As noted when I posted Why the Rich are Getting Richer, the book Why the Rich Are Getting Richer by Robert Kiyosaki, author of Rich Dad Poor Dad, contains a lot more than simply why the wealthy become even wealthier.
As I read the book, I underlined key passages, many of which didn’t fit into the first post. That’s why I’m writing this post — to share some of Kiyosaki’s extra money-related thoughts and my opinions on them.
They will be random, shared in the order they appeared in the book.
Here we go…
Dislike for The Millionaire Next Door
Throughout the book Kiyosaki rails against The Millionaire Next Door. Here’s how he begins:
The Millionaire Next Door was a story about the people who followed the fairytale — “go to school, get a job, save money, get out of debt, and live happily ever after.” Simply put, in 1996, it was easy to get rich; almost everyone was getting rich.
Today, many millionaires next door are unemployed and their house is the “foreclosure next door.”
As you might imagine, I take exception with this thinking. I love The Millionaire Next Door (see my review) and have it listed in my top five money books of all time.
But let’s get a bit more specific. Here’s where I think he’s right and where he’s wrong:
- I’m not sure the fairytale he depicts is correct. But saving money and reducing debt are certainly part of what makes someone a millionaire next door. And is saving money and reducing debt a bad thing? I’m confused…
- I would beg to differ with the statement that in 1996 “almost everyone was getting rich.” In fact, it’s so ridiculous that it makes the rest of what he says less believable.
- As for millionaires next door being unemployed and in foreclosure, he has absolutely no proof of this. It’s simply a statement he made up. Can I say #FakeNews? Yes, there are people in financial trouble these days, but I don’t think it’s millionaires next door. The principles those people live by work in both good and bad times.
- Personally I think Kiyosaki is trying to be controversial for controversy’s sake. And he would be better served picking on something else (like the average American’s finances).
Plus he admits that there are many roads to wealth, so why single one out and berate it?
Later on, Kiyosaki comes back to this subject with the following:
The millionaire next door became a millionaire by being in the right place, doing the right things, at the right time in history. The problem is that these millionaires next door did not need financial education to become a millionaire.
I disagree. They did have financial education. It may have been basic or different than what Kiyosaki teaches, but they most certainly did educate themselves and then took steps which ultimately made them wealthy.
And I would say those same steps would work today as well.
Dislike for Financial Planners
Well after a rocky start, here’s an area where I can agree with Kiyosaki! đ
He shares this quote from Warren Buffett:
Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.
Hahahahahahaha!
He also writes that his rich dad would say this:
The reason the middle class struggle is because they take advice from salespeople, not from rich people.
He took the words right out of my mouth!
But he’s not done and continues with this:
Ask most financial salespeople how much financial education they have. The honest answer is “not much.”
Ask how many books on money they have read, and the answer is probably the same. Not many.
Then ask them if they are rich. Ask them if they can stop working and still put food on the table.
As you might have guessed, I agree with these statements. Here are some of my thoughts on financial planners:
- Most of them are salespeople, not money managers trying to help people, as noted in Financial Locker Room Talk and Not Experts: Financial Advisors.
- IMO planners aren’t financial experts in the true sense because most of them have not successfully applied their own teachings to become wealthy.
- The reason they don’t publish their net worths is because most of them are not wealthy. And yet they feel qualified to advise those with more money than they have…it doesn’t make sense.
Of course there are some good guys out there, planners who know what they are doing and have their clients’ best interests at heart, but unfortunately they are few and far between. The vast majority of them do not fall into the “good” category.
Also Not Experts: College Professors
Not content with bashing financial planners and moving on, Kiyosaki goes on to say this:
I dropped out of the MBA program after six months. One reason was the instructors. The instructors in the MBA program had no real world experience. They were professional teachers teaching business courses.
I said this same sort of thing in Beware of Fake Money Experts with No Accomplishments. There are so many people out there claiming to be “experts” who have little to no experience/success in the areas they are supposedly experts in.
And yet people keep buy from them, listening to them, and so on.
I can’t figure out why…
That said, I did get an MBA and it was one of the smartest money moves I made. It wasn’t because I learned a ton of useful information which set me up for career and life success, but because it opened the door to be recruited by better employers and ultimately get a job with a name brand company.
For the rest of my career, no one cared where I got my MBA from (or that I even had one). They simply knew I worked for ABC Company and that was more than enough.
Your House is Not an Asset
Kiyosaki believes that a personal residence is not an asset. His thoughts:
Most people believe their house is an asset. Yet, in most cases, their house is really a liability. Labeling a liability an asset is one of the main reasons there is a growing gap between the rich and everyone else.
Before I begin commenting on this, let me say that he lists several things that are “one of the main reasons there is a growing gap between the rich and everyone else”, some of which we’ll cover below.
Exactly how many “main reasons” can there be? Only a few, right? And yet he seems to have a wide number of them.
Anyway…
To come to the conclusion in his statement above, you have to use Kiyosaki’s definition of an asset and a liability. Here they are:
Assets put money in your pocket whether you work or not.
Liabilities take money from your pocket even if they go up in value.
Using these definitions, you can see how a home would be classified as a liability — it takes money out of most people’s pockets in interest, maintenance, taxes, insurance, and the like.
