Three Reasons Why Smart People Don’t Save
Two types of smart people and their approaches to savings
This just in: smart people don’t save.
At least that’s according to some interesting connecting the dots by “Money” magazine. They cite a study by Ohio State University indicating that people with an IQ of 130 make between $6,000 and $18,500 more per year than those with an IQ of 100. They then move to a study by Bloomberg that says the highest earners in America live in cities with the highest cost of living—cities where it’s hardest to save.
Thus, smart people don’t save.
Odd logic aside, I know from my many interactions with smart people across the world, that many, in fact, don’t save. As the same “Money” article rightly says, “…there’s actually no strong relationship between those higher incomes and actually building wealth.”
Two types of intelligence
My rich dad said there were two types of intelligence: book smarts and street smarts.
By book smarts, he meant people like my poor dad, my natural father, who had advanced degrees and a high-paying job in education. As smart and talented as my poor dad was, he always struggled financially. What money he did save up, he lost in a couple get-rich-quick schemes. Towards the end of his life, he was penniless. All his book smarts did not translate to financial intelligence.
Rich dad’s other kind of smarts—street smarts—described people like himself who were not highly educated but who knew how the world and money worked. My rich dad, who was my best friend’s dad, started working in and running his family store at a young age. He learned from experience how to run a business. Later, instead of getting advanced degrees, he got real-world experience in business, eventually owning hotels on Hawaii beaches. He did not have book smarts, but he had a high financial intelligence.
Smart people and saving
My poor dad always said, “Work hard and save money.” Yet, he didn’t follow his own advice. His lack of financial intelligence led him to make poor money choices, draining his savings. He was one type of smart person who does not save.
My rich dad always said, “If you want to be wealthy and financially secure, working hard and saving money will not get you there.” He did follow his own advice. Rather than save money, he invested it. As a result, he grew his money exponentially and became financially independent at a young age. He was also a type of smart person who does not save.
When it came to being smart, I modeled my smarts after my rich dad. Today, I am also financially independent. But I know many other smart people who also do not save—but only because they squander their money on liabilities rather than investing it in assets.
My rich dad taught me many lessons about money. Specifically, he taught me three reasons why financially smart people don’t save.
“People who work hard and save money have a hard time building wealth because, relatively, they pay more in taxes,” said rich dad.
He went on to explain that the government taxed savers when they earned, saved, spent, and passed on their money in the form of income tax, capital gains tax, sales tax, and estate tax.
Rich dad also explained that another tax decimated savers—a hidden tax called inflation.
Rich dad used a simple figure of $1,000 to explain why savers almost always became losers in the economy.
Rich dad explained, “Your $1,000 is immediately eaten away by inflation, so each year it is worth less.” Rich dad went on to explain that each year the interest the bank paid you was eaten away by both taxes and inflation. The government took 30 percent of the interest earnings through capital gains taxes and inflation ate away at almost all the rest…or more.
The result is often a net loss. That is why rich dad thought that working hard and saving money was a hard way to get rich.
3. Avoiding risk
When you work hard to save money, you place your “security” in those savings. It becomes very hard for those who spend all their energy saving money to branch out and invest it for fear all their hard-earned money will be lost.
“People who work hard and save often think that investing is risky,” said rich dad. “And when you think something is risky, you avoid learning.”
Rather than take a perceived risk to grow their money exponentially through investing, most people take the “safe” route of saving their money because it is what they know and understand.
Unfortunately, as we learned above, saving is not safe. In fact, it often is the riskiest way to use your money because of taxes and investing.
The need for financial intelligence
At the end of the day, why do people save? For most, it is to prepare for retirement. Yet, most of us know that saving itself is not enough to prepare for a secure retirement. This is especially true for young people who will never see a pension from their employer.
Today, everyone is expected to invest for a secure retirement. Unfortunately, our schools do not prepare us to invest wisely or well. So, it is up to us to become financially educated—and to teach our children financial education as well.
This is something the wealthy have done for generations. For instance, Mike, my rich dad’s son, had an investment portfolio of $200,000 by the time he was 15-years-old. “Whether he chose to be a policeman, politician, or a poet,” said rich dad, “I wanted Mike to first be an investor. You’ll become far wealthier if you learn to be an investor, regardless of what you do to earn money along the way.”
The rules have changed. In the modern world, you need a greater level of financial sophistication, and so do your kids. I encourage you today to increase your financial education and prepare for a brighter, more secure financial future.