The Cashflow Game is a board game created by Robert Kiyosaki. He is the author of the best-selling book “Rich Dad, Poor Dad” and has become one of the most influential thinkers of our time.
Robert Kiyosaki believes in the importance of financial education for everyone and created this game as a teaching tool to help improve the financial literacy of his students (myself included). While I have played the physical board game in a group only about half a dozen times, I’ve played the free online version hundreds of times.
In my spare time, I do some mentoring with teenagers from low-income families. Recently I played the Cashflow Game with them. At the end of the games, I held a debrief, and here are some of the interesting lessons they learned.
** Note: Previous experience playing the Cashflow Game is needed to fully understand what follows.
Lesson #1: Good Debt vs Bad Debt
In his book, Robert Kiyosaki classifies debt into Good Debt and Bad Debt.
Debt is good when the money is put into productive use and generates an income higher than the interest you pay on the money. For example, if you take out a mortgage on a property at 2% interest, but rent it out for a 5% net rental yield, you’re making a 3% profit from the debt. This is Good Debt.
But debt used to finance consumption is Bad Debt (by his definition). The best example is taking a loan to buy a car, which is a depreciating asset that you pay for every month but doesn’t generate any income for you.
If you take a car loan of $100,000 at 2% simple interest over 10 years, your monthly instalment is going to be $1,000. At the end of 10 years, you might be able to get back a scrap value of $20,000, at best.
But if you invest $1,000 a month at 4% annual interest compounded, you will end up with $149,236 after 10 years, which is 7.5x more!
Lesson #2: Stay Invested
For one of my mentees, he had a horrible game for the most part. He started with a low-income profession (Nurse), got hit by a string of Doodads and was Downsized early in the game. At one point, his monthly cash flow was just $100 as he kept having to borrow to cover these expenses, and he was at high risk of becoming bankrupt.
But what saved him, in the end, was that one 2/1 house that he bought. Someone else landed on a Market square, and he managed to sell it for a good profit. He cleared his debts and still had enough left over from that first pot of gold to start accumulating more assets and continue his march towards financial freedom.
In real life, most of us have been taught since young that we need to save money for retirement. But that is a terrible retirement plan. Firstly, inflation, even more so now compared to the last 30 years, will erode the value of your savings. Secondly, without any fresh income after retirement, you may outlive your savings. Thirdly, even if you don’t outlive your savings, there’s less for you to pass on to the next generation.
If you save $1 million by the time your retire, spend $30,000 a year, and pass away after 25 years, you can only pass on $250,000 to your descendants.
But if instead, you buy a $1 million condo (all cash, no debt) and rent it at a 3% net yield*, your asset will generate the $30,000 needed to fund your expenses for perpetuity, so it’s not a problem even if you live for another 50 years. And you still can pass the asset on to the next generation without any erosion in value.
*Net Yield = (Rental Income – Maintenance Costs – Property Taxes) / Investment Amount
Lesson #3: Be In the Market
In order to know whether a deal is good or not, you need to be in touch with the market. Otherwise, you won’t know what’s a good price to buy and to sell.
In the second round that I played with my mentees, the other mentee, on two occasions, drew very good Opportunity cards. She didn’t have enough cash on hand, but she could have borrowed to fund the purchase and still end up with a better cash flow. Instead, she sold the cards to me and the other player.
The first couple of times you play the game, you won’t know which are the good opportunities to take and which are the bad ones to avoid. You won’t know that a $10 stock is a good buy, $5 is a steal, and $1 is “all-in” time. It all comes with experience.
In real life, I look at a minimum of 20 – 30 properties to compare the financials before deciding which one to buy. Without comparing the numbers, how can you tell which one is the best deal?
Lesson #4: Luck is Important
The first round was won by my female mentee, the second was won by the male mentee. Despite having played this game hundreds of times, I still didn’t win. Why?
Luck plays a big role. In the first game, the girl avoided major Doodads and Downsizing and was the first to earn a pot of gold, flipping a stock for a $20,000 profit. In the second game, the boy, who had the worst luck in the first game, now had the best luck. He landed on a $1 stock opportunity and was the first to get out of the Rat Race.
So yes, some people succeed more easily than others, both in the game and in real life. They get their big break and earn their first pot of gold early on, while the rest of us have to wait for many more years.
Lesson #5: If Unlucky, Skill becomes Critical
As proven in our games (and many others played elsewhere, I’m sure) if you’re unskilled but very lucky, you can win the game easily. And if you play this game enough times, you’ll also find that sometimes you’re very unlucky, but sometimes you’re very lucky too. I’ve gotten out of the Rat Race in less than 10 turns, and have also taken more than 100 turns, even though there’s been little change in skill level.
But skill is still very important. An extremely unlucky player with a high level of skill can still avoid bankruptcy and eventually get out of the Rat Race, albeit taking a longer time. That same player can get out within a few moves if his luck turns another way.
