This is part 3 of our 4 part series regarding the biggest scams disguised as wisdom in today’s world.
Scam #4: Live Below Your Means
One of the most challenging things about the scams I’m highlighting in this eBook is how ingrained they are. If you weren’t lucky enough to have a rich dad to teach you about them like I did, these scams probably make up your ideas and attitudes toward money. They feel built in. Most people believe they must be true because they’ve heard them all their life.
It can be difficult to remember that the scams I’ve identified are lies, but it’s vital to know that they are. This chapter is going to handle one of the big ones: “In order to be rich, you have to live below your means.”
On the surface, “Live below you means,” seems to make sense, but the only people who live below their means are poor people. The rich don’t live below their means. Rather, they increase their means.
A Poor Mindset
My poor dad said, “We can’t afford that.”
My rich dad said, “Rather than live below my means, I make more money to get what I want. Rather than say, ‘I can’t afford that,’ I ask, ‘How can I afford that?’”
“Live below your means” is a poor mindset because it teaches you to think too narrowly. Rather than teach you to be creative in making more money, it teaches you to be frugal and restrictive with what you spend your money on. You balance the dollars you bring in from your job against your needs and wants. No one likes finding things you can live without so you can afford something else.
When Kim and I want to splurge on something, we don’t look at where to cut costs to afford it, we acquire an asset to offset the cost of what we want. So, instead of always looking for what we can cut to afford something, we’re always looking to expand our wealth to cover the cost of what we want. It’s a completely different mindset, and it’s the way my rich dad taught me to think.
For instance, some years ago I wanted to get a new Bentley. I could have easily paid cash for the car, but I didn’t want to do that for a liability. Instead, I invested in assets that would provide enough cash flow to cover my new toy. It took a little longer but six months later my investments were creating enough cash flow to pay for my car—and then some. In the process, I got my fun car and built my wealth.
This is the core of thinking like rich dad instead of poor dad. Think like an investor or an entrepreneur; identify what you want and work out a plan to get there in a smart way through assets.
If you live within your means, you can never add assets, so you’ll never break the chain of cutting costs and budgeting to afford something.
Change Your Thinking
If you want to think like rich dad instead of poor dad, begin asking, “How can I afford that?” rather than saying, “I can’t afford that.” In the process you’ll go from a poor mindset to a rich one—and you’ll also break out of the pattern set by scam #4, “Live Below Your Means.”
Scam #5: Save Money
The scams I’ve identified are, very simply, the things you are taught about money that are wrong. They keep you from becoming rich. They are the ideas the ultra-rich have built into society to keep you poor and them rich. Unfortunately, they’re so driven into our minds that it can be hard to recognize them as lies. One of the most ingrained ideas on money is the scam, “Save Money.”
Time and Money Changes
“If you save money, you will have money.” “Save money for a rainy day.” “A penny saved is a penny earned.” These are common lessons parents teach their kids about money. Unfortunately, there’s one big problem with them; they’re lies.
The big problem with the scam of “Save Money,” is that it used to be true. A generation or two ago, saving money paid off. You could set aside a certain amount of money and retire on it. Your parents or your grandparents might have done just that, and it worked. But what worked for them cannot work for you in today’s economy. To understand this, you must understand the history of money.
In 1971, Richard Nixon took the United States off the gold standard, the system where every dollar in the US economy was based on a dollar’s worth of gold that the country owned. When Nixon did this, it destabilized the economy and kick-started inflation and a number of other factors that affect the purchasing power of your dollar. Before 1971, money was money, backed by the value of gold. If you saved 10 percent of your income every year, it could turn into enough to retire on. After 1971, the US dollar became a currency that could go up and down in value with nothing of value backing other than the good faith and credit of the United States. That is why there have been so many fluctuations, peaks and valleys, in the economy.
Money is something that holds its value, which is a different concept from currency, which is a representation of that value. When the US went off the gold standard, US dollars really stopped being money and became a currency. Money is something that keeps its value. Currency fluctuates in value, and the US dollar has continued to lose its value since 1971.
