Top 10 Lessons Taught In Millionaire Next Door & Rich Dad Poor Dad
Our group chose to do our Practical Knowledge topic over the novels Millionaire Next Door and Rich Dad, Poor Dad. Both books taught readers general rules of thumb for how to become wealthy and in turn maintain this wealth. In reading these books, we felt that there were 10 major lessons that the authors were trying to get across to their readers. Each of these lessons is valuable for the students in this class as they leave college and look toward a career , new lifestyle, and potentially open a small business. The 10 lessons are: Focus on Education, Compete in a Non-Attractive Market, Hire Smart People, Know the Difference Between an Asset and a Liability, Avoid the Cycle of Greed and Fear, Live Below your Means, Stick to a Budget, Appearance Isn’t Everything, Know the Difference Between Wealth and Net worth, and Teach Children the Real Value of Money. Both authors touched on each of these topics, and we feel that all of them are solid ideas one should consider when setting out to make the most of one’s assets, building one’s portfolio, or simply to learn better money management for business or personal use. The lessons organized in this paper start with the initial foundation necessary to achieve wealth to the maintenance and growth necessary to maintain it.
Focus on Education
Becoming wealthy does not happen by accident. In order to achieve wealth, one must be disciplined and understand the necessary knowledge and lifestyle choices it takes to get there. A formal education is useful and practical for your general competencies as well as your wallet, but something even more important to your long-term financial outcome is your financial education. Though both books recognize the importance of both a formal and a financial education, each had a different opinion which is more important. What can be gained from this is that they are both important in their own respects to achieving wealth in life.
In the book Millionaire Next Door, the author focuses on the importance of obtaining a degree from an institution of higher education. He believes that the key to wealth is to build a successful career, and, in order to meet the qualifications of the career, one must have a college education. Because the children of the affluent have the resources that many do not, the author stresses that it is important to use these resources for a solid education, so that they are not relying on the wealth of their family for their own stability in the future. The author concluded that money comes and goes, and if one does not have a solid education when times get tough, they may never recover from such a crisis.
A financial education is simply being educated on money. By being able to read balance sheets, cash flows, and other financial statements, one is more likely to not be able to read the number and see how they work together but to truly be able to read between the lines and interpret what those numbers mean.
This, however, is only one part of a person’s financial education. Being financially educated requires a person to understand the true value of money. It requires a person to be able to take that value and apply it in way in which the money begins to grow with little attention from the beneficiary. In other words, investing prudently, knowing when to spend and when to save money is key. It also involves “having the eye” for opportunities that others may not see that could be potentially profitable. The economy we live in is changing, and there is no such thing as a “safe” job anymore. Being able to take a lemon and make millions is trait of financially educated mind that active, always learning, and always looking for opportunities.
In the book Rich Dad, Poor Dad, the author puts more of an emphasis on the importance of a financial education, rather than a formal education. The author described his “Rich Dad” as a man who had little formal education but a strong financial education. The author believes that by knowing how to make money work for you instead of you working for money, one could achieve great wealth. Financially savvy people know how to leverage their own to money to make money. He explains several scenarios where the knowledge of money and how to make it work for you made up for his “Rich Dad’s” lack of formal education. Financial literacy played a key role in building his “Rich Dad’s” success. The author stresses that a good education is not enough. His “Poor Dad,” for example, was a very educated man who had trouble paying his bills on time as well as keeping up with his obligations. He found himself living paycheck to paycheck even though he was making a substantial amount of money.
The key component missing in many people’s lives is not how to make money but what to do with it after it is made. Closing one’s eyes and being oblivious to the nature of money can lead even someone highly educated into a debt-filled life. We, as students of Mays Business School have been through many classes that were supposed to teach us how to understand the fundamentals and inner-workings of business. However, many students come and then go not having learned how to manage money. A degree from an institution of higher education does not guarantee financial literacy.
