Read an Excerpt
A Change in the Law. . .
A Change in the Future
Both my rich dad and my poor dad were very concerned about the overall
well-being of their employees. My real dad, as the superintendent of education
for the State of Hawaii, had tens of thousands of workers who counted on him to
take care of them. My real dad, the man I call my poor dad, was so very
concerned about his teachers that when he was no longer the superintendent of
education he became the leader of HSTA, which stands for the Hawaii State
Teachers Association, a teachers union, again negotiating for the well-being of
My rich dad was also very concerned about his employees, and in many ways, he
was much more concerned about his employees than my dad. The reason he was more
concerned was because my poor dad's employees had the financial support of the
government and the local and national teachers unions. My rich dad's employees
did not have the government support and union protection. He would often say, "I
wish I could tell my workers what I know and what I see coming in the future. I
wish I could but I am afraid I would frighten them too much. Besides, the main
problem is that most of them lack the basic financial education first to
understand what I am saying and secondly to be able to take corrective action.
How do I tell my loyal hardworking employees that today, being loyal and
hardworking is not enough? How do I explain to them that long-term job security
does not insure long- term financial security? How do I tell them about a change
in a law that has changed their future forever? How do I tell them without
frightening or depressing them? How do I tell people about what I think might
happen, but I am not certain will happen?"
As I said, both my poor dad and my rich dad were very concerned about their
workers. The difference was that my poor dad had the power of the government and
the teachers unions to help his workers. My rich dad knew that his workers were
at a disadvantage and this concerned him greatly. In 1974 there was a major law
change in America that was reportedly designed to help workers who worked for
people like my rich dad. While many people thought the intent behind the new law
was a great idea, rich dad could see its inherent flaws. He knew that in many
ways, most of his workers would not be better off in the long run and he could
see a growing threat of financial disaster looming in the future. . . a
financial disaster caused by the passage of this act into law.
In 1979, I was thirty-two years old and struggling to keep my business above
water. My nylon and Velcro surfer wallet business had taken off faster than
expected. In only a few years, we were a big company with a sales force of over
380 independent sales reps in the United States alone. Worldwide, we never
really did figure out how many salespeople we had selling for us. The problem
was that we had a worldwide product but we were a small-time company with a
young incompetent management team. When success and incompetence meet, disaster
is not far away.
It has been said "You cannot learn to swim from a textbook." I would also
add, "You cannot learn business from a textbook or from business school." My
partners and I had limited textbook knowledge and very little real-life business
experience. At an early age, we were learning some simple yet tough lessons
about business, lessons that can only be learned from front line experience.
Besides the lesson that success can kill you, some of the other lessons I was
1. Friends do not always make good business partners.
2. A company can be profitable and still be in serious financial trouble.
3. It's the little things, like not having enough thread, that can stop the
4. People do not always pay their bills, which means you cannot always pay
your bills. People do not like you when you do not pay them.
5. Patents and trademarks are important aspects of a successful business.
6. Loyalty can be fleeting.
7. It is essential to have accurate financial records and accounting.
8. You need a strong management team and a strong team of professional
consultants such as lawyers and accountants.
9. It costs a lot of money to
build a business.
10. It's not the lack of money that kills a business. It's more the lack of
business experience and lack of personal integrity.
The actual list of lessons is much longer. The experience of worldwide
success and worldwide failure was priceless. I went through such experiences not
once, but twice. And although I do not want to go through it all again, I am
ready to. . . because the lessons are priceless, if you are willing and humble
enough to learn from your mistakes. Each business failure showed me what I did
not know and what I needed to learn. . . and that learning experience led to the
In 1979, I was up to my ears in learning experiences. I was over my head in
mistakes, buried by my own personal incompetence, and I did not want to learn
anything more. I had more than enough stupidity to learn from, yet rich dad had
more to point out to me. In the spring of 1979, I walked into his office for our
regular meeting and showed him my company's financial statement. Looking over
the statement, rich dad shook his head and said, "Your company has financial
cancer. . . and I'm afraid it's terminal. You boys have mismanaged what could
have grown into a rich and powerful company." Mike, rich dad's son, was not a
partner in my business, yet he did sit in on most of the mentoring meetings I
had with his dad, the man I call my rich dad. Mike and I had been best friends
all through high school, but after I returned from college and the Vietnam War,
it was difficult maintaining a close friendship since we were in completely
different business and financial leagues. In 1979, Mike was in the process of
taking over his father's multimillion- dollar empire and I was in the process of
losing a multimillion-dollar business. As Mike looked over my company's
financials, I felt shame and embarrassment when Mike also shook his head.
