I had CNBC on in the background earlier today while I was working. A conversation on there about the US financial crisis led me to think about something. I thought for a minute that even something like the book “Rich Dad Poor Dad” helped to contribute to the problem.
One problem I always had with Kiyosaki’s message in the book was his lack of clarity about taking on debt. I distinctly remember that the overall message of his book was not to be afraid of debt. He said smart people are in debt. He said poor people try to avoid debt. I always felt that his book was way too simplistic in its approach on this subject and that it would leave people with a false sense that it was okay to be way in debt as long as you are trying to make money in the process.
This message is Tom Foolery.
What Kiyosaki should have been clearer about was some simple principles that are made known to anyone who builds businesses.
A good business model involves creating a system where you can create value that people will pay for on an individual basis. In other words, you create a product or service that someone is willing to pay you more for than it costs you to produce. This is the fundamental basis for any business model.
It is okay to borrow money to produce that product or service so long as you can still make a profit on it after paying back the loan and you are able to sell whatever that product or service is. The business model must be profitable though before you can scale it up. If you borrow huge sums of money to scale up an unprofitable business model, you simply drive yourself to bankruptcy at a much faster rate.
In fact, part of a bank’s responsibility before making a loan is to see that your business model is sound so that they can expect to get their money back from you along with interest.
Kiyosaki fails to make this point clear in my opinion. Obviously he understands this principle. He just didn’t communicate it properly. Instead his message attained an image that debt is good and people should welcome it with open arms. His one caveat is that the debt must be for assets and not liabilities. If someone needs to be taught that, then they should not be borrowing money for anything period.