In Millionaire Next Door, the author stresses teaching financial independence. Many times people think that they can handle a large sum of money, but when given to them, they do not have to first clue on how to manage and spend it wisely. Often times, when money comes, unwise spending patterns are only heightened.
Compete in a Non-Attractive Market
A non-attractive market is simply what the name implies: a market in which people generally would not want to do business. Non-attractive markets can be just as profitable as every other market, yet the main difference lies in the competitive advantage once the business has begun. In the novel Millionaire Next Door, the author focuses heavily on the idea that it is important to try to compete in an industry that may not be attractive to many people. In doing so, one is able to enter a market with fewer competitors. By finding an industry such as an auto parts store or trash and recycling services the level of competition is generally low. The fact of the matter is that very few people dream of selling auto parts or picking up trash and recycling for a living; therefore, those willing to step out of their comfort zone are potentially able to enter a very lucrative market.
Ricky Hux, owner of Brazos Valley Trash Valet, for example, has started a trash and recycling service is in the Bryan/College Station area. His advice to us was this: enter an industry that few want to join. A trash and recycling service is far from glamorous, but start up costs are relatively low, the market potential is huge, and the competition is low. Even if competitors see the profitability of Mr. Hux’s business and decide to imitate it, he will have the upper hand because he was one of the first movers in the Bryan/College Station area, he will have a clientele base, and he will have worked out many of the “kinks” in his business to the extent that he should have few problems with entry-level competition.
Hire Smart People
There are people everywhere in the world who are experts in their field and are willing, and prefer to work for someone else. Many of these people are lured by the sense of job security, a steady paycheck, and just by the pure fact that they will not have to run a business themselves. In the novel Rich Dad, Poor Dad, the author mentioned that he used people that were smarter than him to help run his business. He believed that by hiring people who were smarter than him, he could gain the advantage of their knowledge. He then took this untapped resource and turned them into an asset that benefit his company in ways he could not do if he were to try it on his own. He gave several examples of the types of people he looked for when he was hiring: lawyers, bankers, accountants, and managers. All of whom were capable of doing things that were far over his head. By using these people his business quickly became more and more successful. The author recommends to anyone who runs a business to hire people who are more capable than you to help you to operate your business that way your employees bring even more to the table when it comes to making business decisions. “Rich dad” did the same, and he believed that he could find some of the best employees while paying them less than they were truly worth because they never used their minds to stop and question the system.
On a similar note, Millionaire Next Door mentions the importance of finding a mentor. A mentor is able to provide a different perspective and broaden your vantage point in regards to consequences of potential actions. A mentor has had more experience, and thus, is able to share wisdom about paths not to take so as not to make the same mistakes.
Know the Difference Between an Asset and a Liability
Knowing the difference between an asset and liability is key when it comes to acquiring real wealth. Rich people generally acquire assets while middle-class and low income people generally accumulate liabilities they believe to be assets. This fundamental difference creates an ever growing gap between the “haves” and the “have-nots.”
An asset is defined as something that brings the owner additional income. An asset should be viewed as your money working for you. A liability, on the other hand, does just the opposite. It does not add to your income, it increases your expenses. Many times, people confuse liabilities as assets. One common misconception many people share is that their house is their greatest asset. In the book Rich Dad, Poor Dad, the author explains why this is not the case. A house, while it is an investment, is one that requires continuous cash flow for maintenance, taxes, mortgage payments, and the like, causing it to become a drain on your income.
It can be said that not every home is a liability. There are properties that actually make the owner money such as rental, “flip” properties, or properties bought low and immediately sold at a profit. In these circumstances, a home or real estate property could be considered an asset.
Some more examples given in the book Rich Dad, Poor Dad of assets are things such as stocks and bonds, mutual funds, Notes (IOUs), royalties, and businesses not requiring one’s presence. If you want to become wealthy, spend your life buying assets, not liabilities.
The author of Millionaire Next Door touches on this same subject, but he describes how people get themselves into costly liabilities solely for the purpose of showing off. The author states that in a neighborhood of $300,000 homes, the majority of people had an average income of only $60,000. These people were setting themselves up to be consistently living in debt.
