Rich Dad Scams #4 and #5: “Live Below Your Means and Save Money”

This is the fourth issue in a series I’m doing on what I call Rich Dad Scams, scams that we’ve identified that the rich perpetrate on the poor and middle class to keep them poor.

One of the most challenging things about these scams is how ingrained they are.

If you weren’t lucky enough to have a rich dad to teach you about them like I did, these scams probably make up your ideas and attitudes toward money. They feel built in.

Most people believe they must be true because they’ve heard them all their life.

So it can be difficult to remember that the Rich Dad Scams we’ve identified are lies, but it’s vital to know that they are. And today’s issue is going to handle two big ones–they go hand in hand.

With that in mind, let’s dive in…

Rich Dad Scam #4: “To be rich, you have to live below your means.”

On the surface, “Live below you means,” seems to make sense.

But really, the only people who live below their means are poor people.

The rich don’t live below their means. Rather, they make better means.

A Poor Mindset

When it comes to money, what’s your financial focus?

My poor dad — my natural father who spent his life working in the public school system — spent much of his energy working for others and saving as much money as he could.

He was addicted to “safe” decisions with his money.

“If you want to be rich,” my poor dad said, “Go to school, get a good job, and save your money.”

The only problem is that my poor dad never became rich. He worked long hours, struggled financially and was never happy.

If he wanted something nice, he denied himself.

If we wanted to go on a trip, he’d say, “We can’t afford it.” At the end of his life, my poor dad was penniless.

The costs of old age eroded his savings and he had no investments to fall back on. If it weren’t for his pension and Social Security, he’d have been in real trouble–and people don’t have those options now.

His financial decisions weren’t “safe,” in the end.

Again, my poor dad would always say, “We can’t afford that.”

My rich dad said, “Rather than live below my means, I make more money to get what I want. Rather than say, ‘I can’t afford that,’ I ask, ‘How can I afford that?’”

“Live below your means,” is a poor mindset because it teaches you to think too narrowly.

Rather than teach you to be creative in making more money, it teaches you to be merciless in what you spend your money on.

You balance the dollars you bring in from your job against your needs and wants. And no one likes finding things you can live without so you can afford something else. It’s awful.

When my wife and I want to splurge on something, we don’t look at where to cut costs to afford it, we acquire an asset to offset the cost of what we want. So, instead of always looking for what we can cut to afford something, we’re always looking to expand our wealth to cover the cost of what we want.

It’s a completely different mindset, and it’s the way my rich dad taught me to think.

For instance, some years ago I wanted to get a new Bentley. I could have easily paid cash for the car, but I didn’t want to do that for a liability.

Instead, I invested in assets that would provide enough cash flow to cover my new toy. I took a little longer, but six months later my investments were creating enough cash flow to pay for my car—and some. In the process, I got my fun car and also built my wealth.

This is the core of thinking like rich dad instead of poor dad. Think like an investor or an entrepreneur. Identify what you want and work out a plan to get there in a smart way through assets.

If you live within your means, you can never add assets, so you’ll never break the chain of cutting costs and budgeting to afford something.

Change Your Thinking

If you want to think like rich dad instead of poor dad, begin asking, “How can I afford that?” rather than saying, “I can’t afford that.”

In the process you’ll go from a poor mindset to a rich one—and you’ll also break out of the pattern set by Rich Dad Scam #4, which tells you to live below your means if you want to be happy. It just isn’t true.

The Rich Dad Scams we’ve identified are, very simply, the things you are taught about money that are wrong. They keep you from becoming rich. They are the ideas the rich have built into society to keep you poor and them rich.

Next, I’m going to cover…

Rich Dad Scam #5, “Save Money.”

Time and Money Changes

“If you save money, you will have money.”

“Save money for a rainy day.”

“A dollar saved is a dollar earned.”

These are common lessons parents teach their kids about money.

Unfortunately, there’s one big problem with them: they’re lies.

The big problem with “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.

In 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.

When Nixon did this, it destabilized the economy and kick-started inflation and a number of other factors that affect the 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, money 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.

Real Money

Money is something that holds its value, which is a different concept from currency, which is a representation of that value. When the US went off the gold standard, US dollars really stopped being money and became a currency. Money is something that keeps its value. Currency fluctuates in value, and the US dollar has kept losing value since 1971.

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 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.

Currency Collapses

Historically, once money isn’t based on something concrete, like gold, its days are numbered. Once your money is simply a piece of paper that really only represents debt, a currency, how can it sustain itself? It can’t.

My team and I are all big believers in diversifying into gold and silver, real concrete representations of money, not currency. Precious metals have been the true measures of wealth for thousands of years. If we learn from history, we see that currencies collapse. Gold is consistent. It is truly money.

Making Your Money Work

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 Rich Dad Scam #5, “Save money,” I encourage you to instead invest your money in cash-flowing assets.

That is the true path to wealth.

The Daily Reckoning