Rich Dad's Increase Your Financial IQ

Rich Dad's Increase Your Financial IQ Plot Summary

Introduction

Financial intelligence is the ultimate key to creating lasting wealth and achieving financial freedom in today's complex economy. While many people work tirelessly their entire lives, they often remain financially vulnerable because they lack the core understanding of how money truly works. The gap between the wealthy and everyone else isn't primarily about income—it's about financial knowledge and the ability to make that knowledge work for you. Most people have been taught that the path to financial security involves getting good grades, finding a stable job, saving diligently, and avoiding debt. But this conventional wisdom is increasingly outdated in our rapidly changing economic landscape. The truth is that financial freedom requires developing specific intelligence areas that enable you to make more money, protect what you earn, budget effectively, leverage resources wisely, and continuously improve your financial information. By developing these five financial intelligences, you'll be equipped to navigate any economic circumstance and create abundance regardless of your starting point.

Chapter 1: Understand the Power of Financial IQ

Financial IQ represents your ability to solve financial problems effectively. It's not simply about how much money you have, but how intelligently you can handle money matters. People with high financial intelligence can solve increasingly complex financial challenges, which in turn creates greater wealth. The higher your financial IQ, the more money problems you can solve, and the richer you become. Robert's poor dad, a well-educated school superintendent, struggled with money his entire life despite having a good job and academic credentials. He never solved his fundamental money problems, which caused him great distress even into his final days. When Robert visited him on his deathbed, his father apologized for not having much to leave his children. Despite his education and professional status, he never developed the financial intelligence to overcome his persistent money issues. In contrast, Robert's rich dad—his friend's father—approached financial challenges differently. Rather than avoiding money problems, he actively tackled them, viewing each challenge as an opportunity to increase his financial intelligence. He understood that solving financial problems makes you smarter, and the smarter you become about money, the richer you grow. His approach to money wasn't about academic credentials but about practical financial problem-solving abilities. The difference between these two fathers illustrates a fundamental truth: most people either avoid their financial problems or pretend they don't exist. When you ignore financial problems, they persist and often grow larger. The financially intelligent approach is to face problems directly and use them as opportunities to develop your money skills. This is exactly how the wealthy approach money—they see financial challenges as puzzles to solve, which increases their financial IQ. Financial intelligence encompasses five distinct areas: making more money, protecting your money, budgeting your money, leveraging your money, and improving your financial information. Each intelligence requires different skills, but together they create the foundation for financial freedom. The exciting reality is that anyone can develop these intelligences through practice and persistence. To start developing your financial IQ today, identify your most pressing financial problem and commit to solving it rather than avoiding it. Remember that your income, investments, and financial security will only grow to the extent that your financial intelligence does. The path to wealth isn't found in a larger paycheck—it's discovered through developing the intelligence to handle increasingly complex financial situations.

Chapter 2: Master Money-Making Strategies

Making more money—financial intelligence #1—is about developing the ability to solve income problems creatively. The secret isn't working harder but solving bigger problems for more people. The more problems you solve, the richer you become. This fundamental principle separates those who achieve financial freedom from those who remain trapped in the rat race. After leaving the Marine Corps in 1974, Robert faced a critical career decision. Though he could have accepted a high-paying position with Standard Oil as a ship's officer or become an airline pilot, he instead took a job with Xerox Corporation that paid far less—just $720 a month. His friends and family thought he'd lost his mind. Why would anyone take a significant pay cut when better options were available? Robert's decision reveals the first principle of making more money: sometimes you must sacrifice short-term income for long-term financial intelligence. Robert joined Xerox not for the paycheck but to learn essential sales skills he knew would be valuable as an entrepreneur. Though naturally shy and afraid of rejection, he recognized that overcoming these limitations would increase his earning capacity far more than a comfortable salary. The first two years were extraordinarily difficult—he nearly got fired multiple times for poor performance. Yet he persisted, eventually becoming the top salesperson in his office through sheer determination and a commitment to mastering his craft. This experience taught Robert that solving personal problems is often the pathway to solving income problems. By conquering his fear of rejection and developing sales abilities, he gained skills that would later help him build multiple successful businesses. After mastering sales at Xerox, he launched his first major venture—a nylon wallet business—which eventually made him a millionaire. Though the business later collapsed due to market changes, the lessons he learned about rebuilding after failure proved invaluable. To increase your money-making ability, identify which problems you're uniquely positioned to solve. Not everyone needs to become an entrepreneur or real estate investor like Robert. Your path might involve enhancing specialized professional skills, developing artistic talents, or mastering technical expertise. The key is understanding that your income will grow in proportion to the value of the problems you solve. The process is more important than the goal. Many people want money but aren't willing to go through the necessary learning process to earn it. They value immediate gratification over delayed rewards. Robert didn't make much money in his twenties and thirties while building his skills, but he later earned millions because he invested time in his financial education first. Similarly, you must be willing to delay gratification and focus on developing valuable skills that solve meaningful problems. Remember that financial intelligence is also emotional intelligence. As Warren Buffett says, "If you cannot control your emotions, you cannot control your money." Developing the ability to delay gratification, persist through failures, and maintain discipline during setbacks is essential for financial success. The path to wealth requires both technical knowledge and emotional maturity.