"What is this?" asked rich dad, pointing to a section of my financial
Looking at where he was pointing, I said, "It's the amounts we owe the
employees and the government for the employees' payroll and payroll taxes." "Now
look at your cash position, there isn't any money there," said rich dad sternly.
"How are you going to make payroll, and pay the taxes?" I sat there quietly
saying nothing. "Well . . ." I began feebly, "well, when we collect on some of
our back accounts receivables we'll have enough to pay them."
"Oh come on," said rich dad. "Don't give me that jive. I'm not your college
professor. I can see from your financials that much of your accounts receivables
are over 120 days delinquent. You and I know that these people you have sold
product to are never going to pay you. Tell me the truth. Tell yourself the
truth. You're broke. You're broke and now you're about to default on paying your
employees and their taxes. You're using your employees' money to keep your
"But it is only a short-term credit problem. We have money coming in. We have
sales coming in from all over the U.S. and the world," I replied in my
"Yes, but what good are sales if you cannot build product and cannot deliver
on those sales? I can see from these financial statements that people owe you
money and you owe money. You owe money to the people that supply you the
materials to produce your products. What makes you think that your suppliers
will give you any more credit?"
"Well-" I began but was cut off again by an angry rich dad. "Your suppliers
won't give you any more credit. Why should they?" "Well, I'll go talk to them
"Good luck," said rich dad. "Look, why don't you face the truth? You and the
three clowns you call partners have mismanaged your business. . . you don't know
what you're doing. . . you're incompetent . . . and worst of all, you don't have
the guts to admit any of this. You guys are pretending to look like
businesspeople. . . but when I look at your financials, you boys are either
crooks or clowns. I hope you're clowns. . . but if you don't make some changes,
you clowns will become crooks." Rich dad said this pursing his lips and slowly
moving his head from side to side. "Borrowing money from your employees is bad
enough. Just look at the back taxes you owe. How are you going to pay them?"
Rich dad had been my teacher since I was nine years old. He was a very loving
and caring man, but when he was angry. . . he was not a polite man. This
particularly heated lesson in business management went on for hours. Finally, I
agreed to shut the business down, liquidate the remaining assets, and use the
money to pay the taxes and the employees.
"There is nothing wrong with admitting you're incompetent," said rich dad.
"But there is plenty wrong with lying and pretending you know what you're doing.
Lying and pretending you know what you are doing is a bad habit. . . and I want
you to stop that habit now. If you want to be rich and successful, you need to
learn to tell the truth quicker, ask for help quicker, and be more humble. The
world is filled with arrogant poor people, educated and uneducated. . . people
who cannot admit they do not know something. The world is filled with people who
go through life pretending they are smart. . . and that makes them stupid. If
you want to learn quickly, the first step is to admit quickly you do not know
"Remember the lesson from Sunday school, the lesson that goes, 'Blessed are
the meek for they shall inherit'? The passage does not go blessed are the weak
or blessed are the arrogant, or blessed are the well educated. It says blessed
are the meek for the meek shall learn and if you learn you shall inherit the
abundance of life that God or nature has placed in front of us. You boys are
arrogant, conceited, cocky, and ignorant. . . not meek. You think that just
because your product is a success you are also a success. You boys are not yet
businessmen. You boys got lucky but you do not have the skill and experience to
turn your luck into a business. No one becomes a successful businessperson
overnight. You have a lot more to learn. And the lesson you must learn today is
that if you owe money, pay the bill. People hate people who do not pay their
bills. Friends, families, and businesses have broken apart because money owed
was not repaid. From your company's financial statements, I can see that you owe
money to the government, your suppliers, your landlord, and most importantly to
your employees. Pay those bills and pay them now. Don't do anything else until
those bills are paid. Don't come back here until you've paid your taxes and all
your employees. You're becoming a sloppy businessman and sloppy businesspeople
do not become rich and successful businesspeople. Now get out of here and don't
come back until you have done what I have just told you to do."
As I said, rich dad had chewed me out many times over the years, but this
lesson from rich dad was especially memorable. As I closed the door behind me, I
could feel this particular lesson sinking into my soul . . . becoming a lesson I
would never forget. Although I hurt, I knew that the lesson was an important
lesson. . . for if it was not important, rich dad would not have gotten so angry
or so brutally forthright. Being thirty-two years old, I was old enough to take
this strong, emotionally charged lesson and wise enough to know that I had
something important to learn.
