The Poor, The Rich, The Wealthy & The Lawnmower.

Readers who have been around from before “The Great Hacking” or who follow me on social media know there's this thing I do: I'll memorize an entire book in a single sitting, and then I'll apply critical thinking to that information over the course of a few weeks.

Sometimes I do what I call a “Deep Dive,” where I memorize the top ten books on a subject over a ten-week period, experiment and play with those core concepts and discuss what I've learned and my own ideas and opinions on a subject with people who have been in the field for much longer.

This week I started such a dive into Financial Literacy, with Robert Kiyosaki's Rich Dad, Poor Dad. Financial literacy is not taught in schools (“why” is a topic for another post), and it really isn't discussed much in homes, either. I'm not ancient, but I'm old enough to know how much missed opportunities in my twenties have cost me now, into my 40s. I don't say this with regret or animosity, is just the way things happened. But I'm young enough that learning more now can still have profound impact on my life and, more importantly, the lives of my kids as I pass on a different (read: smarter) outlook on personal finances then I had at their age.

As I start this Deep Dive into financial literacy, I'm beginning to reframe the way I think about money, especially my view of terminology like Poor, Rich and Wealthy.

Previously, if asked, I'd have said poor people don't have enough money to get ahead, rich people have enough money to live in comfort, and wealthy people have enough money to do whatever they want.

Now, though, I'm revising those definitions, seeing those words in terms of a person's relationship with money, rather than how much money they have. And so far it shakes out like this: A poor person works for money ineffectively. A rich person works for money effectively. A wealthy person makes money work for him or her.

Put another way, there are three fundamental elements: Time, Money and Assets.

--A poor person trades time for money to maintain his assets and pay expenses.

--A rich person trades time and uses his assets to make money to pay expenses and maintain his lifestyle.

--A wealthy person spends money on assets that create more money in order to cover expenses and maintain his lifestyle, giving him the freedom to spend his time however he likes.

I came up with a simple illustration to explain this understanding to my kids. The numbers aren't realistic, but are just used to keep the math simple:

A poor man buys a house. Now he has a yard to maintain. He spends $250 on a lawnmower. Now he spends his time mowing the lawn and spends his money maintaining the lawnmower.

A rich man buys a house and has a yard to maintain. He spends $250 on a lawnmower. He mows his lawn, and then he mows four lawns a week for $25 each. In two and a half weeks he's recouped the expense of the lawnmower. Now he spends his time making extra money to pay for the house.

A wealthy man buys a house and has a yard to maintain. He pays $250 for a lawnmower. He hires 4 people to mow 4 lawns each per week at $15 per lawn and charges $25 per lawn, generating $10 in profit on each lawn mowed. That's 16 lawns per week at $10, giving him $160. He recoups his $250 in less than two weeks. He spends his money to create more money, the lawn mower pays for the house and he spends his time looking for more opportunities to put money to work.

Yes, this is a gross oversimplification. When you factor in that the lawnmower becomes a business expense for the rich and wealthy (as does the payroll expense for the Wealthy man) that can be used as a tax write-off, the income generated effectively goes up. But the actual numbers aren't the point here, it is the relationship with money that drives those numbers. What is an asset to the rich and wealthy is a liability to the poor.

To the poor, time is the source, income is the product, the "asset" is an expense and survival is the benefit.

To the rich, time is the source, the asset is a tool, income is the product and comfort is the benefit.

To the wealthy, the asset is the source, income is the tool , time is the product and freedom is the benefit.

I asked my kids a question as a thought experiment.

"If I gave you $50 and said 'If you turn it into $300, I'll give you another $300,' where would you start?" They all managed to give thoughtful answers that gave me hope that they were actually listening to me drone on about money. None of them said "If I turn your $50 into $1000, would you give me another $1000?" So, there's still work to be done. But it's probably for the best, because if one of them had the mindset to ask that question, I probably would have given them $50 on the spot.