In short, the reason many people have such a problem identifying assets and liabilities is because, often, there is such a fine line between the two. This is where a person’s financial education comes into play. By knowing how money works and being financially literate, one can distinguish the difference between a real asset and what others merely believe to be an asset.
Avoid the Cycle of Fear and Greed
In the novel Rich Dad, Poor Dad, the author uses the cycle of greed and fear to describe how many people live their lives. They put themselves in a situation where they have to make more and more money to just barely get by. The author begins by describing a young couple who buy a house that they can scarcely afford. Then when they receive a raise, they buy a car that they can which is out of their price range. This represents the greed portion of the cycle. The fear portion is the initial emotion that triggered the couple to begin to work in the first place: they were scared of being poor. This emotion, fear, however, evolves and becomes more of a fear of losing all of the things that they consume through their greed. Here enters the rat race. The lifestyle of wake up, go to work, pay bills, wake up, go to work, pay bills, and so forth.
The author stresses the importance of avoiding or breaking free of this cycle. Through recognizing one’s spending patterns and mindset toward money, one can begin to break free of the Rat Race. By doing this, unspent revenue can be used to accumulate assets instead of paying off liabilities.
As we learned in the previous section, assets should put money back into your wallet. By accumulating assets, the people who avoid the cycle of greed and fear and invest wisely are able to live off the revenues of the assets. This type of investment pays for itself many times over.
Live Below Your Means
This is a lesson that all parents try to teach their children but few get across because they do not lead by example. Living below your means involves not getting caught up in decisions to purchase the trendy things of the moment you cannot afford or purchasing a house you have to struggle to make payments on every month. The concept is simple: Spend less than you make. Both books spoke of the importance of this issue. Even though it is such a simple message, few people live this way.
One of the two dominating emotions listed above, greed, can be seen as a leading cause. People feel that they deserve rewards for working hard, so they consume. Often, people consume more than realize on unnecessary purchases.
Millionaire Next Door says that when a person’s income increases, they should not run to buy expensive, luxury items. Instead, their paycheck should be only a report card of their performance. This book really stresses that even most millionaires live by this rule. For example, the most popular driven car by millionaires is the Ford F-150. This is probably contrary to most people’s beliefs. Most would expect them to drive a Jaguar or Lexus, but no, these people are frugal and intentional with their money and spending patterns.
Stick to a Budget
Budgeting is an important skill for running a business or even just managing your personal finances. Without budgeting, most people are not very aware of their spending patterns. For example, one of our guest speakers, Charlie Lima spoke about a lack of budgeting for their marketing expenditures. He did not realize how much was being spent, and those expenses were affecting his business until the year’s end. This problem could have been prevented by simply creating a budget.
Budgeting is done at the beginning of the year and is used to give managers, families, and business owners a good idea of what they can spend, in what different areas of their life/business they can spend, and how much that will leave them at the end of the period. In the book Millionaire Next Door, the author gave several reasons why budgeting was so important for both businesses, as well as families. It is important to not only set a budget but to also make sure you and your household are held accountable to the budget. Set the budget and follow through. By only allowing yourself a small portion of income for each activity or area of life, you will be able to track how much you have spent and exactly where it has gone.
Appearance Isn’t Everything
Today, many people are caught up with their appearance and putting on the air of having money. They feel that it is important for them to look how they think others expect them to look. Some are in the mind set that they have to “keep up with the Joneses.”
The surprising truth though is that often the people with the most money are the ones you would not expect. Often millionaires look like average Joes. In the novel Millionaire Next Door, the author described a study that was done to see how wealthy people behaved. They took a group of multi-millionaires and put them in a penthouse suite of a hotel filled with caviar, expensive champagne, and other delicacies. Few, if any of them ate the lavish food or consumed any of the other extravagant offerings. This study was then repeated, except this time, they served sandwiches, beer, and other common foods. What was found was that the millionaires enjoyed those types of foods better than the stereotypical “rich people foods.”
