Rich Dad Scam #4: Live Below Your Means
Today, many ﬁnancial experts continue to recommend, “Work hard, save money, get out of debt, live below your means, and invest in a well-diversiﬁed portfolio of mutual funds.” The problem with this advice is that it is bad advice—simply because it is obsolete advice.
I don’t say those things because I don’t think that advice solves the problem for anyone who wants to become wealthy. For people who want to have a lot of money and enjoy the lifestyle that money can bring, simply cutting up your credit cards and getting out of debt does not solve that problem, nor does it necessarily make people happy. On just basic financial principles, I do agree that cutting up your credit cards is good advice for most people. But simply getting out of debt does not work for anyone who wants to become wealthy and enjoy life.
If a person wants to become wealthy, a person needs to learn how to respect the power of debt, know how to get into more of the right kind of debt, and learn how to harness the power of debt. If people are not willing to learn how to respect and harness the power of debt, then cutting up their credit cards and living below their means is great advice.
The scam of living below your means is not a ﬁnancially intelligent way to become rich.
A Poor Mindset
“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.
Whenever we wanted something nice, my poor dad said, “We can’t afford that.” When we would push back, asking again, he would say, “The most important lesson I can teach you is living below your means.”
The funny thing is that by many standards my poor dad was well off. He had a good, stable, high-level government job as the superintendent of the Hawaii school system. He was well respected. He was well educated with multiple advanced degrees. But he knew nothing about money.
As a result, even though my poor dad preached the scam of “live below your means,” he struggled financially all his life. Towards the end of his life, he lamented to me and my siblings that he didn’t have much to leave us. We, of course, told him we loved him and that didn’t matter, but he still felt the burden of it.
The biggest problem for my poor dad, and for most people, is that his “l can’t afford that, live below your means” mindset closed off a whole world of possibilities financially for him. That is why I call it a scam.
To be clear, what I’m not saying is to spend money when you don’t have it on liabilities. What I am saying is to begin thinking about how you can make more money so that you can afford some of the finer things in life. I’m asking you to start thinking with a mindset of abundance rather than with a mindset of scarcity.
A Rich Mindset
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?’”
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.
The rich do not view the world in terms of time value. Rather, they view the world in terms of cash flow. 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 my rich dad instead of my 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
“Getting rich begins with the right mindset, the right words, and the right plan. After you have that, the action steps are easy,” rich dad said.
Your reality is simply what you think is real. Or as commonly stated, your perception is your reality. When asked, “Is it hard to change one’s reality?” I reply with, “It depends.” For me, it was a personal struggle to shed my poor dad’s reality of what he thought was the smart thing to do and adopt my rich dad’s ideas on what he thought was smart. In many ways, changing one’s reality from a middle-class or poor reality to a rich reality may be like learning to eat with your left hand after you have spent years eating with your right. While it is not hard to do and anyone can do it if they persevere, it may not be the easiest thing to do either.
If you want to think like my rich dad instead of my 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.”
Editor, Rich Dad Poor Dad Daily