About 3 years ago to this date, Selenid and I read Rich Dad, Poor Dad by Robert Kiyosaki. In that book, a unique set of wealth building principles that I call the “Rich Dad, Poor Dad” principles are presented. And looking 3 years in the future, I can say that learning and enacting those principles has been life-changing for the better.
And a particular recent experience really got me thinking about this. It really surprised me just how far we had come.
I don’t think Rich Dad, Poor Dad or Robert Kiyosaki are infallible.
In fact there’s a lot of stuff that I think he is (kind of dangerously) wring about. Like that 401k investments are a waste of time. He also leans ultra conservative on economic and capitalist ideas which sometimes go too far for my taste.
But, I do think he gets a lot of things right. And has a skill from breaking down the sometimes seemingly complex topic of money and wealth in a very relatable, entertaining, and understandable way.
So I take what I find helpful and leave what isn’t.
My favorite Rich Dad, Poor Dad principles
Here are the three most important Rich Dad, Poor Dad principles to me:
- An asset is anything that you buy that then puts money in your pocket
- A liability is anything you buy that takes money out of your pocket
- Use assets to buy liabilities
They seem really simple. But remember, simplifiers or those who can make tricky topics simple, are usually the ones who understand that topic the best. As opposed to complexifiers.
This post contains a full breakdown of what makes assets and liabilities. But it always comes back to the basic tenets above.
For example, is your primary home an asset or liability?
Many traditionally say that it is an asset. However, your primary home does not put money in your pocket. It takes money out of your pocket in the form of mortgage payments, repairs, updates, taxes, insurance etc.
Yes, you could get lucky and sell your home with some appreciation (which is not always guaranteed). But that still doesn’t make it an asset. Because you are now homeless. Unless you buy another home that takes money out of your pocket.
So, your primary home is a liability.
But the principle that really got me and Selenid excited…
…was the third one above.
Use assets to buy liabilities. Once again, this is such a simple concept. But it was one that had completed evaded us up to that point in our lives.
Like all people, we of course want to enjoy nice things in life. And most of these things end up being liabilities – they take money out of our pocket. This led us to a largely scarcity mindset surrounding money. Because it seemed like we would be very limited in choosing the liabilities we could enjoy – even making a very high income! Obviously this mindset is not healthy. But it also holds true to a degree. If you rely only on your W2 or even 1099 income, that income dictates how many liabilities you can buy while keeping afloat.
But this principle presents an alternative.
Instead of taking your income and buying liabilities to enjoy after which your money dried up, take your income, buy assets that create more money, and then use that money to buy liabilities, after which the asset continues to generate income.
It was, for me, a revolutionary idea that just made so much sense! So we started doing it.
Small multifamily real estate properties are our assets of choice
As many of you know, Selenid and I invest in small multifamily rental real estate properties. We started doing this shortly after reading Rich Dad, Poor Dad. These properties generate income in the form of rent above and beyond their expenses, such as mortgage, interest, maintenance, etc. We also make money from these properties in the form of tax advantages (although tax benefits are not a sole reason to invest in real estate).
And, to this point, we have largely used the income from our real estate properties to invest in more real estate – to buy more assets. That’s helped us scale quickly to 8 properties and 18 units (like this one) in a few years.
But recently we did something different. We used our real estate assets to buy a liability…
Buying our swing-set using the Rich Dad, Poor Dad principles
In May, Selenid and I received our tax refund. It was around $50,000. The reason we received a refund is because we perform cost segregations and use accelerate depreciation for our rental properties. This creates passive losses that we then can use against our active income because Selenid has Real Estate Professional tax status (more on REPS here).
So, that money was a form of income from our rental properties.
And in the past, we have taken these refunds and put them back into our investments. And we did that this year too. We took ~1/3 of the return and paid off more of my private student loans. We took ~1/3 and put it towards real estate investing.
But then we did something different
When we moved to Buffalo, we inherited a swing-set when we bought our house (in an intentional fashion that helps us grow our wealth).
It’s a great basic swing-set but a bit past its prime. And our kids are really obsessed with and enjoy playing on playgrounds and swing-sets. We felt we could do more with ours.
So, after shopping around, we took ~1/3 of our tax refund and bought a new swing-set. Actually we were able to keep a part of our old swing set that we liked, remove the other parts, and add on to the rest of it with new parts. So, we were able to build a real mega swing-set.
Our kids love it!
And yes, this is a lot of money to pay for a swing-set. But, it is definitely an example of an intentional spend. But we also did it with money that we had “grown” and invented via our assets. Which was a really cool feeling!
This is one of the first times that we have done this – using our assets to buy a liability. Especially for a large purchase. But it was really, really rewarding. And a validation of the course that we decided to take in working towards financial freedom.
But there’s even more
We wanted to create an area of the swing-set that was bordered off and had rubber mulch. The reason why is that some of the ground under our swing-set doesn’t have great grass. Plus this is where the risk of falling is highest so the rubber mulch can help soften the inevitable falls.
But, the swing-set company quoted us at around $4,000 to do this. Which is just crazy! So, Selenid become determined to do this ourselves.
Well, we took a weekend and, in about a total of 5 hours, did it! For about $700 in supplies. It was really fulfilling. For us, that $4,000 just didn’t match up with our goal of intentional spending. And honestly we had fun making it and getting the kids involved.
What’s the lesson here?
I hope this little anecdote serves its purpose of illustrating just how powerful a small mindset shift can be.
Eventually, these assets will help fund a large proportion of our retirement/financial freedom. And for now, they can help us buy liabilities that we enjoy intentionally.
Yes, this Rich Dad, Poor Dad principle requires more patience. Because you need to buy assets first. Then liabilities. But in the long run, this is the way to go!
In the meantime, here are some great ways to starting building assets and creating alternative flows of income!
- A Real Estate Investing Guide for Physicians
- Physician Side Gigs to Make You Passive Money
- New Net Worth Update: Almost a Millionaire
- Net Worth and Wealth Are Different: Does It Matter?
What do you think? Have you ever used assets to buy liabilities? How did it feel? If not, do you think you could do this? Let me know in the comments below!