The Danger of Being Rich

We’ve all heard about the tale of an elf and gold. You know, the story that starts off with a short, scrawny elf with a scruffy shirt, shabby shoes, and stained shorts. Displaying a solemn face, the elf walks along a forest, looking at the autumn leaves being blown off trees by the cool crisp air. The elf’s serious eyes reflect the colors of the leaves as they gently travel to the ground. Squash, pumpkin, cranberry – these are the colors the elf sees on all the trees.

Later that day, clouds cluster together as if in a club with a crazy DJ. Droplets of water drizzle from the sky for quite a duration of time. The rain clears. The elf sees seven lovely rays of light. One is red; the other, orange; the remainder, yellow, green, blue, indigo, and violet. Bored, the elf follows the reflection to the other side of the forest. He sees that the end of the rainbow leads to a smiling face of a carved pumpkin. As he approaches the fruit, the elf discovers lots and gold coins. The grim elf becomes gleeful. He’s finally rich! With his gold, the elf goes back to his village and buys fancy items. He shows off his nice stuff to the other villagers.

As the months go by, the elf continues to spend money. His supply of coins seems endless, until he runs out of them. He is shocked. How could he have run out of money so soon? He was, after all, rich.

Perhaps, as you read along, you thought to yourself, “I have never heard of this story before.” Yet, you have. Through the news, you hear about this all the time. Someone wins the lottery. Said person shows off on national television. The winner spends carelessly. Then he is broke again. What’s the problem? That amount of money should set one up for life. The problem is, being rich means that you have a lot of money. That’s it. Onto itself, it means nothing else. You never want to be rich. What you desire is wealth.

How is being wealthy different from being rich? As Robert Kiyosaki explained in his book, Rich Dad, Poor Dad, the former requires assets, while the latter does not. Kiyosaki defines an asset as anything that puts money in your pocket and a liability as anything that takes money out of your pocket. If you have an asset, then you make money while sleeping. Wealthy people don’t work for their money, their money works for them. Such people generate “passive” income. On the other hand, the rich, middle class, and poor work for their money.

Another difference between wealthy people and rich people is that the former have financial acumen, which Kiyosaki labels as “financial I.Q.,” while the latter don’t. Think about it. You don’t have to be as sharp as a sword to be rich. Those lottery winners sure weren’t. However, you need to hone your financial and marketing skills to become wealthy. You need to spot opportunities more quickly than a soaring falcon pinpoints opossums. You also need to understand that the house that you live in and the cars you drive are not assets. They are liabilities, according to Kiyosaki. They fail to put money in your pocket. Rich, middle-class, and poor people complicate these definitions. Wealthy people don’t.

Since that house and car mentioned above are liabilities, what are true examples of assets? A house that you buy for $250,000 and sell for $500,000. That puts $250,000 of liquid income into your bank account. Let’s say you see another house listed for $425,000 with an interest rate of 7%. You provide a substantial down payment of $375,000. The monthly payment comes out to be less than $680 per month. You charge the tenant $2,700 per month to live in the house. You hire a property manager that takes $300 per month. After all that, you generate a cash flow of over $1,000 per month. Remember that stocks, bonds, mutual trusts, and even start-ups can be assets as well.

When it comes to understanding how to make money, wealthy people have an internal locus of control. In contrast, rich people have an external locus of control. In other words, wealthy people hold themselves accountable for creatively searching for chances to make money. Rich, middle-class, and poor people rely on an employer to supply them with a paycheck every month. This is one of the primary lessons Kiyosaki learned from his “wealthy dad” as a kid.

When he was a boy, Kiyosaki had a friend named Mike. Mike requested that his father teach him and Kiyosaki how to become wealthy. His father accepted the request. Mike’s dad was Kiyosaki’s “wealthy dad.” Kiyosaki called him “rich dad” for marketing purposes. “Rich Dad, Poor Dad” sounds catchier than “Wealthy Dad, Normal Dad,” hence the book title.

How did Mike’s dad instill this lesson into Kiyosaki? He gave nine-year-old Kiyosaki, along with Mike, a job. The job involved performing menial tasks for three hours every Saturday. The pay was about $1.30 an hour in today’s money (2023). After three months, Kiyosaki asserted that he wanted a pay raise. Mike’s father responded to this request by changing Kiyosaki’s salary to $0.00 an hour. You read right – $0.

From this, Kiyosaki learned that he needs to use his head and figure out a way to make money. Relying on his boss did not suffice. Kiyosaki and Mike came up with a plan to make money. They allowed their elementary school and neighborhood peers to read magazines in exchange for money. The business was a success! They made plenty of money. Unfortunately, due to the neighborhood becoming more dangerous, the business had to shut down. Paying for security was not within the boys’ budget.

