4 Ways to Budget Like the Rich
Thanks to supply chain shortages, my friends and I have already started buying holiday gifts.
I bet you’ve started thinking about it as well, which makes this a time when money is on our minds. It’s certainly on the mind of retailers…
Regardless of supply chain bottlenecks, one thing remains certain — the stores want your money, and you want to spend it.
A good budget, holidays or not, is essential to financial security
The problem is that most people have misconceptions about what a budget is and why it’s helpful.
Most people think budgets are static things. At worst, people don’t have a budget, at best they generally set it and forget it, revisiting it once a month or so, often to see they’ve overspent.
A smart budget inspires action to get your cash flow: Creating an investment “expense” each month, something we’ll cover a bit later, inspires you to get creative in how to make sure you meet that expense each month.
In my experience, there are three ways that people budget. And the way you budget has a lot to say about your financial mindset.
Budgeting Like the Poor
Those with a poor mindset often don’t use a budget. If they do, however, they use a very simple one. Why? Because they own no assets and no passive income.
For those that budget with a poor mindset, they simply track their earned income (i.e., salary) and their expenses each month. Whatever is left over, which is often nothing or less, is used for savings in case they run into a rainy day.
For those with a poor mindset, a budget serves as a tool to make sure you’re not spending too much, but it is not a catalyst for financial insight, inspiration, or growth.
Budgeting Like the Middle Class
Those in the middle class often have more income than expenses (as long they have that high paying job!). They might have a few investments, but they are not a daily focus. Instead, they contribute to a 401(k) they rarely pay attention to. Mostly, they’re focused on keeping up with the Joneses, so they invest in liabilities like a house, a nice car, and vacations.
The middle class use a budget as a tool to understand how much money they will have left over each month. They then reward themselves for having extra money, which they often use as “discretionary spending”. More often than not, they splurge on vacations, cars, electronics, or something that brings them pleasure — what I call doodads. In the process, they create liabilities but don’t invest in assets.
For those with a middle-class mindset, a budget serves as a tool to make sure you spend less than you make, but also know how much “fun” money can be spent. Yet the source of that money is always earned income from a salary rather than passive income from investments.
Budgeting Like the Rich
The rich don’t look at a budget as a way of comparing their income and expenses. Rather they look at it as a way to prepare for creating more money. In short, they ask, “How can I make more money?” rather than say, “I don’t have enough money?” (the poor) or, “How much extra money can I spend?” (the middle class).
This week I’ve got four crucial tips my rich dad gave me to help you budget like the rich.
#1 – A budget surplus is an expense.
One of rich dad’s most important lessons was, “You have to make a surplus an expense.”
What he meant is that most people view a surplus as an asset. They place their extra cash in the bank or they spend it on liabilities. Rather than view extra money as an asset, rich dad viewed it as an expense in the form of charity, investing, and saving.
Most people want to give to charity, invest in assets, and save money, but the problem is that they view it as something to do after they’ve paid their expenses. By making these things expenses in his budget, my rich dad ensured that he would make them a priority. He called it paying himself first.
#2 – Your expense column is a crystal ball.
If you want to predict a person’s financial future, look no further than their expense column.
Here’s an example of two different expense columns:
While that’s a humorous example, it’s not far from the truth. When you look at most people’s expense columns, they’re littered with payments to other people and for liabilities. In each case, expenses only go to things that permanently take money out of your pocket, rather than things that will make money.
Take a look at your expense column. What does it say about you?
#3 – Use assets to pay for liabilities.
My poor dad was frugal and thought that was a virtue. If he wanted a luxury item, he’d simply deny himself that item. He’d say, “We can’t afford it.”
My rich dad loved luxury and if he wanted a nice toy, he’d find a way to buy it. He wasn’t reckless with his money. Rather, he was smart in how he made it work for him and used his financial education. He asked, “How can we afford it?”
By increasing his assets, which increased his monthly cash flow, my rich dad used this money to purchase his luxury items and liabilities. If he wanted a nice car, he’d invest money until the asset produced the cash flow required to purchase that car. Then he had a nice car and a great asset.
Kim and I have used this philosophy over and over in our life to buy things we enjoy and build our wealth in the process.
#4 – Spend to get rich.
Being able to execute on the first three budgeting tips means building a mindset that says, “When the going gets tough, the tough get going.” Most people stop spending on charity, investing, and saving when times get tough. The rich, however, figure out ways to make more money by spending more money on assets, even when times are tough.
When Kim and I were over $1 million in debt, we could have easily thrown in the towel, gotten jobs, and settled into a middle-class life. Instead, we always paid ourselves first by budgeting for financial education and investments (much to our bookkeeper’s despair), and hustled hard to find ways to make more money to pay our bills.
By pushing through those hard times, we developed a mentality that enabled us to make more money, no matter what the circumstances-and you can do the same. And that will make you richer than you ever imagined.
Play it smart,
Editor, Rich Dad Poor Dad Daily