Today, savers are losers. Why? The bank pays you a lower interest rate on your savings than the inflation rate. In essence, this means that the dollars you have in the bank loses more value than it gains over time. It’s a losing proposition to save. The dollar you save today will be worth less a year from now.
However, if you put that dollar to work for you like an entrepreneur or investor does, then you have a chance at a return that is much higher than inflation. You have an opportunity to make money instead of losing it.
Historically, once money becomes a currency and it isn’t based on something of intrinsic value, like gold, its days are numbered. Once your money is simply a piece of paper that really only represents debt, a currency, how can it sustain itself? It can’t.
My team and I are all big believers in diversifying into gold and silver, real concrete representations of money, not currency. Precious metals have been the true measures of wealth for thousands of years.
If we learn from history, we see that currencies collapse. Gold is consistent. It is truly money.
Making Your Money Work
So, if you can’t put your money in the bank, what can you do? The answer is to get active. Putting money in the bank is passive. Putting your money out in the world is putting it to work. Why put your money in the bank where it will lose value when you can put it to work for you in assets where you can turn your money into more money? That sounds like a better idea to me. Rather than believing the scam #5, “Save money,” I encourage you to instead invest your money in cash-flowing assets. That is the true path to wealth.
Scam #6: Your House Is An Asset
It seems like every financial “expert” says, “Your house is your biggest asset.” When I wrote Rich Dad Poor Dad, I said that your house was a liability. That was like spraying water on a hornets’ nest. The so-called experts lambasted me. At the time, the real estate market was skyrocketing. Everyone called me a contrarian, out to sell books. Today, after one of the worst housing crashes in US history, they aren’t laughing anymore.
Money In, Money Out
Your financial planner, real estate agent, and accountant all call your house an asset. But in reality, an asset is only something that puts money in your pocket. If you have a house that you rent out to tenants, then it’s an asset.
If you have a house, paid for or not, that you live in, then it can’t be an asset. Instead of putting money in your pocket, it takes money out of your pocket. That is the simple definition of a liability.
This is doubly true if you don’t own your home yet. Then it’s the bank’s asset, and it is working for them, but it’s not earning you anything.
So What is an Asset?
In business terms, assets are your pros and liabilities are your cons. You need assets to offset your liabilities. Once you understand the scams you’ve grown up with, it’s easier to think in those terms—to think like an entrepreneur. But what exactly are assets?
The simple definition of an asset is something that puts money in your pocket. This is accomplished through four different categories, one of which is real estate. When I say real estate, I don’t mean your personal residence, which is a liability. What I mean is investment real estate, which is a great investment because it puts money in your pocket each month in the form of rent.
There are three other primary assets: business, paper, and commodities. If you are an entrepreneur or a business owner, your business is an asset. Paper assets are stocks, bonds, mutual funds, and so on.
Finally, commodities include gold, and other resources like oil and gas, and so on.
Kim and I started out making our money in real estate, putting our money to work in properties that we could rent them out and see ongoing returns. After that, we diversified, so now we have some money in all four asset classes.
Invest for Cash Flow, Not Appreciation
The scam that your home is an asset was prevalent when I first wrote Rich Dad Poor Dad. That was in 1997, and everyone’s home values were climbing. It was easy to assume that your house was an asset because it was potentially making money for you in the long run through appreciation. People bought into the scam hook, line, and sinker, taking out home equity loans to buy cars, vacations, TV’s, and more. Today, those same people are so underwater that many of them are defaulting and going into foreclosure. Most people aren’t saying their home is an asset any longer.
A lot of Americans got a fast, ugly financial education when the real estate market turned down. They realized very quickly that their homes were not assets.
The difference between my poor dad and my rich dad was a financial education. It wasn’t an education found in traditional school; it was a nuts-and-bolts, street-smart education and a way of looking at money that is true and that works —not just what the ultra-rich want you to believe.
Rather than invest for appreciation, my rich dad taught me to invest for cash flow and to treat appreciation like icing on a cake. I encourage you to do the same