Robert Kiyosaki Is Right--Kind Of

His 'Rich Dad, Poor Dad' schtick gets pretty old pretty quick but sometimes the guy makes sense.  I think the main thing that drives me nuts (and why he and Suze have big book contracts and I don't--a bit of writer's envy here perhaps?) is the way he kind of glosses over the hard work.  I always say finance is simple.  It is simple to get rich--spend less than you make.  Simple but a lot of hard work.  Bobby Kiyosaki's path to riches is simple, usually involving real estate, but he, as I said, tends to gloss over the hard work involved.  Which explains the attraction of his books--lay out the premise, tell a bunch of real life anecdotes, smile a lot (this applies to his appearences on PBS of all places), assure everybody that getting rich is easy, put up your feet and count your money.  You can make a lot of money in real estate but you are going to do a lot of work. 

But, like I said, he does make sense sometimes.  Found this article--he is in bold, I'm not.  Let's go through it and look for the hard work.

When I was young, people lived from paycheck to paycheck. Today, it seems like they live from credit card payment to credit card payment.  A bit of an overstatement but Bobby knows you have to grab the reader.

Most of us know that millions of Americans are deeply mired in credit card debt. Many financial experts have said repeatedly, "Get out your scissors and cut up your credit cards." While this may sound like good advice, to me it seems like a painful, short-sighted answer to a more complex problem.  Ok, here Bobby makes the clown with the huge credit card balances feel better about himself/herself.  Nice touch.

That problem is a lack of financial education. Why don't we teach kids about money in school? Rich or poor, smart or not-so-smart, we all use money. Yet, while there are a few schools beginning to offer some financial education, it seems that most educators believe money isn't a subject worthy of the hallowed halls of our learning institutions.  It's not your fault.  You are a victim.  Ok, Bobby, give you this one but maybe parents should have a little impact here as well though in principle I agree that finance should be taught in school.  May have a tough time finding any teachers that know anything about it.

A History of Credit

When I was a kid, there were no credit cards. Instead, retailers offered layaway plans. My mom would go to a store, such as a furniture outlet, choose the sofa she wanted, and put it on layaway. That meant she put a little money down to hold the sofa, and every payday she'd pay a little toward the purchase. When the sofa was paid for in full, she would bring it home.  Ok.

At that time, stores also offered "buy now, pay later" plans. This meant my mom could buy the sofa, sign a payment agreement, and take the sofa home that day.

Today, while a few stores still offer such plans or even variations of them, most people simply put their purchases on a credit card. But credit has been a part of American life even before there were credit cards. 

A Growth Industry

There are many reasons why credit cards have grown in popularity, including these:

• Wall Street has turned debt into an asset.

Today, your friendly banker issues you a credit card. He then sells your debt to a Wall Street firm, which collects your monthly payments at high interest rates -- which is why it's an asset to them.

The minute a Wall Street firm purchases your debt, your bank no longer has it on its financial statement, which then allows the bank to look for more credit card customers. That's one reason why you get so many credit card offers.  Hadn't thought of that.  Well, you learn something every day.

• The purchasing power of the dollar has dropped.

If you've followed these columns, you know that in 1971, President Nixon converted the U.S. dollar from money to a currency. That means the U.S. and other governments can print money faster than you can earn it -- or save it.  Don't totally buy that one.  There have been tons of writing on the causes of inflation and the conversion from the gold standard isn't the only culprit.

In terms of purchasing power, if you earned $50,000 in 1996, you would have to earn $100,000 in 2006 just to stay even. Many people aren't earning more even though prices are rising, so they make up the difference by using their credit cards for everyday purchases.

• When wages go up, so do taxes.

Because the purchasing power of the dollar has dropped, many people work harder, ask for raises, or take on extra work (or a second job) to earn more money. And when they earn more money, they move into higher tax brackets. 

Now here is a great point.  People think of what they make, your salary which is always in pre-tax dollars, but not what they bring home, after tax dollars.  A case in point--when first married my wife worked as she does now and I'm very proud of her.  But she was in teaching which doesn't pay much--better now but not much.  So when she got pregnant and stopped working to stay at home, I flipped out.  How were we going to make it on one salary?  Well, quite nicely actually because our expenses, for a while, went down and our income didn't go down that much because our taxes went down.  Back to Bobby.