Chapter 3: Protect Your Wealth Effectively

Protecting your money from financial predators is crucial to building lasting wealth. The world is filled with organizations and individuals waiting to take your money, many of them operating legally. If they're smarter or more powerful than you, they'll get your money. This is why financial intelligence #2—protecting your money—is so important for your financial survival. Rich dad taught Robert and his son about financial predators using a simple metaphor: farmers need to protect their crops from "bunnies, birds, and bugs." This analogy helped young Robert understand that many financial predators aren't obvious villains but seemingly innocent or respected entities. Rich dad expanded his "B" theme to include real-world financial predators: bureaucrats, bankers, brokers, businesses, brides/beaus, brothers-in-law, and barristers. Take bureaucrats, for instance. Taxes are our single largest expense, with government constantly finding new ways to extract more money. The Alternative Minimum Tax (AMT) was created in 1970 for high-income earners making around $60,000 annually. Today, $60,000 is hardly a high income, yet this tax persists, effectively taxing middle-class workers twice on the same income. Bureaucrats excel at spending money but generally lack the intelligence to create it, which is why taxes continue rising. Bankers represent another major predator category. Originally created to protect money from bandits, many banks now operate like bandits themselves. In 2007, Congress began investigating 401(k) plans and mutual funds for hidden fees that significantly reduce retirement savings. Many employers don't even understand these fees, making it impossible for employees to know if they're getting a good deal. Banks effectively collect money directly from paychecks before it even reaches workers' pockets. Brokers—or salespeople—in stocks, bonds, real estate, and insurance often provide financial advice that benefits themselves more than their clients. Warren Buffett observed, "Wall Street is the place people drive to in their Rolls-Royce to take advice from people who ride the subway." The challenge is finding good brokers who are students of their profession, invest in what they sell, and want relationships rather than just transactions. Robert and Kim found success with stockbroker Tom and real estate broker John, who took time to educate them even when they had little money. To protect yourself from legal predators, you must understand the rules of money, which changed dramatically in 1971 when Nixon took America off the gold standard. The dollar became a currency rather than money, beginning a period of ongoing devaluation. This fundamental shift turned savers into losers and debtors into winners. Under the old rules of capitalism, saving money was financially smart. In the new capitalism, it's financially damaging to save a rapidly declining currency. The most effective protection strategies include understanding the different types of income. Earned income (from wages) is taxed at the highest rates, while portfolio income (from investments) and passive income (from business systems or real estate) receive preferential tax treatment. The wealthy focus on generating passive and portfolio income while minimizing earned income. They also use legal entities like corporations and LLCs to hold assets, maintain personal liability insurance, and keep nothing of significant value in their personal names. The financial world is intentionally designed to extract as much of your money as possible—legally. Your best defense is developing the financial intelligence to recognize these systems and legally minimize your exposure to them. Remember, it's not about breaking rules but understanding them and using them to your advantage.

