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Robert Kiyosaki Why the Rich Get Richer

Robert Kiyosaki, Why the Rich Get Richer

Throwing Good Money After Bad

by Robert Kiyosaki

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Very Good (2314 Ratings)
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Posted on Friday, February 16, 2007, 12:00AM

All booms eventually go bust.

We all remember the stock market crash of 2000, and most of us remember the real estate crash after the implementation of the 1986 Tax Reform Act. Today, many people are anticipating another real estate crash.

Unfortunately, despite our understanding of booms and inevitable busts, it's always near the top of a boom that "dumb money" buys in. Currently, this has set the scene for a potential market bust of which few people are aware. I'll describe it today's column, and advise how best to prepare in my next column.

Express-Lane Inspiration

About a year ago, I wrote a Yahoo! Finance column warning readers that the real estate boom was over. How did I forecast the end of the boom? I got my hot tip from the cashier at my local Safeway supermarket.

While she was tallying the cost of my apples, broccoli, and steaks, she handed me her new real estate agent's card and invited me to call her for my next real estate investment. Moments later, I was home writing that column. As my rich dad used to say, "When dumb money chases smart money, the party's over." Needless to say, many real estate agents and investors wrote me nasty notes.

I'm not a hundred-percent certain where things are going today. Most economists are forecasting a strong economy, but economists worry me more than newly minted real estate agents. Most seem to be happy that inflation is in check; when I hear that inflation is in check, I begin to think about deflation, and as most of us know, deflation is much, much, worse than inflation.

An Inconvenient Truth

In the simplest terms, inflation occurs when there' too much money in the system. On the flip side, deflation occurs when there are too few dollars in circulation. When that happens, prices start to fall. For example, in inflationary times, prices of houses go up. In deflationary times, prices of houses come down. If prices of houses begin to drop too fast right now, it could be 1986 all over again.

I wrote a column in 2005 about how I love debt and my credit cards. The trouble is that most people do. Today, you can qualify for a loan to buy a house simply if you're alive and breathing.

The strong economy we've been experiencing for years has thus been built on dumb money -- in addition to smart money -- borrowing more and more. Even the U.S. government has had a field day borrowing money to do such things as fight a war and attempt to rebuild Iraq and Afghanistan rather than rebuild our country. And the inconvenient truth about debt is that it has to be paid back.

A Certain Ratio

For the next two years, I'm cautioning people to watch their ratios between good debt and bad debt, and keep liquid reserves such as cash, gold, or silver.

Good debt is debt that makes you rich. An example of good debt is the debt on the apartment houses I own. That debt is good only as long as there are tenants to pay my mortgages. If tenants stop paying their rent, my good debt turns into bad debt.

Most people don't have good debt -- all they have is bad debt. Bad debt is debt that makes you poorer. I count the mortgage on my home as bad debt, because I'm the one paying on it. Other forms of bad debt are car payments, credit card balances, or other consumer loans.

On our home, my wife, Kim, and I keep a 25 percent debt-to-equity ratio. In other words, our debt is 25 percent of the home's value. Unfortunately, many people have an 80 percent or higher debt-to-equity ratio. That means the debt on their home is 80 percent and their equity is only 20 percent.

On our investment properties, we carry a higher debt-to-equity ratio. To protect ourselves, we have cash reserves to cover the expenses of the properties. For example, in case all the tenants leave and no one is left to pay the mortgage and expenses, we have separate funds for each property, with enough liquidity -- i.e. cash, stocks, and bonds -- to carry the building for a year. Unfortunately, the dumb-money crowd has no reserve funds for their properties.

Where Deflation Does Its Damage

In a deflationary market, the value of your home can drop. If the value drops, the bank may call in your loan. Even if you've never missed a payment, and even if you're ahead on the payment schedule, the bank can call in your loan if they feel the value of the property is lower than the loan amount.

For example, say you buy a house for $100,000 and put 20 percent down and borrow $80,000. If the market deflates and the value of your home drops to $70,000 (because everyone else is selling their homes to get out of debt), the lender may ask you to pay the $80,000 you owe immediately.

If such deflation happens, cash will become king. There will be half-price sales on BMWs, expensive restaurants will close, and people will be out of work. And anybody who caters to people with dumb money will be in trouble. As I said before, deflation is much worse than inflation.