Over the years, rich dad had a lesson on truth and honesty he repeatedly
taught. He often said to his son and me, "Many people ask young people, 'What do
you want to be when you grow up?' When they ask that question, they are usually
asking what profession the child wants to pursue. Personally, I don't care what
you do when you grow up. I don't care if you become a doctor, movie star, or
janitor. But as you grow up, I do care that you grow up to become more and more
truthful and more honest. Too many people grow up becoming more polite, but not
necessarily more truthful, or worse, they tell lies as kids and become bigger
liars as adults." As I walked down the street to where my car was parked, I knew
it was again time for me to become more truthful. . . more honest with myself,
my partners, and my employees. Climbing into my car, I could hear rich dad
saying, "Any coward can tell a lie. Telling the truth takes courage. As you boys
grow up, grow up to become people who have more and more courage to tell the
truth quicker. . . even if the truth hurts. . . even if being honest makes you
look bad. It is better to look bad telling the truth than to be a good-looking
lying coward. The world is filled with good-looking lying cowards." As the
engine came to life and I put my car into gear, I felt terrible and I knew that
I probably looked as bad as my financial statements. Driving away, I also knew
that I had two choices. One was to continue lying to myself and never see rich
dad again. The other was to begin finding the courage to face the truth, to
clean up the mess I made, and then look forward to seeing rich dad again.
At thirty-two, I realized I still had a lot of growing up to do. I knew that
if I wanted to become a richer, more successful person and a better human being,
I had to be able to hear a more refined truth, even if it was a little tougher
truth. As part of my growing up, I also had to be able to tell the truth better.
As I pulled up into my company's parking lot, I knew the time to begin telling
that truth was now. . . and it would begin with my partners, the partners rich
dad called clowns.
Approximately four months later, I returned to rich dad's office with a new
set of financial statements in hand. Rich dad and Mike looked them over for what
seemed to be an extra long period of silence. Finally rich dad said, "So all
your back taxes and your employees are paid?" "That is correct," I said. "If you
notice, I also cleaned up a lot of my old accounts receivables."
them to pay?" asked rich dad. "Either they paid or I took them off the financial
statement and sent a collection agency after them."
"That's good," said Mike. "A customer who does not pay is not a customer. A
customer who does not pay is a thief." "I understand that now," I replied. "But
I was doing the same thing." Rich dad looked up at me. . . paused, and then
slowly nodded and quietly said, "Thanks for admitting that."
"It wasn't easy," I replied. "I had this image of myself as a successful
person, and in reality, I owed a lot of people a lot of money." Mike and rich
dad sat silently, ever so slightly nodding. Finally rich dad said, "The truth
does set you free. . . and hopefully now you are free . . . free to clean up
your mess and begin building your next business on more solid ground. So many
people attempt to build their financial empire upon a mess of lies. . . and lies
never seem to support much of an empire."
Now it was my turn to sit silently and just let the crystal-clear silence
fill the room. After a long pause, Mike asked, "So what condition is your
company in? Your financial statement is a lot more honest but a financial
statement can never tell the whole story."
"The company is finished," I replied. "We still have sales and the actual
business is strong, but the four of us who started this business are finished.
We'll probably never be partners or friends again. Truthfully, the truth tore us
"So when you returned to your company, you had a heart-to-heart?"
"Well, it started out as a heart-to-heart but it soon became face-to-face. We
almost came to blows but thankfully that did not happen. It has not been
pleasant at work, but I do give my partners credit for being willing to stick it
out and clean up the mess, as you suggested."
"Now what happens?" asked Mike. "Well, we are turning over the remains of the
company to one of our suppliers and we are all going our separate ways. We will
soon begin letting our employees go, and they will have all the money we owe
them. Our investors will get some but not all of their money back, but we have
talked to them and they understand the risk they took. Several have said they
would invest with me again. And our taxes are paid."
Mike and rich dad just sat silently. It was like being at a funeral . . . a
lot of emotion but little to say. The winding down of a business is like the
ending of anything. Good or bad, there are parts of the experience that had
forever changed our lives, our future, and who we would become. I was dreading
turning out the lights and closing the office door for the last time, even
though I was also glad it was going to soon close. Finally rich dad broke the
silence and said, "Well, I'm proud of the way you handled the loss of your
business. I know it isn't pleasant and I know you could have handled it
differently. You could have taken the remaining money and run. . . but you chose
a better way of ending things. That will give your next venture a little better
ground to start from. Have you learned a lot?"