The difference is, that while we can play many rounds in the game and experience both good and bad luck, in real life, we can only play ONE round. How do we know whether it will be a lucky round or an unlucky one? What if we are unlucky, and at the same time have no skill?
Therefore, I feel it is important to get a good financial education early, preferably before entering the workforce. Level up your skill before you play the real-life game because you only get ONE shot at it.
What I see many young people do when they start earning an income is to splurge it on material things and spend as much as they earn.
Do you know what’s one of the worst things I see? Many buy a car before buying a house! They may not know it yet, but the car loan has a big impact on their Total Debt Servicing Ratio (“TDSR”) and will severely handicap their ability to get a housing loan.
Lesson #6: Be Careful if you Leverage
In the game, you know that every $1,000 you borrow reduces your cash flow by $100. If you over-leverage and bring your cash flow down too low, you will run into negative cash flow and possibly go bankrupt if you land on a Downsizing square.
This is reflective of what happens in real life. Those people who borrowed money to go “all-in” on crypto last year probably know exactly what I mean.
Lesson #7: Low Income = Economic Vulnerability
In the game, the Doodads hit low-income professions disproportionately harder than the high-income ones. A $17,000 boat on credit decreases the player’s cash flow by $340, which hardly means anything to the Doctor who already has a starting cash flow of several thousand. But for a Janitor having just a few hundred dollars in cash flow, it is pretty devastating.
This happens in real life too. In Singapore, GST is going to increase from 7% to 9%. Inflation hits low-income families harder than high-income ones because they spend a bigger proportion of their income on necessities such as food, transport and housing. And if the sole breadwinner gets retrenched, the whole family goes into financial hardship because their savings are low and they have no assets to sell.
I told my mentees this is the reason why their parents and teachers tell them to study hard and get a good job. The primary reason for doing that is to try and bring their income up so that they are less vulnerable to economic shocks.
Lesson #8: Keep your Income High, and Expenses Low
In the game, the Doctor has the highest income, but also the highest expenses, and actually takes the longest (on average) to get out of the Rat Race. They get a bigger house, a more expensive car (sometimes many cars) and spend the most on their kids. This is quite true in real life too, isn’t it?
But in my final debrief to my mentees, I gave them the power formula. It is not actually low income that makes one vulnerable to economic shocks; it is low cash flow.
I asked, “What if you have the Doctor’s income, but the Janitor’s expenses?”
If such a Dr Janitor card existed, it will no doubt be the most powerful profession in the Cashflow Game.
I told them that while it is good to keep your income high, it is equally important (if not more) to keep your expenses low. Furthermore, you’ll probably have far more control over your expenses than your income, since most of it is likely to be discretionary.
I gave them an example of me giving up my car more than a decade ago, switching instead to my company van. During operating hours, my company van is an asset, doing deliveries and enabling the business to generate an income that more than pays for it. After operating hours and on weekends, I get to drive it for free.
Lesson #9: Be Emotionally Neutral to Doodads
This is something you can learn only by playing the game dozens of times. In your first few games, you will find yourself having mood swings.
If you keep drawing Doodads and/or landing on Downsizing squares, you’ll think, “Why am I always so unlucky?”
If you see others getting good opportunities but not you, you’ll find yourself feeling jealous.
These negative emotions are normal. But, from a motivational perspective, they are also disempowering, because you get into a negative emotional state. Your judgement becomes clouded as you constantly fear making the wrong move. You’re less alert in spotting opportunities, and you’re less resourceful and creative in striking bargains with other players.
For example, another player may have drawn a good card but doesn’t have the money to invest, and is about to put the card back to the bottom of the pile. If you’re in a good emotional state, you may be alert enough to make him/her an offer for the card and “buy” your own luck. But if your mind is too preoccupied asking why you’re so unlucky, would you be able to spot the opportunity?
You need to focus on making the best out of the cards that you are dealt. You also need to focus on playing your own game, instead of worrying that others are getting out of the Rat Race faster than you.
Through the Cashflow Game, I have trained myself to be emotionally neutral to Doodads. For example, in trying to rent out an industrial property I bought last year, I realized I had to spend about $2,000 (plus a lot of time and effort) to fix a number of problems which I had not budgeted for. It was quite annoying.
But instead of focusing on the $2,000 Doodad, I reminded myself constantly that my profit from this property is going to be more than $100,000. When viewed in that context, the $2,000 Doodad actually means nothing.
Staying emotionally neutral was even more critical in Apr-Jun 2020 when my businesses suffered heavily due to the COVID Circuit Breaker in Singapore. I was (most of the time, at least) able to keep my cool and do what was necessary to keep the businesses afloat and to keep improving and preparing them for the eventual upturn.
We only get to play the Cashflow Game once in real life. There is no second chance. Do you really want to wing it? Or is it better to upskill yourself to the max and be prepared to escape the Rat Race as fast as you can?