Today, the alternative minimum tax (AMT) -- first levied in 1970 as a tax against the rich -- is penalizing the middle class. In many ways, the AMT is a form of double taxation. Many working people are now making more money but taking home less because they pay a higher percentage of taxes.

• The cost of retirement has gone up.

When I was young, many people worked for a company with a pension plan that covered them for as long as they lived. If they didn't have a pension plan, they could count on Social Security and Medicare.

That's all changed. Today, millions of workers need to be able to afford their day-to-day living as well as put enough money aside for when they can no longer work.

A bit of a stretch but we'll let it go.

I Love Credit Cards

Clearly, cutting up credit cards won't address these economic changes or solve America's debt problem.

In the real world, credit cards are essential. It would be extremely difficult to rent a car or make hotel and airline reservations without a credit card. It would also be tough to pick up the tab at a business lunch or shop online without a credit card.  Fine with that.

Personally, I love my credit cards because of the financial freedom they allow me, and my life would come to a grinding halt without them. Ok.

Fight Debt with Debt

This is where things get a little dicey.

Whenever anyone asks me how to solve the credit card problem, I tell them to fight fire with fire -- and debt with debt. The way I solve my increasing needs for cash is to go deeper into debt -- good debt, not bad debt.

For example, I use debt -- which is essentially tax-free money -- to invest in real estate, which in turn increases my cash flow. Not only do I not pay taxes on my debt, I could also pay no taxes (or very little in taxes) on the income from the debt. Hence I earn more but pay less in taxes.  You can make the argument for 'tax free money' but you have to pay it back which you don't with after tax money.

Obviously, in order to do this you need to know how to use debt wisely and responsibly, and must be able to find great investments that increase cash flow. Remember what I said about glossing things over--Bobby can never be accused of not warning you but the warning statement is one line, kind of like on a pack of cigarettes.  And he doesn't tell you "how to use debt wisely and responsibly" or how to "find great investments that increase cash flow."  That is the hard work part and where most people quit.  But I, Uncle Bill, will tell you how.  Case in point-a real estate investment.  1)  Study the market, look at 50 houses.  2)  Find one that nobody wants and has been on the market for a long time.  3)  Find out why nobody wants the property 4)  Fix the reason nobody wants the property 5)  Screen renter's ruthlessly. 6)  After doing that, be ready for getting screwed.  It happens.  Simple, yes.  Hard work--you bet.  Another reason I don't have a big book contract.  Bobby got away with a little disclaimer.  I told the truth, the hard work part that will make you a lot of money but be ready to work for it.

The Root of the Problem

Most financial experts will scoff at my "fight debt with debt" approach. They'll say my advice is based on flawed logic, and it may well be -- for most people. But I ask you to step back and take a look at the world of finance. As I stated earlier, Wall Street is able to take your debt and turn it into their asset. That's what financially smart people do, and it's one example of why rich people get richer.  Can't argue with that.  Smart people also work hard, another reason they get rich.

Unfortunately, most people take bad debt and turn it into horrible debt. This is especially true of poor people and people with bad credit, who have access to only the worst forms of debt and pay the highest interest rates on it.  This is kind of a chicken or the egg thing--are poor people and people with bad credit, poor because they have access only to debt or are they poor because they don't manage their debt wisely?  Either way they are in trouble so don't really see the value of the paragraph.

But their problem isn't credit cards -- it's a lack of financial know-how. And at the root of that lack of knowledge is our school system and its archaic curriculum, which is out of touch with the way people really live.  Full circle--blame it on the school system, you are a victim because you were not taught about APR's in the third grade.  I agree that schools should teach more about personal finance but bet there will still be people with huge credit card balances if they did.

Clearly, advising people to cut up their credit cards won't solve the problem of excessive credit card debt. A pair of scissors won't make anyone financially smarter, but some financial education just might. 

A simple answer and in the most part I agree with Bobby.  But it is not a solution.  Solutions require hard work and getting out of debt is hard work.  Doable but hard.  Another of Bobby's easy answers masks the truth. 

Comments

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[Tarun Trikha]

Nice Article. Get the Best of Robert Kiyosaki at http://robertkiyosakisecrets.com

[Jsiegel]

I think that the Rich Dad is somewhat of a scam artist...I read thru some his books and realized the guy is right, HE probably IS RICH. Buy selling me his books, he probably became rich...

and then I read http://www.johntreed.com/Kiyosaki.html

Then I saw him partner with Trump...and then I think I saw enough.

You rule Uncle Bill!