That said, Kiyosaki does not have a traditional definition of an asset. According to NerdWallet, here’s what an asset is:
An asset is something you own that has monetary value, like a car or stock. Assets are generally grouped into two categories: cash and cash equivalents, and property. They can be personal or business-related.
To clarify where a home would be listed, here’s this:
Tangible assets: These are physical objects, or the assets you can touch. Examples include your home, business property, car, boat, art and jewelry.
I can see both sides. Kiyosaki sees life in terms of cash flow (as we’ll see in a moment) so within that paradigm, a house is not an asset.
But in the traditional sense, a house most certainly is an asset — at least the equity you have in it is.
And I’m not really sure how a house that appreciates is not an asset. Ask people in California who bought their homes 30 years ago if they think they are assets. I think you know what they’ll say.
Six Core Money Words
Here’s what Kiyosaki says about the most important money words:
There are six words at the core of financial literacy. They are:
- Income
- Expense
- Assets
- Liabilities
- Cash
- Flow
Ask any entrepreneur what the two most important words are, and they will say cash flow.
This is because cash and flow determine if something is income, expense, asset, or liability.
Not much to say on this one but I wanted to include it in the bunch.
Anyone disagree with this list of six? And that cash flow is most important?
Hates Holding Cash
Here are Kiyosaki’s thoughts on cash (which he gets from a Warren Buffett quote):
The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time.
This is interesting coming from Buffett (though it was said in 2010 to be fair) since as of this past August (shortly before I wrote the post), Berkshire Hathaway had $122 billion dollars of cash.
This from Business Insider:
Warren Buffett’s Berkshire Hathaway held a record $122 billion in cash at the end of June.
The conglomerate’s cash is worth nearly 60% of its portfolio of public companies, the largest proportion since before the financial crisis.
So…is holding cash good or bad?
Obviously we all need cash for an emergency fund, but how much is too much? And if you think there’s going to be a correction, do you try and stockpile cash? Or if investments are too expensive (which Buffett says they are these days), do you just sit and wait?
I don’t have a lot of good answers. We’re stockpiling cash, though not doing it intentionally.
We’re accumulating simply because we make more than we spend and I can’t find any investments I like at today’s prices. (Note: I don’t need to invest any more in index funds since we’re past the need for that.)
I’d love to buy a few more pieces of real estate, but the two markets I’d consider (my home of Colorado Springs and where my current places are in Grand Rapids, MI) are way over-priced IMO. Now if there was a correction, I’d be ready to pounce!
I have found a friend who is buying rental real estate in a market I’m not interested in. He needs the cash, so I lend it to him at 10% and have deployed over $100k this way. But eventually he’ll pay it back and I’ll be left wondering how to allocate the money again.
And even with that investment we’re still sitting on $450k in cash and it’s growing every day…any ideas or suggestions?
Dislikes Diversification
Warren Buffett again:
Diversification is protection against ignorance. It makes little sense if you know what you are doing.
Kiyosaki’s point is that if you know how to make money in something (like real estate), then why not focus all your efforts on it?
It’s not a bad point, but I would think you’d want at least a few different things working.
For instance, I like the concept of multiple streams of income. You don’t have to have a million of them, but 5 to 10 seem reasonable (from various sources) and not too much of spreading yourself thin.
Our income streams come from:
- Business (this site)
- Rental real estate
- Real estate loans (noted above)
- Dividends from index funds
- Cash (interest)
- My wife’s job
Plus we have a few more we could activate if times got bad. And we could always draw down our assets if we wanted.
What do you think — diversification or no diversification?
Three Types of Income
Kiyosaki lists three types of income as follows:
- Ordinary income
- Portfolio income
- Passive income
Here’s what he says about each of them:
Ordinary income occurs when you work for money (earned income). It is the highest taxed of the three incomes.
Portfolio income is also called capital gains. It occurs any time you buy low and sell high…when your money works for you, instead of you working hard for money. It’s taxed at lower capital gains rates.
Passive income is cash flowing from an asset. In real estate this is called rental income. It’s the lowest-taxed income, sometimes at 0%.
As you might imagine, he recommends making less ordinary income and more of the other two.
This is generally the flow of wealth we talk about here at ESI Money. You begin with your career (ordinary income), grow it to make more, then save and ultimately invest to produce portfolio and passive income (like index funds and real estate).
So in the end I think he’s against people who don’t invest. It that what it seems like?
That said, he does rail on the stock market at times so I’m not sure he’s ok with index funds or stocks at all.
There is Risk in Real Estate
Kiyosaki is a HUGE real estate fan, but he does recognize its risks:
Paper assets are liquid. If you make a mistake investing in paper assets, you can get in and get out quickly. You can cut your losses immediately.
If, on the other hand, you make a mistake in real estate, the mistake could take you down into bankruptcy. real estate is not liquid. You cannot cut your losses quickly.
Yep, ask Dave Ramsey about how much financial trouble you can get into with real estate.
This was one reason I was hesitant to start investing in real estate, why I took it slow, and why I bought my places with cash — all attempts at trying to reduce the risks involved.
He Likes a Favorite Book of Mine
I have to include this Kiyosaki quote:
There are two books I highly recommend: The Miracle Morning and The Untethered Soul.
