Poor dad said, “Live below your means.”
Rich dad said, “Expand your means.”
If you were to take a look at the difference between my poor dad’s budget and my rich dad’s budget, you’d understand the vast difference of mindset between the two statements above.
My poor dad’s budget focused on cutting expenses to meet his income. It was important for him to pay everyone else and then enjoy what was left—if anything.
My rich dad’s budget focused on increasing income. It was important for him to pay himself first and then taking care of his expenses. He said, “Most people use their budget as a plan to become poor or middle class rather than become rich. My budget is a plan to become rich.”
Here are four tips my rich dad taught me about budgeting to become 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, you have to look no further than the expense column.
Here’s an example of two different expense columns:
|Donation to charity||Six-pack of beer|
|Books on investing||New TV|
|Seminar on real estate||Football tickets|
|Gym dues||(Another) six-pack of beer|
|Personal coach||Bag of potato chips|
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 don’t go towards anything that will make money and only things that permanently take money out of your pocket.
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 said, “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 tips on budgeting 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.
By pushing through those hard times, you develop a mentality that will enable you to make more money no matter what the circumstances. And that will make you richer than you ever imagined.