Most people buy expensive items to portray to the world that they have money, whether this is truly the case or not. The lesson learned is often the rich do not look to be rich, and those who look rich may actually be in serious debt trying to pull off the “look.”
Know the Difference Between Wealth and Net Worth
As was mentioned previously, many people try to live beyond their means, amassing expensive homes or cars or the like. These people think they are accumulating wealth. What has been found though is that these people are lacking in the key difference of wealth and net worth.
Truth be told, wealth and net worth are not equal. In the novel Rich Dad, Poor Dad, the author discusses the difference between being genuinely wealthy as opposed to just having a lot of stuff. He said that some people may give off the “rich vibe” because they have the fancy house, the expensive car, and the designer clothes with the shoes to match, but these things do not amass wealth.
The difference between net worth and actual worth, or wealth, is net worth is simply an idea of what you paid for it yesterday and considering that same value to hold true today. Wealth on the other hand is an actual fair market value of the things a person owns. Acquiring wealth comes through your real assets, those mentioned by the author of Rich Dad, Poor Dad. Wealth is defined as a retained value, and even sometimes a value that continues to increase as time goes on. Net worth often is just the glamorous side of how much money a person wasted buying “stuff.”
People that do not know how to manage their money will invest in items that will only increase their “visual wealth”. People see some in Mercedes and automatically assume they have money. What the people do not know is that this driver leased the Mercedes for ten years and can barely afford the monthly payments.
The author of Rich Dad, Poor Dad labeled people who have many assets working for them as being wealthy, and people whose liabilities outweigh their assets as having a lot of net worth. Clearly, being wealthy is much better than having a high net worth, so in order to meet this criteria, one should acquire assets and reduce liabilities.
Teach Children the Real Value of Money
The final point to make is that the rich encourage their children to go out and make money. Further, they give them the tools they need to use the money prudently. Teaching children that they are not entitled to everything is a key aspect of parenting in wealthy households. When a child feels as though everything should be just handed to them and they should not have to work for anything, they are lacking the basic foundation of the actual value of the dollar.
In the book Millionaire Next Door, the author describes wealthy parents as those who encourage their children to go to college, get a degree, and earn their own money so they can see the importance of being financially independent. The book also describes the negative effects of the reverse situation. It describes how many affluent people do not take the time to teach their children how to manage money wisely. They want to give their children money because they themselves have worked hard to earn it, and they do not want to see their children struggle. However, when the child is struggling and the parent automatically comes to their rescue, they are “weakening the weak” as the book describes. Parents, often times, do not reward the child who is actually pursuing their own career and making it on their own. They give all their money, time and attention to the child who does not care to try hard enough to make it. They know that their parents will help them so there is no incentive to figure it out on their own. After this, the child is trained that help will always be available. The book talked about how often times the parents end up buying their child a house, new car and pay for their grandkids to attend private school. The cycle continues and the child remains dependent on their parents for majority of his or her life.
One of the ways the author of Rich Dad, Poor Dad attempts to combat the above issue and the life cycle of greed and fear is by helping parents to teach their children financial literacy at a young age through a game called CASHFLOW. He has designed a version of this game, CASHFLOW for kids, to help parents build their children’s financial IQ at young age.
By implementing the top 10 lessons the books Millionaire Next Door and Rich Dad, Poor Dad taught, a person is more likely to be able to meet the goal of attaining wealth, live financially independent, not in the rat race of this life, as well as better manage their money. This will lead to a better understanding of what money is, how to make it, how to spend it, and how to preserve it in such a way that it is an asset to their bank account which continues to grow and work for them.
- Kiyosaki, R, & Lechter, S. (1997). Rich dad poor dad. New York: Time Warner Book Group.
- Stanley, T, & William, D. (1998). Millionaire next door. New York: Simon & Schuster.
** All information included in this paper is gathered from the above two resources.