I like this comment because I love The Miracle Morning as well.
I wrote about it in Can Getting Up Early Make You Wealthy? Boy, I wish I had found that book 20 years ago! If you haven’t read it, I highly recommend you check it out!
The Economics of College
Kiyosaki and I are on the same page when it comes to college:
If a student can afford a great education, they should. Education is extremely important. Yet if the long-term cost of education is too high and ROI too low, the student and parents may want to reconsider their options.
The students who struggle are students who graduate with a college degree but no professional license. Examples are degrees in art, music, or general science. Today, many college graduates work at jobs that do not require a college degree.
One day I’m going to write a post on the “college debt crisis.” It will be less of a post and more of a rant. Why? Because people are making dumb financial decisions, then regretting them and wanting their loans to be forgiven! It makes no sense! If we’re going to begin paying people back for crazy financial mistakes, we’re going to owe a ton of money.
But for now, let’s just focus on what Kiyosaki says.
My take:
- I agree that generally a college education is a good thing. But it does come with some qualifiers…
- The long-term ROI needs to be there, as Kiyosaki says. In other words, what the student gets out of the education needs to be worth more than what it costs. It’s common sense, which frustrates me when I see all these stories of people who make poor decisions, have tons of debt, and want a bail-out.
- Kiyosaki gives examples of majors that often do not “pay out.” Now if you have the money and enjoy the subject, have the time of your life. But if you’re making a financial decision — and make no mistake, college is a HUGE financial decision — it probably doesn’t make sense to spend $200k on an art degree.
- Just as bad is the degree that costs a fortune and then the student gets a job that he could have had out of high school (no college degree required.) The worst is kids who leave jobs when they graduate high school, go to college for four years and a ton of money, and then come back to the same job they had as a high school senior. How does that make sense?
I could go on, but the bottom line is that college needs to be looked at from a cost-benefit standpoint. This impacts where someone goes to school, how they do it (all on campus or some online, etc.), how they pay for it, what major they have, etc. College is the first big financial decision most people make. It’s the first step in setting up your “E” in E-S-I and it needs to be treated as such.
By the way, I don’t put the most blame on students for the mess. I blame the parents. Where are they in properly advising their children?
And yes, the colleges are to blame too, but that’s part of our consumer society. Caveat emptor applies to college as much as any other purchase. You don’t expect Walmart, Amazon, Comcast, Verizon, or any other business to look out for you, do you? Then why blame a college when it acts like a business — that’s what it is!
Hating on ESI
Here’s a quote I found amusing:
One reason the gap [between rich, poor, and middle class] grows wider is because schools teach students to work, save, and invest for earned income. The rich work for portfolio and passive income.
Haha! He almost nailed E-S-I with the exact words! đ
I’m not sure where he gets the last part — that we focus on earned income and neglect the other two.
In fact, I think a key part of “invest” deals with both portfolio and passive income, so what’s the beef with “work, save, and invest”?
If he’s counting a savings account as “invest” then yes, I see the point. But if that’s what he’s doing, that’s a straw man argument IMO.
Network Marketing
You’re going to love this one:
Donald Trump and I are the only two major financial educators who recommend individuals join a network marketing company. Network marketing teaches four essential skills required to be successful entrepreneurs. Those skills are sales, leadership, handling rejection, and delayed gratification. Handling rejection and delayed gratification are indicators of very high EQ, emotional intelligence.
I’ll ignore the reference to Donald Trump so I don’t rile up the political junkies, but let’s focus on network marketing.
I have several thoughts:
- In general, network marketing (aka multi-level marketing) people annoy me. I think the system attracts people with annoying personalities.
- I agree that sales, leadership, handling rejection, and delayed gratification are all skills that are valuable and can help you have a more successful career. That said…
- Generally, I would not classify network marketing individuals as the “cream of the crop” business-wise. Who am I actually supposed to learn these awesome skills from? Bozo is not going to teach me anything about leadership. In fact, he’s likely just a pretender.
So while the idea of learning from network marketing seems plausible, practically I think it’s lacking much substance.
On-Going Education
Here are some thoughts on post-school education:
For most people, their education ends when they leave school. That is the primary reason why the gap between rich, poor, and middle class grows wider.
Have you met or do you know anyone who hasn’t put much (or any) focus on learning since they left school?
Yeah, that’s what I thought — almost everyone.
It’s a strange thought to me, that people would quit learning after leaving school. Sure, we all learn through life, but I’m talking about intentionally studying a subject to learn something new.
Personally I’ve learned way more since leaving school than I did while in school. I’ve studied more, read more, written more, and on and on. I can’t imagine not learning as there are so many interesting things to discover.
Here are just a few things I’ve learned about since college:
- How to be a successful business person. I found learning and developing new skills to be vital in growing my income.
- How to grow roses. I had quite a collection when we lived in Michigan and still have three bushes to this day.
- Playing chess. It’s an endless topic you can study for a lifetime.
- How to handle guns. I liked to shoot as a kid but was always with an adult who managed the situation. When I became an adult, I had to learn how to handle and manage a gun so I could target practice when I wanted.
- How to play pickleball. Haha! Did you think I was going to let a post go by without mentioning pickleball? đ
- How to set up and manage a terrarium. I’m still learning here and the jury remains out on whether or not my plants will survive.
