“If you have dug yourself into a hole… stop digging.” — Tom Grites

As often discussed, Robert Kiyosaki’s book, Rich Dad Poor Dad, is my favorite “money” bestseller. I glanced through Lesson Two during my flight last week. If you read the book and find yourself getting annoyed with the Rich Dad vs Poor Dad parable, then cut to the chase and just read Lesson Two.

To make his point about assets & liabilities and income & expenses, he uses the example of a recently married, happy, highly educated young couple that moves in together in one of their cramped rented apartments. “Immediately they realize that they are saving money because two can live as cheaply as one.”

“The problem is, the apartment is cramped. They decide to save money to buy their dream home so they can have kids. They now have two incomes, and they begin to focus on their careers. Their incomes begin to increase. As their income goes up… their expenses goes up as well.”

“As a result of their incomes going up, they decide to go out and buy the house of their dreams. Once in their house, they have a new tax, called property tax. Then, they buy a new car, new furniture and new appliances to match their new house. All of a sudden, they wake up and their liabilities column is full of mortgage debt and credit-card debt.”

“They’re now trapped in the rat race. A child comes along. They work harder. The process repeats itself. More money and higher taxes, also called bracket creep. A credit card comes in the mail. They use it. It maxes out. A loan company calls and says their greatest “asset,” their home, has appreciated in value. They go for it, and pay off those high-interest credit cards. They breathe a sigh of relief.” But the process continues to repeat itself and they ask him, “Can you tell us how to make more money?”

“Their spending habits have caused them to seek more income.” Sound familiar. This is pretty similar to my experience (minus the credit-card debt) and I’m certain similar to many of your stories. It’s the American way.

“Many great financial problems are caused by going along with the crowd and keeping up with the Joneses.” Kiyosaki’s basic concept is to spend money on assets (something that puts money into your pocket) and not liabilities (something that takes money out of your pocket), to increase income through passive producing assets (rental properties) and minimize your expenses (living within your means and on a budget).

It really is a simple formula. Executing on it is what takes discipline. All of this is top of mind because Jeanine (my partner) and I are ramping up to start a family… “A child comes along. They work harder.” More about this in another post… that was my attempt at foreshadowing.

Just remember Kiyosaki’s simple observation:

1. The rich buy assets.
2. The poor only have expenses.
3. The middle class buy liabilities they think are assets.

Be rich!