“Doodads” Make You Poorer
There are financial gurus out there who say the only way out of debt is by cutting up your credit cards, forgoing your daily coffee, or avocado toast, or even putting your credit card in a freezer. Essentially they are saying: Stop spending and start saving.
There are many reasons that I do not subscribe to this advice. But essentially, I don’t think that advice solves the problem for anyone who wants to be wealthy.
If you want to be rich, this is all you need to know. It is rule number one. It is the only rule. This may sound absurdly simple, but most people have no idea how profound this rule is. Most people struggle financially because they do not know the difference between an asset and a liability.
“Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets,” said rich dad.
As an adult, I have difficulty explaining it to other adults. The simplicity of the idea escapes them because they have been educated differently. They were taught by other educated professionals, such as bankers, accountants, real estate agents, financial planners, and so forth.
The difficulty comes in asking adults to unlearn or become children again.
What Is An Asset?
The Rich Dad definition of an asset is not the definition you’ll hear from your traditional accountant. The conventional accountant will tell you that an asset is “something of monetary value that is owned by an individual or company.” By that definition, your vacuum cleaner and your everyday dishes could be considered assets!
Most accountants go crazy with my definition because they want to classify your shares of stock, your jewelry, your personal residence, your cars, and your mutual funds as assets. To me, none of these things have any value until the day you sell them.
Instead, here’s my definition: An asset is something that puts money in your pocket, whether you work or not.
Why use such a definition? Because a vacuum and some plates and bowls will not get you closer to your financial dream, but something that is putting money in your pocket whether you work or not will.
What is a Liability?
Again, I go to battle with the traditional definition of a liability. Most accounting professionals will tell you that what is considered a liability is “an obligation to pay any amount you owe to creditors, be it an individual or an organization.”
My definition begs to differ: A liability is something that takes money out of your pocket.
You can see the dilemma. Most would list their Mercedes as an asset or something of value. However, I would list the Mercedes as a liability because every month it takes money out of your pocket. “But it’s paid for!” you argue. The car loan may be paid for, but what about gasoline, tune-ups and repairs, and insurance?
The biggest fight we get at The Rich Dad Company is when we tell people your home—your personal residence—is not an asset. We received a lot of flak for that, especially when times were booming and people were taking out loans against their home, sometimes two or three times. It wasn’t until the real estate market crashed and people found out that they owed more on their house than it was worth before they started to understand their home was not an asset. If you haven’t suffered through this experience personally, then please take my word for it—you don’t ever want to be in this position.
A doodad is an expense, often unnecessary or unexpected, that simply takes money out of your pocket. More simply, doodads are not something you need, they are something you want. Think of it as the daily trip to Starbucks for a latte, or the pair of shoes you “just had to have.” Simply, they are liabilities but not ones you’d necessarily put in the liability column of your financial statement. A liability is something you pay over time.
Doodads can get you into trouble when they turn into liabilities. How does that happen? For example, let’s say you are paying for your daughter’s wedding. You’re buying the dress, renting a venue, paying for food, etc. and suddenly you find that these seemingly one-time purchases are growing into one large expense that you are paying over several months. Now your doodad is a liability and should be considered as such on your financial statement.
Building Your Financial Intelligence
The solution isn’t to stop spending on things you enjoy in order to save. The solution is to increase your financial education—and by extension, your income—so you can continue to eat your avocado toast, drink your lattes, and paying for things like your daughter’s wedding while building true security for your financial future.
Perhaps you’re thinking, “Sure, that sounds easy when you make as much as you do. But what about me? I’m living paycheck to paycheck!”
Fair enough, but you should know that Kim and I have been there and done that. When we were first married, we were very poor. I was $1 million in debt, and at times we lived in our car or on the couch of a kind friend. During that time, we were hustling day and night to build our business, and we hired a bookkeeper named Betty.
Betty was great because she organized our finances and kept us honest about our financial situation. But the one thing Betty and us disagreed on was the idea to pay yourself first. Each month we instructed her to take the 30% off the top and apply to our savings, investments, and charity—and each month she moaned about what a bad idea it was (mostly because the money wasn’t there for it).
Yet, each month, we made it happen and Betty dutifully fulfilled our directive. As entrepreneurs, we worked together to figure out new ways to make up the shortfall. We’d find side jobs, or create a new product. We’d hustle our way forward. And in the end, we paid ourselves and paid our creditors. Betty almost had a heart attack, but it all worked out!
The good news is you can do the same! Make this a habit. Once you embrace our philosophy of paying yourself first, you will be surprised at how fast the money will grow. Once you start investing in assets, that’s when the fun starts and you are able to use that income to purchase things like cars and vacations. But only once you’ve replaced your salary with investment income.
Editor, Rich Dad Poor Dad Daily