3 Things 'Rich Dad, Poor Dad' Gets Wrong About Building Wealth

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  • Rich Dad, Poor Dad has some good advice about investing in income-generating assets and avoiding unnecessary spending.
  • The book is dismissive of investors who play it safe and build wealth through mutual funds and 401(k)s.
  • You don't have to take huge risks to become financially independent.

Not only does the best-selling author belittle the lives of millions of working Americans, he's also wrong about their potential to become financially free.

I first read Rich Dad, Poor Dad when I was in my late twenties and approaching a new chapter in my career. Almost two decades later, with a few more life chapters under my belt, I returned to the best-selling book. I was shocked to find it advocated some pretty risky behavior.

To be fair, the book has some great nuggets of advice. Robert Kiyosaki stresses the importance of financial education, of building up income-generating assets, and of not spending money you don't have on things you desire. But there's a lot of dangerous advice in there as well. Here's a few examples

1. He twists the idea of paying yourself first

The advice to "pay yourself first" has been around for almost a century. It refers to the idea of always diverting a percentage of your income to your savings and investments. Some people even opt to automate the payment so they don't have to think about transferring money out of their checking account after payday. The rule of thumb is to put 5% or 10% of your income towards building wealth. Over time, this adds up -- especially if you can benefit from the power of compound interest.

Kiyosaki subverts this idea and takes it into dangerous territory. He tells his readers to pay themselves before they pay their bills and taxes. His thinking is that this will pressure you into coming up with imaginative ideas to make money and cover those outstanding bills. The truth is that if you don't pay your taxes, there can be serious repercussions. And if you don't pay your bills, you can be charged late fees, damage your credit score, and even face foreclosure on your property. Pay yourself first, but pay your bills too.

2. He's overly dismissive of diversified investments such as mutual funds and 401(k)s

A recent survey of millionaires showed that 8 out of 10 of them participated in their company's 401(k) plan. The Ramsey Solutions study showed that a good proportion of these wealthy Americans had built their fortunes by consistently investing in relatively safe assets. Kiyosaki dismisses this approach and says it causes people to miss out on the real opportunities when they come along.

He advocates what he calls "focusing" instead of diversification. "Do not do what poor and middle-class people do: put their few eggs in many baskets," he writes. "Put a lot of your eggs in a few baskets and FOCUS: Follow One Course Until Successful." While Kiyosaki does stress the importance of educating yourself, if you haven't been learning about investing since you were nine years old as he did, going all in on a single asset is not a smart idea.

Cryptocurrency investing is a good example of what's wrong with his advice. I'm a fan of crypto, but it was heartbreaking to read about the people who lost their life savings when one popular coin collapsed. Crypto prices have fallen across the board, and while they may recover and go on to reach new highs, there are no guarantees. Going all in on a high-risk asset can be a quick way to destroy your long-term wealth.

3. He glorifies risk and entrepreneurship

Throughout the book, Kiyosaki tells us to overcome the fear that's stopping us from becoming rich. He repeatedly criticizes the idea of being an employee, because you're making the owner and shareholder rich rather than yourself. Instead, he pushes the reader to build income-generating assets such as businesses, stocks, bonds, and other investments. This makes sense, it's just that you can do that without taking unnecessary risks.

Kiyosaki says he likes starting small companies and also explains how he made money in real estate. He thinks people stay in their jobs because they are scared of not having money or of failing, and he celebrates his rich dad's willingness to embrace risk versus his poor dad's dedication to his career.

"Rich dad knew that failure would only make him stronger and smarter," he writes. "He would take a loss and make it a win." It's absolutely true to say that learning from our mistakes is a good idea, and that fear holds us back. But that doesn't mean that it's wrong to play it safe with your money. Bear in mind that one of Kiyosaki's companies filed for bankruptcy in 2012.

I'm currently a freelancer, and during my career I've set up two failed businesses. I can certainly see the appeal of having a steady income and a thriving work environment. Entrepreneurs can make significant money, but many new businesses fail. It isn't the only way to be successful and it isn't right for everybody.

Bottom line

Kiyosaki is selling the idea that we can all leave the rat race, run our own businesses, come up with incredible ways to make money, and be rich by the time we are 50. I've skirted over some of his advice -- such as avoiding tax -- as that's more of a moral question than a financial one. But given that a large proportion of today's millionaires got there by consistently putting money aside in exactly the way Kiyosaki has dismissed, it raises questions about the rest of his wisdom.

Moreover, the idea of stimulating financial genius by actively putting yourself into risky situations by, say, not paying your bills, is far too glib. If desperation really had that effect, the millions of Americans who live close to the breadline would today be wealthier than Kiyosaki.

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