- How to be a soccer referee. Talk about studying…nothing like two mad coaches, 30 anxious players, and 50 angry parents to focus your learning!
- How to raise money. I was the president of a small non-profit for seven years and had to learn how to fundraise.
- How to write. School taught me relatively little about writing other than the “rules” for grammar, some of which I ignore since I don’t like them. Ha!
And of course I’ve learned how to manage money since college. Plus so many other topics — I can’t remember them all.
I’ve also read so many books since college it’s almost unbelievable. Then again, I love learning and cannot imagine life without it.
Most of the people I know (friends from school, family members, etc.) learn much less than I do. Which is fine, we all don’t have the same interests.
But what shocks me is the percentage of those who haven’t read a book, studied a subject, or done anything substantial since school to learn something new.
So is it any wonder that Americans are in the financial situations they are in? If they didn’t learn about money in school (which no one does) and stopped learning after school, you can see that they wouldn’t learn how to handle their finances, with the results often being disastrous.
Anyway, that’s it for Kiyosaki’s random thoughts on money. Any comments?
Bernd Doss says
ESI great post, yet controversial post, as there are far to many points to discuss. But, if I had to go to work on only one it would be education. We learn what schools center on, like being an engineer, teacher, etc. Yet everyday life teaches us a myriad of lessons. Mankind’s ability to adapt to changing environments is what drives learning at a very basic level, but it is a sustainable level. It took me several years to understand the financial system and how to make it work for me. Now that I have that knowledge I have a modicum of what that knowledge has passed on to me. IMO we must never take for granted the power of education at any level. The military taught me how to survive under extreme conditions. These learnings helped me to adapt to frugality and to make sure I had the ability and opportunity to learn more. Many of your assessments and posts provide many opportunities to learn, yet we still have those who do not know how to turn the key to start the movement forwards.
Chadnudj says
“Weâre accumulating simply because we make more than we spend and I canât find any investments I like at todayâs prices. (Note: I donât need to invest any more in index funds since weâre past the need for that.)….weâre still sitting on $450k in cash and itâs growing every dayâŚany ideas or suggestions?”
Invest in the index funds? You already make more money that you spend (and seem to be spending at a level you feel comfortable with and that gives you plenty of “wants” in addition to needs), so why aren’t you just chucking the excess into index funds to make more money (in dividends, and hopefully capital gains as they appreciate) rather than build a cash silo that loses money compared to inflation?
Prices are high? Mathematically, the stock market is regularly meeting new highs, meaning it is reaching new, higher prices. Even if there was a huge correction that you could deploy your cash in, you’d (a) have lost the gains/dividends to date by holding that $450k and growing in cash (which may/might outpace even the loss from a market correction at this point — S&P500 is up nearly 20+% in 2019, so even a 10% correction would mean you’d have been better off investing at the beginning), (b) would have lost to inflation, and (c) would have to decide when to deploy your cash into index funds (market timing).
If you want to time the market with some amount and build up cash reserves when you think the market is overpriced for that purpose, I suppose that makes sense, but set a cap/maximum in advance as part of your investment policy statement (say $250k? A certain proportion relative to your net invested worth — i.e. everything but your house?). Once you reach that maximum, that’s it — you deploy all extra surplus cash towards dollar cost averaging into index funds at a reasonable asset allocation (given the fact that you’ve “won the game” and already have more money coming in than you spend, I’d go 100% stocks because you have the ability to take risk with this money for long term growth potential as a charitable behest/inheritance to your family).
ESI says
I’m thinking I’d like to 1) focus more on income (versus growth) since I have a lot in growth already (with index funds) and 2) diversify (RK would hate me! LOL!)
I have been giving dividend investing some serious consideration…or maybe buying a business.
Chadnudj says
FWIW, and take this with a HUGE grain of salt given it comes from so-called “financial analysts,” value stocks are relatively huge bargains right now, so maybe that’s one direction to go in.
Matt says
There’s definitely a disconnect between how value stocks have performed vs. growth stocks the last decade. I’ve added to my position in my value index fund as a result. Valuations seem out of line with historical trends between value/growth.
Mark says
I enjoy your blog and have read the Rich Dad books and enjoy them both. Our society is advancing at miracle levels these days by almost all measures. There are many ways to be successful and contribute to society. Our society wouldnât advance if there werenât many different types of people and paths to take to reach success as measured by whatever you choose. You and Robert provide maps to two different paths in life to âsuccessâ but there are many more domains to play in other than just âcorporationâ or âentrepreneurâ
MI 174 says
Thank you for this excellent and thought-provoking post!
Robert Kiyosaki is more articulate and knowledgeable and wealthier than I am. However, many of his claims (e.g., “the foreclosure-next-door”, and “your house is not an asset”, etc.) are unsubstantiated. I often wonder whether he is delusional, or if he is just trying to be provocative and force us to question our beliefs. Yes, there is an occasional nugget of wisdom buried within his writing, but virtually all of this wisdom has been lifted from others, such as Warren Buffett.