"Massive learning," I said. "I'm still digesting the lessons." "You will for
years," said rich dad. "But someday this experience and the mistakes and
experiences yet to come will become the basis for your success and fortune. Most
people avoid mistakes. Most people spend their lives playing it safe. . .
avoiding such lessons. . . and that lack of life's experience limits their
future financial success. Always remember that business experience can never be
gained from a textbook or a classroom. Although painful, because of the way you
chose to handle this business failure, this painful short period of time will
someday become the basis of your long-term financial wealth. If you had run and
lied, your financial future would probably be a coward's future. . . because if
you had run you would have been letting the coward in you determine your
I simply sat quietly and nodded. There was not much to say. I had heard this
talk and this lesson before . . . but on this day, this simple lesson had much
more meaning and a deeper impact. Rich dad often said to his son and me that
inside each of us is a cast of characters. Inside each of us is a kind person, a
mean person, a greedy person, a rich person, a poor person, a coward, a crook, a
hero, a liar, a cheapskate, a lover, a loser, and more. He constantly reminded
us that growing up was a process of choosing which person we wanted to become. .
. which person we wanted to draw out of all the cast of characters available. As
stated earlier, when he asked us what we wanted to be when we grew up, he was
asking which character we were choosing to become. . . not if we were going to
be a doctor, lawyer, or fire- fighter. To rich dad, a person's choice of
character was far more important than a person's choice of profession.
"When it comes to money, the world is filled with cowards," said rich dad.
"Money has a way of bringing out the coward. . . more than the hero . . .and
that may be why there are so few truly rich people. Money also has a way of
bringing out the cheat and the crook in some people. . . and that is why our
jails keep filling up. Money also has a way of bringing out the betrayer . .
.the person who will steal from those that love and trust them. . . and when you
'borrowed' from your employees, that is the character you were choosing to
become. . . and that is why I was especially tough on you. Crooks and cowards
are one thing. . . but becoming a person who betrays those that trust you is one
of the most despicable of all characters available to all of us. . . and you
were choosing that character."
There was not much for me to say. The internal pain was intense. Truth and
honesty are not always pleasant and this dose of truth and honesty was very
unpleasant. . . yet necessary. I realized that in my desperation to save my
company, I had chosen to betray those that trusted me.
"Have you gotten your lesson?" asked rich dad. "Have you gotten the lesson in
I just nodded my head again. I had understood the lesson. . . a deep, painful
lesson, a lesson I would always remember. I had always thought of myself as a
good, honest person. . . yet under pressure, the character that emerged was the
person who betrayed those that trusted me.
"Good," said rich dad. "A lesson in character is far more important than a
lesson in reading a financial statement. . . yet the financial statement did re-
flect your character. Your financial statement told me the story of the betrayer
in you taking over your business. That is another lesson in the importance of
accounting, accountability, and the importance of being able to read financial
statements. The numbers tell me a story. . . a story of which character is in
charge of the money. When you and your partners started your business, you
started off as gamblers, you got lucky and became clowns thinking your luck was
skill, when the money came pouring in you became fools buying Porsches and
Mercedes sports cars, and when you got into fi- nancial trouble you became
people who betrayed your suppliers, your government, and your workers. Your
financial statements tell a better story than most novels."
"That's enough, Dad," Mike said as he jumped in to protect me from any more
of the lesson. "I think you have made your point." "Okay," said rich dad.
Turning to me he then asked, "Have you got the lesson?"
"Right between the eyes," I replied. "Good. Let's go get some lunch," said
rich dad. "There is a far more important lesson I want you to learn. . . a very
important lesson. . . a lesson that begins with the question, 'Why did your
employees not know what you were doing with their money?'"
When the elevator finally arrived, we found it crowded with people also going
to lunch. Packing into the elevator, rich dad said, "Sometime in the future,
long after I am gone, millions of hardworking people will find out that clowns
like you and your partners have been playing games with their money. . . their
retirement money. . . their financial future. . . their financial security. The
government has made changes in the law. . . changes to protect workers, but I do
not think this law change will solve the problem. In fact, I think the law
change will make things worse for many people. I am afraid something terrible is
going to happen."