Smart Money, Bad Times

The good news is that during deflationary times, smart money reenters the market, so crashes are great for smart people with smart money. Instead of listening to the optimistic economists, then, you should eliminate bad debt and improve your debt-to-equity ratios on good debt.

Most important, study; if you want to be smart, you need to learn. I'll discuss what you should study in the second part of this column. For now, be aware that if deflation comes and there's a recession, it won't have much effect on the poor. Instead, it'll punish middle-class people who think they're rich because their houses and stocks have gone up in value.

I'll explain more in a couple of weeks.

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524 Comments

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  • Yahoo! Finance User - Saturday, October 20, 2007, 2:59PM ET  Report Abuse

    • Overall: 5/5

    Boy do I feel dumb. I knew all this and still bought and now I am bleeding and feeling the pain. Robert's columns are priceless.

  • Lee - Tuesday, September 18, 2007, 3:02AM ET  Report Abuse

    • Overall: 5/5

    I'm reading this months after the fact. He was spot on with his advice

  • P - Saturday, April 7, 2007, 6:22PM ET  Report Abuse

    • Overall: 1/5

    Throwing Good Money After Bad - descibes this Multi Level Marketing (MLM) thinking. Perhaps it was this thinking that put him / estate into bankruptcy?

  • Yahoo! Finance User - Wednesday, March 21, 2007, 11:23AM ET  Report Abuse

    • Overall: 5/5

    I always find Kiyosaki's articles interesting, informative and, best of all, just plain good ol' common sense. Many people don't take the time to do the necessary research to understand how money or finance works then boo hoo when circumstances render them one paycheck away from homelessness. Kiyosaki has proven that he does his homework - even when others don't agree with his findings.

  • Yahoo! Finance User - Wednesday, March 21, 2007, 3:01AM ET  Report Abuse

    • Overall: 4/5

    A lender can certainly call the loan-- if it's in the contract. The problem is that with all this dumb money, usually sub-prime candidates, a barrower doesn't have a lot of options when it comes to contract terms EVEN if they happen to notice that particular clause. So while it's uncommon for all us regular 80/20 folks to see anything like that, it happens on a large enough scale to be a force in the markets-- which I believe is his point. When someone has zero down and bad credit and poor job history but grabs onto an ARM because they want the american dream of home ownership, they may not be reading all the details in the fine print. Many times it's said on here that Kiyosaki columns are bare bones, without substance. I submit that you may be overlooking quite a bit and so missing his point.

  • Ryan - Tuesday, March 20, 2007, 3:10PM ET  Report Abuse

    • Overall: 5/5

    he tells it like it is, of course people don't want to here it, they are the dumb money, the bush bots.will they still vote republican when they have no money and have to sell. 2 types of republicans, stupid, vote their pocketbook, my daddy was a republican and the oh I'm so scared, I believe fox news and my church tells me to always vote republican, no matter how stupid it seems.

  • Yahoo! Finance User - Friday, March 16, 2007, 2:32AM ET  Report Abuse

    • Overall: 2/5

    Nothing new or special in this article. I didn't learn anything new...

  • Anne - Saturday, March 10, 2007, 2:53PM ET  Report Abuse

    • Overall: 5/5

    very informative and down to earth from an Irish reader here in new jresey on a holiday with my daughtre and son in law and grand daughter who live in Montclair New Jersey I will be looking out for your books at home Well done

  • Matthew - Saturday, March 10, 2007, 9:26AM ET  Report Abuse

    • Overall: 2/5

    Maybe he was thinking of a margin call and not a mortgage call. I am a little amused that he has previously stated that saving is for suckers and now we need to keep cash reserves. That sounds like savings to me. It seems a little like he just starts writing without thinking sometimes.

  • Yahoo! Finance User - Thursday, March 8, 2007, 11:16AM ET  Report Abuse

    • Overall: 4/5

    A lot of people are very opinionated when it comes to finances. Yes he may be repeating himself if you have read any of his books. To call him a quack and state that his articles have no validity is mearly opinion. People like me who arent rich have nothing to lose by listening. So how come he is financially successful and a lot of negative critics arent. (food for thought)

  • BrianS - Wednesday, March 7, 2007, 6:37PM ET  Report Abuse

    • Overall: 4/5

    Mr. Kiyosaki is right on. If you read his book, "Rich Dad, Poor Dad" it is basically about good debt & bad debt. The secret to accumulation of wealth is to live beneath your means and eliminate the bad debt.

