Everything You Learned About Budgeting Is Wrong

Dear Reader, 

While the poor are the victims of money, the middle class are prisoners of money.

In describing the middle class, rich dad said, “The middle class solves their money problems differently. Instead of solving the money problem, they think they can outsmart their money problems… 

“The middle class will spend money to go to school, so they can get a secure job. Most are smart enough to earn money and put up a firewall, a buffer zone, between them and their money problems. They buy a house, commute to work, play it safe, climb the corporate ladder, and save for retirement by buying stocks, bonds, and mutual funds. They believe their academic or professional education is enough to insulate them from the cruel, harsh world of money.”

“At the age of fifty,” said rich dad, “many middle-aged people discover that they are a prisoner in their own office. Many are valued employees. They have experience. They earn enough money and have enough job security. Yet deep down they know they are strapped financially, and they lack the financial intelligence to escape from their office prison. They look forward to surviving fifteen more years when, at age sixty-five, they can retire and then begin to live—on a leaner budget, of course.”

The middle class thinks they outsmart their money problems by being smart academically and professionally. Most lack financial education, which is why most tend to value financial security rather than take on financial challenges. Instead of becoming entrepreneurs, they work for entrepreneurs. Instead of investing, they turn their money over to financial experts who manage their money.

When the rich have money problems, they use their financial intelligence developed through many years of facing and solving problems. If the rich don’t know the answer to their money problems, they don’t walk away and throw in the towel. They seek out experts who can help them solve their problems. In the process, they become more financially intelligent and are that much more equipped to solve the next problem when it comes around. The rich don’t quit. They learn. 

One way to start our path to financial freedom is to learn how to budget like the rich. 

When it comes to budgeting your money, there are only two choices—deficit or surplus. Many people choose a budget deficit. If you want to be rich, choose a budget surplus, and create one by increasing income, not reducing expenses.

#1  A Budget Deficit

The definition of a budget deficit in Barron’s Finance and Investment Handbook is: “Excess of spending over income, for a government, corporation, or individual.” Notice the words “excess of spending over income.” 

Spending more than you make is the cause of a budget deficit. The reason so many people operate on a budget deficit is that it’s so much easier to spend money than to make money. When faced with a crippling budget deficit, most people choose to cut back on their spending. 

Instead of cutting back on spending, rich dad recommended increasing income. He thought it smarter to expand your means by increasing income.

#2 A Budget Surplus

Barron’s handbook states, “A budget surplus is an excess of income over spending for a government, corporation, or individual over a particular period of time.”

Notice the words “excess of income overspending.” 

This does NOT necessarily mean living below one’s means. The definition does not say a surplus is created due to a reduction of spending, although a reduction of spending may lead to an excess of income. It does mean focusing on creating excess income, rather than reducing expenses and living below your means.

When it comes to spring cleaning your budget, there are only two choices—deficit or surplus. Many people choose a budget deficit. If you want to be rich, choose a budget surplus, and create one by increasing income, not reducing expenses.

How to Budget a Surplus

After making money, and protecting your money, learning how to budget for a surplus is essential for achieving financial integrity. The following are several lessons I have learned from my rich dad and other wealthy people about budgeting for a budget surplus.

Budget tip #1: A budget surplus is an expense. 

This is one of the best financial lessons my rich dad passed on to his son and me. Pointing to the financial statement, he said, “You have to make a surplus an expense.” 

To create a budget surplus, his financial statement looked like this income statement: 

Budget Statement

He said that the reason businesses, governments, and individuals fail to create a budget surplus is because they think saving, tithing, and investing are assets rather than expenses. 

Most people know they should save, tithe, and invest. The problem is, after paying their expenses, most people don’t have any money left to do so. The reason is that they consider saving, tithing, and investing as a last priority.

I know most of you can agree with the logic of what I’m saying and agree that people need to make the process of saving, tithing, and investing a higher priority. I also know this is easier said than done. So let me tell you how Kim and I handled this problem.