Those who follow his recommendations (particularly borrowing heavily to invest in real estate and leveraging their “good debt”) are taking greater risks than necessary. While this can result in accelerated accumulation of wealth, it is just as likely to lead to financial ruin. This is part of what I refer to as the “swinging for the fences” approach to investment. It might be fine for some, but it is far too risky for my taste, and I believe Kiyosaki does his readers a disservice by not fully exposing the downside to this approach.
I strongly agree that we must differentiate among fake money experts (insurance salespeople and college professors) and true experts (those with a proven track record, who have demonstrated the ability to acquire and retain a high net worth). This is where I see great value in the stories found in the “Millionaire Interviews series” here at ESI Money.
Holding large amounts of cash on the sidelines: this should never be anyone’s primary investment objective. However, from time to time we all find ourselves with too much cash. Just like we often find our portfolio may be too heavy in stocks, or bonds, or real estate as a result of market conditions over the past year or two. This is actually a good problem to have, and not an indicator of a poor investment strategy. It simply means we need to rebalance our portfolio, to find a way to get that cash off the bench and back onto the playing field.
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” I am reluctant to disagree with Buffett. Rather, I will just have to concede that I don’t know what I’m doing, so I am one of those who rely on diversification to protect myself against myself. BTW: virtually all wealthy people have multiple streams of income, and Buffett and Kiyosaki are no exceptions to this rule.
The âcollege debt crisis is a huge national problem, dwarfing most of the issues that we hear about in presidential debates. Your point about parents making stupid decisions on behalf of their totally naive children is spot on! This is a truly lamentable situation that needs to be corrected, because it is leading our nation deeper into debt every year. And no, student loan forgiveness is not part of the answer, unless it is in exchange for some other form of indebtedness. People need to be held accountable for their actions. Sorry, but this means that children will have to be held accountable for the mistakes of their their parents (to wit, climate change).
Gino says
Kiyosaki is every bit as bad as the financial planners that masquerade as salesman that he rants about.
Kiyosaki gives no actionable advice in any of his books! Itâs common sense to folks in the FIRE community, buy assets not liabilities.
And grow multiple streams of income.
Perhaps a novice might be enlightened by some of his advice. But an ESI reader will certainly see the flaws in his advice and observe he gives no actionable advice.
Just a bunch of fluff repeated in a different way. Buy assets and donât work for your income.
Clearly he is in the business of selling books. And is doing well.
I read his book Rich Dad Poor Dad years ago, and itâs one hour of my life Iâll never get back!
The Millionaire Next Door is an excellent book and way more valuable than anything Kiyosaki has ever published.
Kiyosaki is a fraud in my opinion and simply a salesman. Nothing more!
Fritz and many others readers of his blog have done very well with the ESI principles, but not according to Kiyosaki, we either couldâve done better or failed.
Iâll speak for myself and my wife.
Weâre in our lates forties. We have ZERO debt. Own our home. 2 paid for cars. 2.1M in Vanguard index funds and pensions.
My pension pays 60k per year with 3% COLA starting in March of 2020 and my wifeâs will be similar starting in 5 years.
And whatâs our secret ? The ESI principles while working W2 jobs.
The problem isnât so much earning income which Kiyosaki is against, its the spending which the majority of Americans suck at which puts them in the poor house!
End of rant đ
ESI says
Hahaha! I love a good rant!
B. Johnson says
I found his take on your “House not being an Asset” rather interesting. Based on his definition, it’s not an asset, but it seems a bit narrow-minded. Owning a house can provide significant benefit, if you strategically purchase a home with low operating/ownership costs. For those who intend to retire early, owning your personal residence can keep your cost of living lower than renting and it limits your exposure to rising costs in a bear market. Our monthly cost for our home is under $500 month, which includes taxes, insurance, HOA fees, electric, water, sewerage, internet and cable. Since he has such an obvious focus on cash flow, I’m surprised he doesn’t point out this benefit with home ownership. Of course, you have to complete your due diligence on the front end to fully leverage the benefit and there will be maintenance and upkeep costs with ownership, but you get the idea. Home ownership falls into what I consider the major costs in our lives, (education, housing & transportation). Much like your thoughts on higher education, the other two categories should also be approached with ROI in mind.
BJ
Matt says
I like the take on this I’ve seen a number of times. You have to live somewhere, so you have a living expense no matter what. If you’re thoughtful and prudent about how you buy, then you essentially turn living expense into an asset opportunity, one that you don’t get from renting.
Where I live, I’m certain I would pay just as much all-in to rent the same house I bought, thanks to the low interest rate, and my costs will stay fixed over time, where rents are going up. For the 10 years I’m planning to live there, I have little doubt it will net out as an asset. If you run the math on 10 years of owning vs. 10 years of renting, unless there’s a massive bear market in housing like the one in 2007-2008, owning will come out ahead most/all of the time.
Millionaire 110 says
I agree with your point on living somewhere and using a purchase of a home to limit your expenses. However, there’s one point of the analysis you’re missing in the argument about renting vs buying a home: the opportunity cost of capital. If you consider just the monthly/annual cost of renting vs buying, you’re ignoring the fact that buying a home typically entails putting down at least 20% of the purchase price to own the home. There are many investment strategies one could pursue that would lead to a significantly better outcome as a renter but you also need to be comfortable with those risks, and as we all witnessed in the financial crisis, home prices can be just as volatile as any other investment strategy, so people need to be prudent about how much they pay for their own home.