  • Yahoo! Finance User - Wednesday, March 7, 2007, 1:00AM ET  Report Abuse

    • Overall: 1/5

    In my opinion, Mr K does not give details or supports his comments. Can he say he is capable to predict the future of our economy better than Mr Bernake? Why is not Mr K the head of the Fed?

  • Yahoo! Finance User - Tuesday, March 6, 2007, 3:37PM ET  Report Abuse

    • Overall: 2/5

    i like r.k.'s boldness, but it's curious how he demeans the average reader of this column, ie. someone with a respectable 80/20 mortgage...

  • Yahoo! Finance User - Tuesday, March 6, 2007, 2:28PM ET  Report Abuse

    • Overall: 5/5

    Nice to learn the difference between good debt and bad debt.

  • Yahoo! Finance User - Tuesday, March 6, 2007, 1:23PM ET  Report Abuse

    • Overall: 1/5

    This dude is a complete quack.

  • Yahoo! Finance User - Tuesday, March 6, 2007, 12:13PM ET  Report Abuse

    • Overall: 5/5

    Read Kiyosaki as general advice. Not great on the details or historical accuracy but that's just his style. His perspective on personal debt and assets are excellent. People go bankrupt not because of debt, but because they lack cashflow to service their debt.

  • Yahoo! Finance User - Monday, March 5, 2007, 8:22PM ET  Report Abuse

    • Overall: 1/5

    I think that this guy is a complete fraud. It is unfortunate that Yahoo! Finance gives him a forum, because the other columnists all seem to be legitimate experts giving thoughtful advice. Sometimes his ramblings are accurate, but a blind hog finds an acorn every now and then. Many times his advice is truly bad, in my opinion. He talks about financial risk now, but he didn't seem to have any concept of risk when he wrote that first book. I don't see why some ambitious reporter with access to a mainstream venue doesn't make a name for him/herself by digging up the dirt on this guy. One of the guys on CNBC seemed to be leaning that way once by saying asking like, "Yeah, and why are you rich?" in a skeptical tone... then the interviewer let him off the hook with an answer along the line of "because I like it." I was very disappointed CNBC. Anyway, based on his very limited understanding of finance and economics, I think the only wealth this guy has came from selling books. Here's a scathing indictment that many may not be familiar with: http://www.johntreed.com/Kiyosaki.html If this guy's claims were untrue, Kiyosaki could just sue him, because much of it goes well beyond the writer's opinion. That page has been up for years, so Kiyosaki must not have very much ground to stand on in terms of proving that this guy is lying about Kiyosaki's apparent lack of wealth before books. That's my perspective anyway. As someone else already noted, it's laughable how this guy continually claims to be able to time markets consistently. If you believe his claims, he has seen everything coming... that leaves us to wonder why he's not the richest man in the world. He tries to get readers to associate himself with Warren Buffet by constantly quoting him and acting as though there are major similarities b/w Buffet's and his own warped philosophy. There are plenty of truly great investors out there who have shared their secrets. It's unfortunate that people are too lazy to learn from them (or too resistant because the truth isn't what they want to hear), but those same people will probably not take advantage of their 401k plan because they are a Kiyosaki disciple.

  • David - Monday, March 5, 2007, 9:54AM ET  Report Abuse

    • Overall: 3/5

    One criticism: he says, "If deflation comes and there's a recession, it won't have much effect on the poor." Recessions cause unemployment, which hurts the poor, while the rich have cash stowed away that lets them do well during deflation. Has he forgotten that last time we had deflation was the Great Depression, when the poor suffered the most?

  • Yahoo! Finance User - Monday, March 5, 2007, 6:16AM ET  Report Abuse

    • Overall: 1/5

    Since there are tax benefits to mortgages on your primary residence in some countries, not to mention the 'tax-free' basis of living in the home, a mortgage is not a 'bad debt' unless the interest rate is too high.

  • waffiboy - Monday, March 5, 2007, 5:48AM ET  Report Abuse

    • Overall: 4/5

    good article,Kiyosaki makes complicated issues simple to understand.