Chapter 4: Create Budgets That Generate Surplus

Most people misunderstand the purpose of budgeting. They see it as a tool for cutting back and living with less, when in fact, proper budgeting should expand your financial capacity. The difference lies in whether you create a budget deficit or a budget surplus—and this single distinction can determine whether you grow richer or poorer throughout your life. Rich dad often advised, "If you're going to be rich, you need to expand your means," while poor dad counseled, "Live below your means." This fundamental difference in perspective reveals two contrasting approaches to money. A budget is simply a plan for coordinating resources and expenditures. Most people create budgets that lead to poverty or middle-class status rather than wealth because they focus on cutting expenses instead of increasing income. Shortly after Robert and Kim married, they faced the common newlywed challenge of having more expenses than income. Their solution was radical: they hired Betty the Bookkeeper and instructed her to take 30% of all income off the top and put it in their asset column before paying any bills. Betty nearly quit, thinking they were financially irresponsible. Using simple numbers, if they had $1,000 in income and $1,500 in expenses, Betty was to take $300 and invest it, then try to pay $1,500 in bills with the remaining $700. For months, they came up short—sometimes by as much as $4,000. Instead of taking money from their assets to cover bills, they viewed this shortfall as a challenge to increase their income. Kim would consult on marketing plans, take modeling jobs, or sell clothes. Robert would teach investment classes, train sales teams, or even help families move. This approach forced them to solve their income problem rather than merely trimming expenses. This method of budgeting for surplus created pressure—creditors called and made demands. But instead of letting this pressure force them to pay bills first, they used it as motivation to make more money. Most people don't pay themselves first because no one pressures them to do so. No one hires bill collectors to collect from themselves or threatens foreclosure on their own assets. By using the pressure tactics of creditors to motivate themselves, Robert and Kim grew stronger financially. Another powerful budgeting principle is understanding that your expense column predicts your future. Rich dad said, "You can tell a person's future by looking at what they spend their time and money on." Someone who spends on donations, savings, books on investing, and personal development will have a different financial trajectory than someone who consistently buys beer, new shoes, TVs, and sports tickets. Rich dad also taught Robert to have his assets pay for his liabilities. Instead of denying himself luxuries, he would create assets that generated enough cash flow to pay for them. When Robert wanted a $200,000 Bentley convertible, he didn't simply spend cash from his asset column. He instructed his broker to take $200,000 in gold and silver shares and trade them up to $450,000. After taxes and commissions, he used the proceeds to buy the car while keeping his original $200,000 in assets intact. To create your own budget surplus, start by allocating a percentage of your income—even just 3%—directly to your asset column before paying any other expenses. If this makes life harder, that's good—the challenge will make you more resourceful. As your financial intelligence grows, gradually increase this percentage. Today, Robert and Kim direct approximately 80% of their income to assets and live on the remaining 20%. This continual challenge keeps them growing financially rather than becoming complacent.

Chapter 5: Leverage Money to Multiply Returns

Leverage is the art of doing more with less, and mastering it is essential for creating extraordinary wealth. While many financial advisors warn that higher returns require higher risk, the truth is more nuanced. Leverage becomes risky only when you lack control over your investments. With proper control, you can achieve exceptional returns with minimal risk. During a major stock market crash in August 2007, financial planners on television advised viewers not to panic and to "save money, get out of debt, and invest for the long term in a well-diversified portfolio of mutual funds." Meanwhile, Robert and his wife Kim were excitedly purchasing a $17 million, 300-unit apartment complex in Tulsa, Oklahoma. This stark contrast highlights the difference between conventional financial thinking and leveraged investing with control. The apartment purchase illustrates several principles of intelligent leverage. First, Robert used the bank's money for 80% of the investment, creating a 1:4 leverage ratio—for every dollar he invested, the bank provided four more. More importantly, while the bank contributed 80% of the funding, Robert received 100% of the appreciation, income, tax benefits, and debt reduction (amortization). This arrangement creates a win-win situation where the bank earns interest while Robert captures all the investment upside. Control is what makes this leverage safe rather than risky. Robert has control over the property's income (by raising rents strategically), expenses (through efficient management), liabilities (by securing favorable financing), and asset value (which increases as net income rises). This control allows him to confidently use bank financing without excessive worry about market fluctuations. Unlike stocks or mutual funds where investors have no operational control, real estate permits active management to improve returns. Robert planned to increase each apartment unit's rent by $100 monthly over three years through strategic improvements—installing washers and dryers, upgrading landscaping, and repainting. This would generate an additional $30,000 monthly or $360,000 annually in income. Because these improvements were included in the original loan, no additional capital was needed. This represents an infinite return on the additional investment—more money for nothing. The exit strategy further demonstrates sophisticated leverage. Rather than selling the property and facing substantial capital gains taxes, Robert planned to refinance after enhancing the property's value. This would allow him to extract his original investment tax-free while still owning the asset. The increased income from improvements would more than cover the higher mortgage payment. At this point, any ongoing income represents an infinite return since no personal capital remains in the investment. To develop your leverage skills, start with smaller investments where you can learn the principles of control before applying significant leverage. Kim began with a $45,000 two-bedroom house in Portland that generated just $25 monthly in positive cash flow. Robert's first investment was an $18,000 condo in foreclosure that the bank allowed him to purchase using a credit card for the down payment. These modest beginnings provided the education needed for larger deals later. The financial integrity of leverage comes from controlling your investments rather than merely owning them. Professional investors don't diversify as financial advisors recommend—they focus on great investments they understand and can influence. Warren Buffett says, "Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing." Instead of spreading investments thinly across uncontrollable assets, concentrate on developing expertise in areas where you can apply intelligent leverage. Remember that in the new capitalism, currency must keep moving to maintain value. Rather than trying to accumulate and save a declining currency, focus on acquiring assets that produce income and increase in value. By mastering leverage with control, you can achieve what might seem impossible—higher returns with lower risk.

