Rich Dad, Poor Dad

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who controls the past controls the future, who controls the present controls the past. The above box is an Income Statement, often called a Profit and Loss Statement. It measures income and expenses. Money in and money out. The bottom diagram is the Balance Sheet. It is called that because it is supposed to balance assets against liabilities. Many financial novices don't know the relationship between the Income Statement and the Balance Sheet. That relationship is vital to understand. The primary cause of financial struggle is simply not knowing the difference between an asset and a liability. The cause of the confusion is found in the definition of the two words. If you want a lesson in confusion, simply look up the words "asset" and "liability" in the dictionary. Now it may make sense to trained accountants, but to the average person, it may as well be written in Mandarin. You read the words in the definition, but true comprehension is difficult. So as I said earlier, my rich dad simply told two young boys that "assets put money in your pocket." Nice, simple and usable. "This is Cash Flow pattern of a liability." +------------------------+ |Income | |------------------------- | Expense | +-----|\-------------------+ | \------------------------------> ---------------------------|--------+ | Assets | Liabilities | | | | |_________|____________| Now that assets and liabilities have been defined through pictures, it may be easier to understand my definitions in words. An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket. This is really all you need to know. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend your life buying liabilities. It's not knowing the difference that causes most of the financial struggle in the real world.
who controls the past controls the future, who controls the present controls the past. Illiteracy, both in words and numbers, is the foundation of financial struggle. If people are having difficulties financially, there is something that they cannot read, either in numbers or words. Something is misunderstood. The rich are rich because they are more literate in different areas than people who struggle financially. So if you want to be rich and maintain your wealth, it's important to be financially literate, in words as well as numbers. The arrows in the diagrams represent the flow of cash, or "cash flow." Numbers alone really mean little. Just as words alone mean little. It's the story that counts. In financial reporting, reading numbers is looking for the plot, the story. The story of where the cash is flowing. In 80 percent of most families, the financial story is a story of working hard in an effort to get ahead. Not because they don't make money. But because they spend their lives buying liabilities instead of assets. For instance, this is the cash flow pattern of a poor person, or a young person still at home: Job (provides income)-> Expenses(Taxes Food Rent Clothes Fun Transportation) Asset (none) Liability (none) This is the cash flow pattern of a person in the middle class: Job (provides income)-> Expenses(Taxes Food Mortgage Clothes Fun Transportation) Asset (none) Liability (Mortgage Consumer loans Credit Cards) This is the cash flow pattern of a wealthy person: Assets(stocks bonds notes real estate intellectual property)->income (dividends interest rental income royalties) Liabilities (none) All of these diagrams were obviously oversimplified. Everyone has living expenses, the need for food, shelter and clothing. The diagrams show the flow of cash through a poor, middle class or wealthy person's life. It is the cash flow that tells the story. It is the story of how
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Rich Dad, Poor Dad

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