Sunday, December 15, 2013

A Simple, Powerful Diagram In The Book, Rich Dad Poor Dad

The book 'Rich Dad Poor Dad' is the best selling personal finance book of all time. The author Robert Kiyosaki uses simple diagrams to explain very complex money concepts. The most important of them all is to understand the difference between assets and liabilities.

This is how he explains it using this diagram. This one is arguably the most powerful diagram in personal finance.

The picture on the left is how the poor and the middle class handle money. They accumulate liabilities that continue to take money out of their pocket.

The picture on the right is how the rich handle money. They accumulate assets that put even more money in their pocket. According to the author, any one can choose to be rich or poor. It is not luck or inheritance. It is a matter or choice and financial literacy.

Think about it. If a person with a mindset depicted on the left gets $50,000, he or she might buy a luxury car to replace his current (probably still usable) car. It will cost the person more money in maintenance and will lose almost all its value in 10 years.

The person on the right might use the same $50,000 as down payment to get a mortgage for buying a single family home valued at $200,000, rent it out and use the rental income to service the debt, insurance and property tax. In ten years the person will have close to $80,000 in the assets without spending any additional money or time on the asset.

The power of a picture is incredible. I draw pictures every day at work to explain more mundane things like SAP SuccessFactors integration.

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