Kiyosaki's definition
Rich Dad Poor Dad boils financial literacy down to one rule:
- An asset puts money in your pocket.
- A liability takes money out of your pocket.
By this rule a rental property that earns more than it costs is an asset, a dividend-paying share is an asset, and a car on finance is a liability. Most controversially, so is the home you live in: it costs you money every month and pays you nothing.
How accountants define it
In accounting, an asset is something you own that has value: cash, shares, a car, a house. A liability is something you owe: a mortgage, a car loan, a credit card balance. Your net worth is assets minus liabilities.
So in accounting terms your house is an asset and your mortgage is the liability. Kiyosaki is really talking about cash flow, not value. The two definitions answer different questions:
- Accounting asks: what am I worth?
- Kiyosaki asks: what pays me every month?
Both questions matter. Confusing them is where people go wrong in both directions.
A worked example: the home vs the rental
Illustrative numbers, for two identical flats each worth $300,000 with a $240,000 mortgage:
- The home you live in. Monthly costs (mortgage interest, insurance, maintenance, property tax) of around $1,700. Money in: $0 a month, but you're not paying rent, which might otherwise be $1,500. Over time you also build equity as you repay the loan and the value (hopefully) rises.
- The rental you let out. The same $1,700 of costs, plus letting and vacancy costs of about $200. Rent in: $2,100. Net cash flow: roughly +$200 a month, plus the same equity growth.
By Kiyosaki's rule the rental is an asset and the home is a liability. In practice the home still saves you rent and builds equity, so it's better described as a lifestyle purchase that can also be a decent long-term store of value.
What the idea gets right
- "House rich, cash poor" is real. Stretching for the biggest home you can borrow for can leave nothing to invest and no buffer for emergencies.
- Many "assets" are really expenses. Cars, boats, holiday homes you rarely let out, and luxury goods lose value or cost money every month.
- Cash flow is what buys freedom. You can't pay bills with home equity unless you sell or borrow against it.
Where it oversimplifies
- Rent is a real cost. Calling your home a liability ignores the rent it saves you.
- Assets that don't pay monthly can still grow. A growth fund or a home can build wealth without regular payouts.
- "Assets" can turn into liabilities. A rental with a vacancy, a big repair or a rate rise can cost you money every month. Leverage cuts both ways, as our criticism guide explains.
A practical way to use the idea
- List everything you own and owe, the accounting view, and work out your net worth.
- Mark which items pay you, cost you or are neutral each month, the Kiyosaki view.
- Aim for the "pay you" column to grow every year: savings, investments and income-producing property.
- Keep big "cost you" items, home and car included, to a level that leaves room for step 3.
For the debates behind these choices, see is buying a rental property still profitable and our money and debt guide.
Sources
- Robert T. Kiyosaki with Sharon L. Lechter, Rich Dad Poor Dad (1997), chapter "Lesson Two: Why Teach Financial Literacy?".
- The worked example uses illustrative round numbers, not a forecast.