Matt says
Enjoyed the point on the college professors. I think the best one I had was in an MBA course, guy was a retired executive who taught a 3 hour tax course one evening a week. Probably spent half the time on the actual course, and half on stories to illustrate life lessons from his career in business.
That was probably the most valuable time I spent in class in college – most of the rest was about getting the degree that’d look impressive on a resume. He talked a lot about ways to shape your career, how to get ahead in your employment. Lots of great lessons on the “Earn” part of ESI, can’t think of another professor who did anything on that front.
xrayvsn says
I seem to get antsy when I have a pile of money sitting in a savings account especially since the interest rate has been trending down even more punishing savers.
I agree that sometimes cash is the best option as the other options may be overpriced depending on your criteria. It is important that you don’t deploy that money just for the sake of deployment but actually have a thought out plan of attack.
I do not include my home in my “usable net worth” calculations because I don’t plan on selling it in the foreseeable future and thus really can’t tap into that equity unless I am in dire straits and need to do a reverse mortgage in my golden years. It’s a bonus value that I have in reserve but not a cash flowing asset and thus more of a liability.
ESI says
I’m also wondering if the issue is different when you’re trying to accumulate net worth versus not.
For instance, back when I was working on becoming FI, having a ton of cash was bad, bad, bad.
Now that I’ve “won the game”, deploying cash quickly doesn’t seem like that urgent of an issue.
Phillip says
There was a recent reader poll article in Barron’s that also validated this behavior (average reader has a net worth of $4M+). Contrary to the better practice of statistically maximizing ROI by continually buying into the market vs trying to time it, those that have “won the game” tend to become more conservative and hoard more cash when the market “seems” over-valued. I’m also holding over $500k in very “safe”, low return investments. Ready to pounce on the next drop that never seems to come. Statistically, it’s a bad bet that I didn’t do earlier in my life (I constantly bought and bet on dollar cost averaging) but for whatever reason, it’s more comforting to do what I’m doing now … not really sure why.
Matt says
That’s the tough part of holding cash. Often times you miss out on growth, since quite a bit of growth happens just before the recession hits. I got a lump sum a couple months back, and I’m guilty right now of holding a bit more cash than I’d like too. Waiting for my bonus to be paid in March and then plan to allocate it all out, but it seems like that may cost me with how the market’s performed the last 90 days.
ESI says
For me, it’s the opportunity to grab some potential opportunities in the future (like more real estate, a business, etc.).
If it happens, it will be great (and I’ll need the cash to make it happen).
If it doesn’t happen and I lose some growth, oh well, I don’t really need it anyway. Plus it’s on a relatively small part of my portfolio — I still have a TON in the market taking advantage of any gains.
Not much downside really…
Tom S says
Agree, not much downside really. At least, not now. Time was that holding that much cash wouldâve meant a considerable portion of your portfolio missing out on growth.
Then there is the fact that as we get older, we do become a bit more conservative due to the change in our time frames – weâre closer or already at the stage where we might be drawing down savings; or might need to rely on drawing cash if the market takes a tumble
And thirdly, weâre wiser now. We have more patience, and more perspective on how things work.
Millionaire 124 says
Frankly I agree with many things he says but I dislike the way he says it – heâs a bit of an ass. What heâs saying is about half correct.
Seems to be really arrogant and needing to sell books. Whether itâs true need or ego, thisnis all about book sales / seminars etc.
I went to a seminar he endorsed a few years back. The guys that led it were âslickâ – like carnival barkers trying to hock automated stock market / real estate investments.
Just because he wrote one of the greatest books ever published doesnât mean that his new stuff is good.
Seems to me that he would take the responsibility of being a financial âelderâ more seriously. Most true elders teach with humility. RK is a blabbering prick.
Bob Dylan will even admit that the âKnockin on Heavens Doorâ years were one-offs – a time that heâll never be able to repeat. RK ainât Dylan.
ESI says
Ha! I think you wrote the words I’ve been searching for these past few posts.
Kinda like Dave Ramsey…or Suze Orman.
But all are successful, so it sells!
Millionaire 124 says
Lol. I almost said that. You and i agree on most things.
Had I not read Tom Stanley in 1996, I would have never been able to apply Rich Dad Poor Dad because I wouldnât have had the money to consider it.
Great parallel btw !
Tom Short says
He does seem to be a bit of a grandstander, being contrarian just for the sake of it. I think one area that is worth discussing more has to do with the value of education.
I think there is too of a utilitarian focus on education of late. Get a degree with a professional certification. Learn something that is applicable, that will provide the basis for a career. I say, “hogwash.” This is a good soundbite, and certainly contains an appealing logic to those who are looking at spending tens of thousands of dollars while hearing about the huge debt that many recent grads are saddled with.
But how do you square the idea of getting a degree that is directly applicable to a job or career, with the fact that:
a) you said yourself you’ve learned way more since graduating than you did while you were in school?
b) your MBA (which I’m guessing was pretty pricey), really just served as a door opener to get you your first job – after which, the company you worked for became more important?
c) in this day and age, the one thing that’s certain is if you want to be successful, you’re going to have to keep learning new
If all that be true, then why worry about getting a “practical” degree – one that credentials you for a specific professional area? Why not focus on getting a degree that teaches you how to learn, regardless of the value of it’s actual subject matter in the job world?
