Assets, liabilities and the difference most people never see

Rich Dad Poor Dad has sold more than 40 million copies and is probably the most widely read book on personal finance there is. It is also one of the most criticised. Both facts deserve to be taken seriously, and that is what makes it worth going through.

The book is built as a story about two father figures: the author’s own father, highly educated and securely employed, and “rich dad”, a friend’s father with little formal education and his own business. The two give contradictory advice, and the whole book is the reckoning between them.

Assets and liabilities

The core is a definition. An asset is something that puts money in your pocket. A liability is something that takes money out of it. No more complicated than that.

It sounds trivial, but the consequence is uncomfortable: much of what we call investments lands on the wrong side. A home you live in, with a mortgage, insurance, maintenance and council charges, takes money out of your pocket every month. A car does the same. By Kiyosaki’s definition they are therefore liabilities, whatever they are worth on paper.

Kiyosaki's test – which way do the money flow?

The thing	What it does to your pocket each month	By his definition
A rental property with positive cash flow	Puts money in	Asset
The home you live in, with a mortgage	Takes money out – interest, insurance, maintenance, tax	Liability
The car	Takes money out, and loses value	Liability
Dividend-paying shares	Put money in	Asset

Note that this is not the accounting definition. In a set of accounts the house is an asset and the mortgage is a liability, separately. Kiyosaki uses the words in his own way, and that is one of the things professionals object to. His point is practical all the same: look at the cash flow, not at the label.

The rat race

The image he uses for the trap is a wheel. You get a higher salary, and spend more. A bigger house, a more expensive car, higher fixed costs. Spending grows in step with income, and you are as exposed as before – just at a higher level.

The way out is not through earning more, but through building income that does not require you to show up at work. That is where he wants the surplus to go: into something that returns cash flow.

Working to learn

One of the better pieces of advice in the book has nothing to do with investing. Choose a job by what you learn, not only by what it pays. Sales, negotiation, accounting, communication – skills that follow you whatever you end up doing.

What the criticism is about

This has to be included, because the book is often sold without it:

• “Rich dad” is probably not a real person. Kiyosaki has never been able to document who he was, and has suggested in interviews that the figure is a construction.
• The advice is vague. The book tells you to acquire assets, but says little about how. The specifics sit in the courses and games sold alongside.
• It recommends debt and leverage without giving equal weight to what happens when the market turns. Several of the examples assume rising prices.
• The definitions collide with professional terminology, which makes the book hard to build on if you later read something more thorough.

What still holds

The distinction between something that produces money and something that costs money is a useful lens, particularly for anyone who has never thought about money that way. So is the idea that financial literacy is a skill you can train, and that a higher salary alone is not a plan.

Read it as a doorway that gets you thinking – not as a recipe to follow.

The walk-through includes the criticism the book has met.

Main topics

• Kiyosaki's distinction between assets and liabilities
• Cash flow as the measure instead of salary
• Why your home may be an expense rather than an investment
• The rat race – why a higher salary does not solve the problem
• Working to learn, not to earn
• Financial literacy as a skill you can train
• The criticism of the book, and what is actually disputed

Questions this episode answers

• What is the real difference between an asset and a liability?
• Is my home an investment or an expense?
• What does Kiyosaki mean by the rat race?
• Why does a higher salary not make you rich?
• What is passive income, and how do you build it?
• What is the criticism of Rich Dad Poor Dad?
• What is worth taking from the book, and what should you ignore?

Key points

• Kiyosaki's definition is simple: an asset gives you money, a liability costs you money.
• Cash flow says more about your finances than your salary does.
• A higher salary does not solve the problem if spending grows at the same pace.
• Financial literacy is a skill, not something you are born with.
• The book is disputed, and its advice is vaguer than it seems.

Sources and references

• Robert T. Kiyosaki – Rich Dad Poor Dad (1997)