Chapter 6: Develop Quality Financial Information Sources

In today's Information Age, the quality of your financial information directly determines your wealth. Information is the single greatest asset of our era, yet many people perish financially because they lack knowledge about money or operate with obsolete information from previous economic ages. Developing financial intelligence #5—improving your financial information—is critical for navigating today's complex economy. Robert's experience as an information officer in Vietnam taught him to respect the power of information in life-or-death situations. He learned that information must be classified according to time, credibility, security level, relativity to other information, and potential deception. These same principles apply to financial information. For example, all investment information is essentially "inside information"—the question is how far from the inside you are. By the time average investors hear news about a company, insiders have already traded on that information. When evaluating financial information, it's essential to distinguish between facts and opinions. Many investors lose money because they mistake opinions for facts. An opinion is a statement about a future event that hasn't been verified—like when someone says a stock will go up. A fact is something proven through physical verification. Financial insanity occurs when people use information that is opinion as if it were fact. For instance, many homebuyers purchased properties they couldn't afford because their brokers said values would increase—an opinion treated as fact. Robert learned a powerful lesson about information in 1972 while serving in Vietnam. As North Vietnamese forces advanced southward, he noticed intelligence reports showing South Vietnamese citizens trading their currency for gold leaf. Gold was rapidly increasing in value as people lost confidence in paper currency. Seeing an opportunity, Robert and a friend flew behind enemy lines to buy gold directly from miners, hoping to get a discount. Instead of making a killing, Robert nearly got killed. Standing in a bamboo hut arguing with a red-toothed old woman about the price of gold, he realized she knew exactly what she was doing. Despite lacking formal education, she understood both local and global economic forces affecting gold prices. She knew gold's price was the same worldwide and that with the war intensifying, its value would only increase. Robert learned that information combined with intelligence is what creates wealth—not the gold itself. This experience taught Robert the power of trends. The old woman understood that people fleeing war zones convert paper money to precious metals, creating a predictable upward trend in gold prices. Following trends rather than fighting them is key to successful investing. Robert now focuses on several major trends: rising oil prices as emerging economies develop, increasing silver value due to industrial consumption and limited supply, and demographic shifts affecting housing markets. One particularly valuable trend indicator is what Robert calls "the financial bird of prey"—construction cranes on the skyline. When multiple cranes appear in a city, it often signals that the real estate cycle has peaked. This simple observation can help investors know when to sell before a market decline. Similarly, understanding the historical twenty-year cycle between stocks and commodities can provide strategic advantage. From 1960-1980, commodities rose while stocks struggled. From 1980-2000, stocks boomed while commodities languished. Since 2000, commodities have outperformed stocks, a trend likely to continue until around 2020. To improve your financial information quality, cultivate diverse information sources rather than relying solely on mainstream financial media. Join investment clubs, read unconventional financial authors, study economic history, and pay attention to demographic shifts. Most importantly, verify information before acting on it, as credible financial adviser Ken McElroy says, "Trust, but verify." Remember that ultimately it's not gold, stocks, real estate, or any other asset that makes you rich—it's the quality of information and intelligence you apply to those assets. Even real money like gold can be a poor investment if purchased without proper information. By developing sophisticated information gathering and analysis skills, you'll make better financial decisions regardless of economic conditions.

Summary

The path to financial freedom isn't paved with higher paychecks or lucky investments—it's built on developing comprehensive financial intelligence. Through the five core financial IQs—making more money, protecting what you earn, budgeting for surplus, leveraging intelligently, and improving your information—you gain the capacity to solve increasingly complex money problems and build lasting wealth regardless of economic conditions. As Robert Kiyosaki powerfully states, "It is not the asset that makes you rich... it is information and intelligence that makes you rich." This fundamental truth lies at the heart of financial success. When you increase your financial intelligence, you develop the ability to see opportunities where others see obstacles and to create wealth where others can only consume it. Your most valuable asset isn't your investment portfolio but your financial mind—and like any asset, it appreciates in value the more you develop it. Start today by identifying which of the five financial intelligences needs your immediate attention. Choose one area to focus on, develop a specific action plan, and commit to consistent improvement. Remember that small daily actions compound over time into remarkable results. By treating each financial challenge as an opportunity to grow smarter rather than a problem to avoid, you transform your relationship with money and create the freedom you deserve.

About Author

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Robert T. Kiyosaki

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