I think there are three key skills that all college students should master are available to them via any major you can think of. These skills are:
1. Critical thinking: the ability to organize facts into a coherent pattern and argument, leading to a logical conclusion.
2. Communication: written and oral. Being able to express oneself clearly in plain English (or whatever language is needed), including being able to ascertain and adapt to your audience’s needs.
3. Taste: the ability to distinguish the great from the merely good. To be able to detect fact from fiction. To know who’s worth following and who isn’t.
Whether you study applied math, zoology, literature, music or art history – it matters not. What matters is you learn how to learn. You learn who the luminaries were in these fields, what their work was, and why it was so good. You learn how to organize information and make an argument. This is what you learn from college. And it makes getting a degree absolutely worthwhile – for the rest of your life.
MI 162 says
I will stoke the fires a bit because I sawa very compelling well thought out reason why having a house is a bad investment written from a standpoint of what makes a “bad investment”
-It should be not just an initial, but if we do it right, a relentlessly ongoing drain on the cash reserves of the owner.
-It should be illiquid. Weâll make it something that takes weeks, no â wait â even better, months of time and effort to buy or sell.
-It should be expensive to buy and sell. Weâll add very high transaction costs. Letâs say 5% commissions on the deal, coming and going.
-It should be complex to buy or sell. That way we can ladle on lots of extra fees and reports and documents we can charge for.
I-t should generate low returns. Certainly no more than the inflation rate. Maybe a bit less.
-It should be leveraged! Oh, oh this one is great! This is how weâll get people to swallow those low returns! If the price goes up a little bit, leverage will magnify this and people will convince themselves itâs actually a good investment! Nah, donât worry about it. Most will never even consider that leverage is also very high risk and could just as easily wipe them out.
-It should be mortgaged! Another beauty of leverage. We can charge interest on the loans. Yep, and with just a little more effort we should easily be able to persuade people who buy this thing to borrow money against it more than once.
-It should be unproductive. While weâre talking about interest, letâs be sure this investment we are creating never pays any. No dividends either, of course.
-It should be immobile. If we can fix it to one geographical spot we can be sure at any given time only a tiny group of potential buyers for it will exist. Sometimes and in some places, none at all!
-It should be subject to the fortunes of one country, one state, one city, one townâŚNo! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes itâs ownerâs net worth, but does so even as they are losing their job and income!
It should be something that locks its owner in one geographical area. Thatâll limit their options and keep âem docile for their employers!
-It should be expensive. Ideally weâll make it so expensive that it will represent a disproportionate percentage of a personâs net worth. Nothing like squeezing out diversification to increase risk!
-It should be expensive to own, too! Letâs make sure this investment requires an endless parade of repairs and maintenance without which it will crumble into dust.
-It should be fragile and easily damaged by weather, fire, vandalism and the like! Now we can add-on expensive insurance to cover these risks. Making sure, of course, that the bad things that are most likely to happen arenât actually covered. Donât worry, weâll bury that in the fine print or maybe just charge extra for it.
-It should be heavily taxed, too! Letâs get the Feds in on this. If it should go up in value, weâll go ahead and tax that gain. If it goes down in value should we offer a balancing tax deduction on the loss like with other investments? Nah.
-It should be taxed even more! Letâs not forget our state and local governments. Why wait till this investment is sold? Unlike other investments, letâs tax it each and every year. Oh, and letâs raise those taxes anytime it goes up in value. Lower them when it goes down? Donât be silly.
-It should be something you can never really own. Since we are going to give the government the power to tax this investment every year, âowningâ it will be just like sharecropping. Weâll let them work it, maintain it, pay all the cost associated with it and, as long as they pay their annual rent (oops, I mean taxes) weâll let âem stay in it. Unless we decide we want it.
-For that, weâll make it subject to eminent domain. You know, in case we decide that instead of getting our rent (damn! I mean taxes) weâd rather just take it away from them.
source:
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
Phillip says
There’s no fire stoking with me. I never considered my house a good investment from a pure ROI point of view. But a home at least typically increases in value after accounting for expenses and adjusted for not having to pay rent for a comparable property. We bought our house not for ROI but for enjoyment. It’s next to impossible to rent a house similar (as nice) to ours. That said, I tend to agree that if your objective is purely ROI, your personal residence isn’t the best investment choice per your arguments stated.
Dan says
I am ambivalent about your view of college. You wrote “college needs to be looked at from a cost-benefit standpoint.” This flies in the face of what college is supposed to be. If you look at most 4 year universities’ mission statements, average starting salary of its graduates is not mentioned. It is tracked by numerous publications and even used by universities in their promotional materials but not part of their core mission statement.
Consider Harvard’s Mission & Vision statements.
https://college.harvard.edu/about/mission-vision-history
“The mission of Harvard College is to educate the citizens and citizen-leaders for our society. We do this through our commitment to the transformative power of a liberal arts and sciences education.”
“Harvard College sets the standard for residential liberal arts and sciences education. We have committed to creating and sustaining the conditions that enable all Harvard College students to experience an unparalleled educational journey that is intellectually, socially, and personally transformative.”