  • Allen - Monday, March 5, 2007, 5:48AM ET  Report Abuse

    • Overall: 4/5

    Sorry I picked the wrong rating. It should be VERY GOOD

  • Asian - Sunday, March 4, 2007, 1:14AM ET  Report Abuse

    • Overall: 4/5

    this is for those haters and uneducated..Robert advices are all up to you if you want to listen and do it on your own..he didnt put a gun to your head and tell you to listen to him..so please leave Robert alone, personaly i think he is great on some of his ideas about investing, and his rich dad advices...keep it up Robert

  • chicago3200000 - Saturday, March 3, 2007, 9:15AM ET  Report Abuse

    • Overall: 1/5

    His article really does not make a lot of logical sense and seems much more an instrument for fear than anything else. If a bank calls a loan for a 50,0000 mortgage because the property is now worth 35,000 even though they are up to date in payments, that is just stupid. The bank has a strong likelihood of making 65,000 more by holding the mortgage so why call the loan unless it needs immediate cash. As the banks do have a safety net (S&L bailout), that point makes even less sense. As far as his ability to time the market, no one has shown the ability to do that consistently. Warren Buffet is probably about the best and I doubt that even he is 100% accurate. Kiyosaki is not even close to that making his money selling and marketing books. The best way to offset market fluctuation is dollar cost averaging-but you probably don't sell very many books offering that bit of advice. Overall, I think Kiyosaki's advice would either lead one to a steady financial state or a loss. My advice is if you are just starting out in the market invest long and invest in index mutual funds-these funds have a lower amount of fees in comparison to others (morningstar ratings helpful if looking outside this).

  • Jeff - Friday, March 2, 2007, 9:34PM ET  Report Abuse

    • Overall: 1/5

    This guy is an expert? Puleeze...This guy doesn't seem to have a grasp of economics, and his explanations are rather lame and overly simplistic.

  • Yahoo! Finance User - Friday, March 2, 2007, 11:47AM ET  Report Abuse

    • Overall: 3/5

    Mr. Kiyosaki makes a lot of good points in this article about "dumb money". He gives financial advice you typically won't find in the mainstream media. I really don't agree with his idea of keeping liquid reserves in gold and silver.

  • Mikko - Thursday, March 1, 2007, 10:21PM ET  Report Abuse

    • Overall: 5/5

    Ah yes, another excellent common-sense explanation. Though I am not really an expert in real estate, I can tell RK knows his economics, and he emphasizes the value of financial literacy. Why is this guy rich anyway? Because his mind is rich, and his actions are towards being rich, and plus, all his works make good sense and will definitely motivate any reader to be rich. After all, you don't get 26 million sales by just having a good book cover and write crap inside of it.

  • GetSome - Thursday, March 1, 2007, 8:00PM ET  Report Abuse

    • Overall: 1/5

    What an idiot. The sky is falling, the sky is falling. Quick give all your money to this nimrod so he can lose it for you really quick. Buy his junk books and worthless games so you can learn how to loose money faster than everyone else. For a limitted time only, you can be the biggest dope in the world by following this wackjob's advice. Please Yahoo, get rid of this idiot. His rediculous columns do a dis-service to everyone.

  • akbar - Thursday, March 1, 2007, 9:04AM ET  Report Abuse

    • Overall: 1/5

    Very Poor and naive thinking.

  • Stephen - Wednesday, February 28, 2007, 6:34PM ET  Report Abuse

    • Overall: 1/5

    I have to rate this article poor because it tells a very scary tale based on misinformation. I am no where near a real estate expert but I am 52 and I have bought and sold several principal residences. Never have I heard of a conventional mortgage that could be called by the lender despite the borrower always having been current, paying his real estate taxes, insuring and maintaining the property, using the property legally, etc. This is a contractual nightmare and it does make a lot of sense. Would the lender call a 320k loan because the property, previously worth 400K is now only worth 280K. Would not a lot of people simply say come and foreclose. Again, I don't think a current mortgage loan can be cancelled by the lender, not because he no longer likes the interest rate, and equally, not because he no longer likes the property.

  • Yahoo! Finance User - Wednesday, February 28, 2007, 3:10PM ET  Report Abuse

    • Overall: 5/5

    Simply excellent, true and logical! His books make simple sense! For more easy-to-understand and detailed information on the Federal Reserve and our economy, read "Secrets of the Temple" by William Greider.

Showing comments 6-35 of 524<< PreviousNext >>
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