This was a part of Mike’s dad’s master plan. Kiyosaki’s “wealthy dad” refused to teach by lecturing. The businessman believed that words were not enough to properly relay business lessons. With lectures, the boys would have learned nothing. However, through strife and passion, the boys learned their first lesson about wealthy people. Wealthy people look to themselves to make money. Rich, middle-class, and poor people point the finger elsewhere for any financial misfortune that comes their way. Outsourcing the blame outside of themselves, they never amass wealth.

Another difference between the wealthy and non-wealthy involves money management. Wealthy people purchase their fancy toys using the money they generate with assets, says Kiyosaki. Loads of rich, middle-class, and poor people take out loans to buy their “wants.” This is called debt spending. Debt spending precludes the accumulation of wealth. The habit also showcases a serious lack of financial acumen. Again, you don’t have to be smart to be rich. You just have to have a lot of money. A professional athlete who makes millions of dollars per year but avoids financial planning like a fatal plague has lots of money. Homer Simpson can become rich if he wins the lotto.

Here’s a similarity between the wealthy and everyone else: financial risk-taking. Most people in western nations love to take financial risks. Where the wealthy and everyone else differ lie in the type of risks they take. Wealthy people take calculated risks, be they big or small. They analyze a market and then put money that they can afford to lose into those markets. If they hit a home run, great; otherwise, they learn from the loss and keep it moving. The average person risks money recklessly, hence the national credit card debt of over a trillion dollars. They spend more money than they make, directing that money into liabilities – mansions, super cars, vacations. The spending continues until they find themselves in deep trouble.

Using two people as examples for the above will more lucidly illustrate the point. These people will be William and Richard. William is wealthy; Richard, rich. Both have a wife and two tenderly young children. William has 27 assets that earn him a total of $500,000 per year in semi-passive income. These assets include real estate, stocks, and start-ups. He has no boss.

Richard is a CEO of a Fortune 500 company. The salary for his position is $500,000 per year. William, having saved up $1,000,000 across multiple bank accounts, decides to buy a house in full for $300,000 for his family to live in. He buys another house for $200,000, hires a property manager, and gets his first tenant. He now has 28 assets. Richard, making it his life mission to keep up with the Joneses, takes out a $1,500,000 mortgage on a house by the beach.  The executive buys BMWs and Mercedes and goes on yearly trips to exotic places. He gets many toys as well. In total, he accrues $310,000 in credit card and personal debt. He also has $200,000 in student loan debt.

Five years later, the economy takes a substantial hit. Job markets become saturated. You look to the left and see thousands of employees get fired. You look to the right and see thousands of citizens applying for government assistance. What about our two examples? William has only 19 of the original 28 assets left. He now makes only $270,000 per year from his 19 assets, just over half of the money he was bringing in years prior. How will he pay off any of his debts? He won’t. He has $0 in credit card debt and $0 in student loan debt. His tenants pay his mortgages for him.

Richard, on the other hand, is faring much worse. The CEO was fired from his job a few months ago. He’s struggling to find another job and has nothing saved in the bank. He applies for loans so his family can survive. The value of his house is now only $1,000,000. If he attempts to sell the house, he’ll still have a monumental amount of money left on the mortgage. Don’t forget his personal and student loan debts. Richard is deep in the water. He owes the government and a few banks large sums of money. The banks decide to cut him off. Richard declares bankruptcy. His family suffers.

As you can see, both William and Richard took heavy financial risks, yet one of them took smart risks and the other took dumb risks. One put his financial acumen and business skills to the test, sharpening both through his triumphs and defeats. The other allowed an MBA and job position to delude him into thinking that he had masterful money management skills. One used his “passive” income to pay for his lifestyle; the other, debt. For one, the goal was financial independence and freedom; for the other, the goal was to increase his status and become a Jones.

For the third time, you don’t have to be smart to be rich, you just have to have a lot of money. Conversely, you must be smart to be wealthy. If you are still reading this, you’re smart. Dummies don’t read. You innately have what it takes to become wealthy. Don’t take my word for it, I’m neither wealthy nor rich…yet. Put your trust into Kiyosaki. His book, Rich Dad, Poor Dad, published first in 1997, has aged very well. Kiyosaki stated that you need only elementary school level math to become wealthy. Business savviness is gained through trial and error. You have no need to climb an ivory tower into the ionosphere to grasp the contents of the book. Kiyosaki’s book is written to be understood by the common man. It’s as clear as water.

In this day and age, with inflation skyrocketing, becoming wealthy is a wise choice. Being rich is risky.

Watch Kiyosaki’s interview with Oprah Winfrey. When he said “rich,” he meant “wealthy.” The word “rich” is, again, catchier and more marketable.