real wealth.
Rich Dad's Financial StatementAs for Robert's rich dad, the picture is quite different. Again, there are two boxes up top, but this time, the Income box is at least four times larger than the Expense box. Obviously, this means that the man spends much less than he earns. For the bottom two boxes, rich dad's Asset box is about five times larger than his Liability box. From what I've written above, this can be translated as a situation where rich dad's earning potential from his assets far outweigh any liabilities on which he owes. Robert says that the second illustration is a perfect example of why the rich get richer. It's not a bad thing. Certain people choose to invest their money, which pays them back, as opposed to burning it away on junk food and loans for things they can't afford. As a result, that invested money pays all of their bills, with some left over. Because of their frugal lifestyle, any leftover money gets reinvested, which makes even more money. Eventually, they become wealthy because of their good habits.
Why the Rich Get RicherIf you look at the income flow pattern of a wealthy person, you'll find that they spend most of their income on income producing assets, which, in turn, creates more income with which to purchase more income producing assets. What they've essentially created is a virtuous circle. Their money begets money. Their continued actions are making matters better. On the other hand, a poor or middle class person spends most of their money on liabilities; things that actually cost them more money in the future. What these people have essentially created is called a vicious circle. Their continued actions are making matters worse.
Why the Middle Class StruggleDebt is like a cancer that can easily hallow out any person's financial well-being. As people work and get older, they tend to make more money. With those greater earnings comes higher taxes and an increase in spending. Since the poor and middle class tend to spend on things that cost them money, not only up front, but well into the future, they'll need to either make even more money later on or borrow it to cover their expenses and liabilities. Whether we want to admit it or not, we all know this is true. The very first thing someone does after they get a raise is go out to dinner with friends to celebrate. The very first thing they do when they graduate college is buy a new car. The very first thing they do after they get married is buy a new house. In general, all poor and middle class people need to spend money is an excuse to spend it. Something that gives their minds the green light. A perfect example would be the government stimulus checks that were sent out during 2020 and early 2021 (in the U.S.). You know as well as I know, the first thing every single person asked themselves after they got that future taxpayer funded gift was, "What can I buy?" Some people, if they fit the mold I'm describing above, put the money down on a new car purchase, something that will cost them more in insurance, more in local property tax, more in principle, and more in interest. Those are future costs that could have been avoided if the buyer had any amount of self control. Basically, what they did was add to the foundation of what's already a debt-ridden society.
The problem is, the buyer I described above has no idea they did anything wrong. They merely followed the path laid before them by many other Americans. No one I know saves up to buy a car with cash. Everyone I know would much rather buy the car first and then pay for it later, all the while adding on interest payments for something they should never have paid interest on in the first place. In both cases, the car was paid for. The buyer had the money. The question is, when did the buyer have the money? Before the purchase or after? Taking on unnecessary debt is a very risky business. I know people who have been ruined by debt. Utterly ruined.
This post is part of a series: Rich Dad Poor Dad by Robert T. Kiyosaki