The Day Savers Became Losers
“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.
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 won’t work for you in today’s economy.
To understand why, you must understand the history of money…
On August 15, 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.
He made his announcement during the popular TV show “Bonanza” so I think most people missed that the biggest change to our money.
When Nixon did this, it destabilized the economy and kick-started inflation and several other factors that affect the power of the dollar.
Before 1971, money was money, backed by the value of gold. If you saved 10% of your income every year, it could turn into enough to retire on. After 1971, money became a currency that could go up and down in value with nothing of value backing it other than the good faith and credit of the United States.
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 your money 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 than a year from now.
If, however, like an entrepreneur or an investor, you put that dollar to work for you, then you have a chance of a return that is much higher than inflation. You have an opportunity to make money instead of losing it.
The Dollar Became Debt
When Nixon took the dollar off the gold standard, the dollar became debt. This was one of the biggest economic changes in world history.
In 1971, savers became losers — and debtors got rich.
When I speak to groups around the world, I’m often asked this question: How does debt make the rich richer?
The banking system’s fractional reserve system reduces the purchasing power of their savings by multiplying the savers’ money, lending to debtors with financial education (who will invest it) $10 for every dollar in savings. The fractional reserve system is the way “money is printed.” Every bank does it.
Add this fact to the equation: Interest on savings is taxed at the highest tax rates and… debt is tax-free.
Debt is Tax-Free
The general rule is that all income is taxable. Income is money you receive that is yours to spend as you please with no strings attached. Debt is not income. You have to pay it back. So when you borrow money for an investment, it’s really tax-free money. This makes debt less expensive than equity. Equity is your money that has already been taxed. So even if you have a 5-6% interest rate, the debt is far cheaper than if you had to use the equity on which you paid 40% tax.
Use Debt to Buy Assets
So, how does a person learn to use debt as money? I’ll start with a story you may have heard before.
In 1973, the year I returned to Hawaii from Vietnam, my poor dad suggested I go to graduate school to get my MBA. My rich dad suggested I learn to invest in real estate.
My poor dad encouraged me to become a high-paid employee in the E quadrant. My rich dad encouraged me to be a professional investor in the I quadrant.
While watching television one day, an infomercial came on advertising a free seminar on investing in real estate. I attended the free seminar, liked what I heard, and invested $385 for a three-day course.
That $385 was a lot of money at the time because I was still in the Marine Corps and not making much money.
The three-day program was great. The instructor was real — a rich, experienced, and successful investor who loved to teach. I learned a lot from him. At the end of the program, the instructor gave me some of the best advice I have ever received. He said, “Your education begins when you leave the class.”
His assignment was for all of us to get together in groups of three to five students to look at and write an evaluation of 100 properties that were for sale. He gave us 90 days to complete the assignment. He didn’t want us to buy anything, or invest any money, for at least 90 days.
Initially, there were five people in our group. By the first meeting, we were down to three or four. By the end of the 90 days, our group was down to two.
After 90 days of looking at and writing one-page evaluations on 100 properties, I identified my first real estate investment opportunity. It was a 1-bedroom/1-bath condominium, next to the beach on the island of Maui. The entire development was in foreclosure and the price for the condo was $18,000. The seller was offering 90% financing.
All I had to do was come up with $1,800 for a 10% down payment. I handed the real estate broker my credit card for the down payment and the property was mine. I purchased my first investment property with 100% OPM — Other People’s Money. I had none of my own money in the investment.
At the end of every month, after all the expenses were paid, including debt service and management fees, the property put approximately $25 in my pocket, an infinite return on my investment. It was an infinite return because I didn’t have any of my own money in the deal.
While $25 a month is not a lot of money, the lessons learned have proven to be priceless. One of the lessons learned was that debt is money and the other lesson was debt is tax-free.
Today, Kim and I, along with Rich Dad Advisor Ken McElroy, own approximately 10,000 rental units. We have cash flow, tax-free, every month without working, and earn more money than many people earn in a lifetime. The real estate investment process is the same, the only thing that has changed is the number of zeros on the checks we deposit.
Play it smart,
Editor, Rich Dad Poor Dad Daily