How the rich budget to get richer
sometime ago, I wrote about how budgeting gives crucial insight into your financial mindset. In that post I wrote, “Want to be rich? Learn to budget like the rich.”
This week I want to dive a bit more into what it means to budget like the rich, giving you four crucial tips my rich dad gave me.
#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:
|Donation to charity
||Six-pack of beer
|Books on investing
|Seminar on real estate
||(Another) Six-pack of beer
||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 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?
What Are You Doing To Make Your Dreams A Reality?
#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.