Rich Dad Scam #5: Save Money
One of the most ingrained ideas on money is the scam, “Save Money.”
“If you save money, you will have money,” or “Save money for a rainy day,” or “A penny saved is a penny earned.” These are all 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.
Like I always stress, In 1971, Richard Nixon took the United States off the gold standard, the system where every dollar in the U.S. 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 U.S. 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.
Savers are Losers
These three reasons are why financially smart people don’t save.
“People who work hard and save money have a hard time building wealth because, relatively, they pay more in taxes,” said rich dad.
He went on to explain that the government taxed savers when they earned, saved, spent, and passed on their money in the form of income tax, capital gains tax, sales tax, and estate tax.
Rich dad also explained that another tax decimated savers—a hidden tax called inflation.
Rich dad used a simple figure of $1,000 to explain why savers almost always became losers in the economy.
Rich dad explained, “Your $1,000 is immediately eaten away by inflation, so each year it is worth less.” Rich dad went on to explain that each year the interest the bank paid you was eaten away by both taxes and inflation.
The government took 30 percent of the interest earnings through capital gains taxes and inflation ate away at almost all the rest…or more.
The result is often a net loss.
That is why rich dad thought that working hard and saving money was a hard way to get rich.
- Avoiding risk
When you work hard to save money, you place your “security” in those savings. It becomes very hard for those who spend all their energy saving money to branch out and invest it for fear all their hard-earned money will be lost.
“People who work hard and save often think that investing is risky,” said rich dad. “And when you think something is risky, you avoid learning.”
Rather than take a perceived risk to grow their money exponentially through investing, most people take the “safe” route of saving their money because it is what they know and understand.
Unfortunately, as we learned above, saving is not safe. In fact, it often is the riskiest way to use your money because of taxes and investing.
Rich Dad’s Lessons
You need to follow these 10 lessons my rich dad would tell me constantly when it came to saving money.
- “How long would it take you to save $1 million?” He would then ask, “How long would it take you to borrow $1 million?”
- “Who is going to get richer in the long run? Someone who works all his life trying to save a million dollars? Or someone who knows how to borrow a million dollars at 10 percent interest and also knows how to invest it and receive a 25 percent per year return on that borrowed million dollars?”
- “To whom would a banker rather lend money? Someone who works hard for money, or someone who knows how to borrow money and have that money safely and intelligently work hard for them?”
- “Who would you have to be and what would you have to know in order to call your banker and say, ‘I want to borrow a million dollars,’ and then have the banker say, ‘I will have the papers ready for you to sign in 20 minutes’?”
- “Why does the government tax your savings but give you a tax break for being in debt?”
- “Who has to be financially smarter and more financially educated? A person with a million dollars in savings or a person with a million dollars in debt?”
- “Who has to be financially smarter with money? Someone who works hard for money or someone who has money work hard for him?”
- “If you had a choice of education, would you choose to go to school to learn how to work hard for money, or would you rather go to school to learn how to have money work hard for you?”
- “Why is it that a banker will gladly lend you money to speculate in real estate, but will not lend you money to speculate in the stock market?”
- “Why do the people who work the hardest and save the most pay more in taxes than people who work less and borrow more?”
When it came to working, money, savings, and debt, it is obvious that my two dads had completely different points of view.
The biggest difference in points of view was this statement by my rich dad: “The poor and middle class have a hard time getting rich because they try to use their own money to get rich. If you want to get rich, you need to know how to use other people’s money to get rich, not your own.”
So, if you can’t put your money in the bank, what can you do?
The answer is to get aggressive. 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 Rich Dad Scam #5, “Save Money,” I encourage you to spend your money, investing it in cash-flowing assets.
Editor, Rich Dad Poor Dad Daily