Soon after we were married, we had the same financial problems many newlyweds have. We had more expenses than income. To solve this problem, we hired Betty the Bookkeeper. Betty was instructed to take 30% of all income off the top, as an expense, and put that money in the asset column.

Using simple numbers as an example, if we had $1,000 in income and $1,500 in expenses, Betty was to take 30% of the $1,000 and put that money in the asset column. With the remaining $700, she was to pay the $1,500 in expenses.

Betty nearly died. She thought we were nuts. 

“You can’t do that. You have bills to pay.” She almost quit. 

You see, Betty was a great bookkeeper, but she budgeted like a poor person. She paid everyone else first and herself last. Since there was rarely anything left over, she paid herself nothing. Her creditors, the government, and bankers were all more important than Betty.

Betty argued and fought. All of her training told her to pay everyone else first. The thought of not paying her bills or taxes made her weak in the knees. But when she finally understood she was creating income through expense, she was willing to go along with our plan to create a budget surplus. 

For every dollar of income, Betty would take 30 cents and put it in savings, tithing, and investing. She knew that saving, tithing, and investing were necessary expenses to create a surplus, our first and most important expense.

With the 70 cents from every dollar left, she was to pay taxes, liabilities such as our mortgage and car payments, and then our bills such as electricity, water, food, clothing, etc.

Needless to say, for a long time we came up short every month. Although we had paid ourselves first, we did not have enough money to pay others. There were some months Kim and I came up as much as $4,000 short. We could have paid the $4,000 from our assets, but that was our money. The asset column belonged to us.

Budget Tip #2: The expense column is the crystal ball.

If you ever want to predict a person’s future, just look at the person’s discretionary monthly expenses. For example, someone who has discretionary expenses like donations to charity and seminars on investing will have a different future than someone whose spending habits include buying football tickets and buying a new tv. 

Rich dad said, “You can tell a person’s future by looking at what they spend their time and money on.” He also said, “Time and money are very important assets. Spend them wisely.”

You can tell how important a budget surplus is to someone by looking at his or her expense column. 

Budget tip #3: My assets pay for my liabilities.

My poor dad believed in buying cheap. He thought being frugal was smart budgeting. If my poor dad wanted a luxury item, he simply denied himself the luxury of owning. He said, “We can’t afford it.” 

If my rich dad wanted a luxury item, he simply said, “How can I afford it?” And the way he afforded it was to create an asset in the asset column, an asset that paid for the liability. 

In other words, he acquired assets by paying himself first. With the cash flow from the assets, he then purchased his luxury liabilities. If he wanted big luxuries, he first created big assets. What many people do is buy big luxuries first and never have enough money to purchase assets. Again, it’s a matter of priorities.

Budget Tip #4: Spend to get rich.

When the going gets tough, most people cut back rather than spend. This is one reason why so many people fail to acquire and maintain wealth.

One sign of high financial intelligence is knowing when to spend and when to cut back. When Kim and I realized we were in trouble, instead of allowing our bookkeeper Betty to cut back and pay bills first, we went into full-scale sales, marketing, and promotion. We spent time, money, and energy increasing our income. We did not cut back on expenses.

One day at a time

Budgeting is a very important process to learn and be smart at. Take the process one day at a time. Instead of fighting about money, Kim and I used the process to discuss and learn more about money and ourselves. 

Positive things did not happen overnight, but they did happen. If you will sincerely work at creating a budget surplus, your life will become richer. That is what budgeting is about—using what you have, even if what you have is no money, to make you better, stronger, and richer.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

You May Also Be Interested In:

401(k) Crash

The people who pushed for 401(k)’s are racked with guilt. Because it exposes you to massive risks..Like a stock market event my colleagues warn about in this quick video. Here’s what you need to know about your 401(k)...

Robert Kiyosaki

Robert Kiyosaki, author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company.

View More By Robert Kiyosaki