WHY TEACH FINANCIAL LITERACY?

Rule #1: You must know the difference between an asset and a liability, and buy assets.

you want to be rich, this is all you need to know. It is rule number

one. It is the only rule. This may sound absurdly simple, but most

people have no idea how profound this rule is. Most people struggle

financially because they do not know the difference between an asset

and a liability.

“Rich people acquire assets. The poor and middle class acquire

liabilities that they think are assets,” said rich dad.

When rich dad explained this to Mike and me, we thought he

was kidding. Here we were, nearly teenagers and waiting for the

secret to getting rich, and this was his answer. It was so simple that

we stopped for a long time to think about it.

“What is an asset?” asked Mike.

“Don’t worry right now,” said rich dad. “Just let the idea sink in.

If you can comprehend the simplicity, your life will have a plan and

be financially easy. It is simple. That is why the idea is missed.”

“You mean all we need to know is what an asset is, acquire them,

and we’ll be rich?” I asked.

Rich dad nodded his head. “It’s that simple.”

“If it’s that simple, how come everyone is not rich?” I asked.

Rich dad smiled. “Because people do not know the difference

between an asset and a liability.”

I remember asking, “How could adults be so misguided? If it is

that simple, if it is that important, why would everyone not want to

find out?”

It took rich dad only a few minutes to explain what assets and

liabilities were.

As an adult, I have difficulty explaining it to other adults. The

simplicity of the idea escapes them because they have been educated

differently. They were taught by other educated professionals, such

as bankers, accountants, real estate agents, financial planners, and so

forth. The difficulty comes in asking adults to unlearn, or become

children again. An intelligent adult often feels it is demeaning to

pay attention to simplistic definitions.

Rich dad believed in the KISS principle—Keep It Simple,

Stupid (or Keep It Super Simple)—so he kept it simple for us, and

that made our financial foundation strong.

So what causes the confusion? How could something so simple

be so screwed up? Why would someone buy an asset that was really

a liability? The answer is found in basic education.

We focus on the word “literacy” and not “financial literacy.”

What defines something to be an asset or a liability are not words.

In fact, if you really want to be confused, look up the words “asset”

and “liability” in the dictionary. I know

the definition may sound good to a

trained accountant, but for the average

person, it makes no sense. But we

adults are often too proud to admit that

something does not make sense.

To us young boys, rich dad said, “What defines an asset are not

words, but numbers. And if you can’t read the numbers, you can’t tell

an asset from a hole in the ground.” “In accounting,” rich dad would

say, “it’s not the numbers, but what the numbers are telling you. It’s just

like words. It’s not the words, but the story the words are telling you.”

“If you want to be rich, you’ve got to read and understand

numbers.” If I heard that once, I heard it a thousand times from my

rich dad. And I also heard, “The rich acquire assets, and the poor and

middle class acquire liabilities.”

Here is how to tell the difference between an asset and a liability.

Most accountants and financial professionals do not agree with

the definitions, but these simple drawings were the start of strong

financial foundations for two young boys.

An asset puts money

in my pocket.

A liability takes money

out of my pocket.

The reason I started with the story of the richest men in America

is to illustrate the flaw in believing that money will solve all problems.

That is why I cringe whenever I hear people ask me how to get rich

quicker, or where they should start. I often hear, “I’m in debt, so I need

to make more money.”

But more money will often not solve the problem. In fact, it may

compound the problem. Money often makes obvious our tragic human

flaws, putting a spotlight on what we

don’t know. That is why, all too often, a

person who comes into a sudden windfall

of cash—let’s say an inheritance, a pay

raise, or lottery winnings—soon returns

to the same financial mess, if not worse, than the mess they were in

before. Money only accentuates the cash-flow pattern running in your

head. If your pattern is to spend everything you get, most likely an

increase in cash will just result in an increase in spending. Thus, the

saying, “A fool and his money is one big party.”

I have said many times that we go to school to gain scholastic

and professional skills, both of which are important. We learn to

make money with our professional skills. In the 1960s when I was in

high school, if someone did well academically, people assumed this

bright student would go on to be a medical doctor because it was the

profession with the promise of the greatest financial reward.

Today, doctors face financial challenges I wouldn’t wish on my

worst enemy: insurance companies taking control of the business,

managed health care, government intervention, and malpractice suits.

Today, kids want to be famous athletes, movie stars, rock stars, beauty

queens, or CEOs because that is where the fame, money, and prestige

are. That is the reason it is so hard to motivate kids in school today.

Cash flow tells the story of how a person handles money.

They know that professional success is no longer solely linked to

academic success, as it once was.

Because students leave school without financial skills, millions

of educated people pursue their profession successfully, but later find

themselves struggling financially. They work harder but don’t get ahead.

What is missing from their education is not how to make money, but

how to manage money. It’s called financial aptitude—what you do with

the money once you make it, how to keep people from taking it from

you, how to keep it longer, and how to make that money work hard

for you. Most people don’t understand why they struggle financially

because they don’t understand cash flow. A person can be highly

educated, professionally successful, and financially illiterate. These

people often work harder than they need to because they learned how

to work hard, but not how to have their money work hard for them.