Rich Dad, Poor Dad

25th September, 2005 with responses from kyb and Chris Lautischer

I recently read Rich Dad, Poor Dad by Robert Kiyosaki et al. I thought it was so good that I went on to read Rich Dad, Poor Dad 2: Cash Flow Quadrant.

Unfortunately, this has caused a few problems with my friends. When I get excited about things I talk about them, unceasingly. My friends are truly wonderful people, but there's only so much anyone can take. Not good.

So what follows is an explanation of what I thought Mr Kiyosaki was talking about. I bought a flat last year for approximately £100,000. I could afford this place because although the mortgage (plus a few other costs) was about £250 per month more than my previous rent, I had more than that left over every month. All very nice, but would you spend £100,000 based on just that logic?

Of course you wouldn't. You'd:

  1. take inflation into account to count against house value appreciation and payment depreciation over the full 25 years of the mortgage
  2. take into account the various costs and limitations you will incur by signing up to a 25 year contract
  3. work out the total cost of renting, taking into account savings and investments gained (say with the £250 left over every month)
  4. make sure you have a financial plan for the next 25 years before you sign those years away to the bank
  5. do lots of other things I can't even think of because I do not have sufficient financial education

I know you would, because failure to do those things and more before spending a total of £200,000 (with interest most people pay double the buying price to the bank) over 25 years would be insane.

The point that I took away from the book is that I do not have sufficient financial education to make competent decisions about my life. I cannot blame anyone else, it is my fault. Further more, now that I recognise this, it would be incompetent of me to continue to abdicate from my financial responsibility to both myself and loved ones.

A response from kyb

28th September, 2005

It's certainly true that you should consider those things. Particularly now that the world economy is in such an unusual state, and one of the contributing factors is overvalued houses in anglosaxon economies. It's quite possible we'll be seeing a hard landing for the whole global economy in a few years.

When you're considering financial things, remember to put a price on intangibles as well. You have considerably more freedom and privacy in a house you own yourself than in a rented place (particularly if shared), and you need to work out how much that's worth to you every month. If you compared the rent for a place like your current place, you'd probably find that the money that could have been used for investment instead is substantially less.

There are certainly risks. The ones that absolutely everyone should consider, financially wise or not are, 1. the way the interest rate will change over the 25 years, 2. the way house prices will change over the 25 years (here, demographics is your friend), 3. How safe your employment prospects are for the next 25 years. I agree that buying a house without considering those is foolish. Some of the other things that you can do aren't so important in my view (although helpful).

Firstly, number 2 and number 4 make it sound like you are a slave to the bank. This is definitely not true at the moment, and probably never will be. If you buy your house at the beginning of your career, your mortgage repayments will become smaller and smaller proportions of your income as you move. You can just do whatever you would have done normally, and naturally you'll feel less pain for your mortgage, so it's not like you've signed years away to the bank. If you want to do something radical like a complete career change or a big move, this is all possible too. As long as house prices don't fall faster than you pay your mortgage off (my number 2), you can always sell, (probably making a profit) and free yourself from your obligation. Letting, although more expensive than it sounds at first, is also a perfectly feasible possibility. Buying a house is a responsibility, but you really aren't all that limited by it.

The real point is the reason you're buying the house. If it's for the freedom and privacy and location etc. then you only need to consider the ones I mentioned. If you're buying it with the intention that it is an investment that would outperform other possible investments, then that's a completely different kettle of fish. I think most people buy houses for the first reason. If you buy a house for the second reason, then you need to know what you would have done with the money otherwise, and you need to know the risks and payoffs over 25 years for that other investment. (And don't forget to include in the risks the risk of you spending the spare money on a shiny toy)

It's perfectly reasonable to buy a house for the intangible reasons, closeness to friends, the luxury of having a space that is truly yours, the ability to redecorate whenever you like, etc.... And in that case, you really don't have to do massive financial analyses, the simple ones suffice.

A response from Chris Lautischer

3rd November, 2005

Kiyosaki is a smart man. It's because of him, I decided to stop being an E, and an S... I can say with honesty, I've built myself a growing B!!!