What you advocate would turn universities into glorified trade schools and vocational colleges. Who would get a liberal arts education if everyone applied a cost-benefit analysis? Would the world be a better place w/o liberal arts degrees? Perhaps you believe the world would be a better place w/o liberal arts degrees. I can respect that. My father felt that way.
I’m not trying to downplay the pernicious effect of the student debt crisis. However, I look back wistfully to a time when a university education was more about knowledge and the journey of self-awareness than a piece of sheepskin and the salary it commands.
Robert Kiyosaki has a checkered past which makes me dubious of his advice.
ESI says
I personally don’t care what people spend or what degrees they get. They can go to whatever college they want.
Just don’t come back to me crying when you have $200k of debt and a liberal arts degree that allows you to make $20k per year and expect me, as a taxpayer, to pay for (or forgive) your (IMO unwise) decision.
Dan says
I agree with that. Federal bankruptcy laws make it difficult for people to discharge student loan debt. I read recent changes make that easier. If universities had to eat the unpaid student loans like credit card companies do, you would see a change in behavior. Universities would be less willing to accept students majoring in liberal arts degrees who are paying for tuition via student loans. This would result in liberal arts majors coming from well off families. There would be a stratification. Liberal arts degrees would be a status symbol or only academics would get them.
To me, student loans are like the mortgage crisis. The federal government wanted to encourage home ownership so they made low cost loans available to the masses. Private industry came in and reacted to this easy credit in predictable ways. Perhaps the magnitude was not predictable but a cottage industry built around easy mortgages was easily predictable. Now the federal government has repeated the mistake with student debt. They wanted more people to get college degrees so they made it easy to get a student loan. The end result is predictable.
What is your alternative at this point? I think the number is approaching $2 Trillion in student loans backed by the federal government. If the borrower defaults, the most obvious choices are make the taxpayer cover the debt, float Treasury bonds to cover the debt (which means the taxpayer pays the interest on the bonds) or worst of all, the federal government defaults on the debt.
ESI says
I don’t have a solution for how the government should solve the problem — that’s for an economics/policy blog. My focus is on what people should do to make the best money choices going forward — which would be to follow the advice I initially gave.
As long as we keep up the current system of “go where you want to have a ‘great experience’ and borrow the amount, whether you can pay for it or not”, the problem will get worse. I’m in favor of people taking personal responsibility and looking at the college selection process for what it is — a business decision.
I do favor not dismissing the debt. These people borrowed the money and need to be responsible for it. If we protected people from every dumb financial decision, we’d be bankrupt in a second.
Tom S says
Ultimately it comes down to consumer culture run amok. Kids from rich families can afford to go to a small private liberal arts college where they will learn in the way Harvardâs mission statement proposes. (Nice post, Dan).
Everyone else, though, who has any ambition to ascend in the consumer pecking order (bigger house, nicer car, more vacations), will do whatever it takes to attend the âbestâ university they can get into and/or afford, future debt be damned, because this will get them a shot at the highest possible salary when they get out. As for learning for learningâs sake, whatever.
In other words, culturally, weâre doomed. :-\
ESI says
Hahaha! Probably true…
MMiguel says
Someone above said that Kiyosaki is often “half correct”. I completely agree with that. Some of what he says rings true, much of it is shear nonsense. How is the uninitiated non-ESI type going to be able to tell the difference? So, IMO, that places him firmly in the corner of dangerous and irresponsible.
On the topic of education , I have one of those fluffy sounding liberal arts degrees, and no I did not have rich parents to pay for it, and yes I had a mountain of student loan debt when I graduated. But, I now have a NW in the upper seven digits and earnings have been in the mid six figures for past 20 years. So, there is a way to do the liberal arts major thing right – college does not have to be all practical engineering, finance and such.
Here is what I did right:
#1 – I graduated from to a top name brand university
#2 – I graduated with top honors
#3 – I studied lots of practical things (like computer science, and math, and minored in economics, etc.) on the way to getting my utterly impractical degree
#4 – I took advantage of internships in practical areas to build my resume
#5 – I participated in activities, such as school newspaper, that helped me develop marketable skills
So, by the time I graduated, business employers were very interested in this well-rounded, tech and business savvy student. Yes, I had to send out about 100 resumes, and attend maybe 40 interviews to get two job offers. But they were both great job offers.
What did I get from my utterly impractical degree program:
1) I learned how to write… really really well. People still notice. Graduating required writing a book length thesis.
2) I learned how to communicate… really really well. That is the cornerstone of almost any business career
3) I learned how to confidently cull, organize, and distill complex issues
4) I learned how to learn, and learn really fast, and keep learning throughout a lifetime
5) I gained a network of life-long friends who were destined to (and have) gone on to become extraordinarily successful individuals (ok, arguably that was a function of the caliber of school not the specific degree program)
That said, I recognize that not everyone can replicate what I did the way I did it. And, yes I do agree that an element of practicality and strategic thinking should be part of the thought process around a college education – I have often counseled younger colleagues to reconsider plans to exit to get an outrageously expensive graduate degree just because. And no, I absolutely do not think that student loans should simply be forgiven by taxpayers.
I’m just saying that all the ragging on liberal arts degrees has gone too far – don’t throw the baby out with the bathwater!