Most retirement research points to an impending crisis for about half of Americans who save too little at the advice of their financial planner. Because people worry about outlasting their savings, most adjust by living humbly – often too humbly.
If I hear one more financial advisor tell their audience “cut your expenses,” I may just do something I’ll regret later. Personally, it’s insulting to me, and it should be to you too, if a financial “expert” thinks we are so unconscious and ignorant that the only way we could possibly reach financial security is by cutting back, reducing expenses to the bare minimum and living a life less than what we really want.
It’s safe advice for the so-called “advisor” to tell you to cut back so you don’t outlast your savings because it sounds logical and it won’t cause any flack for the advisor. It’s lazy because the advisor doesn’t have to think.
My rich dad said, “There are two kinds of money problems. Not enough money, and too much money. Which type of money problem do you want?”
Most people come from families where the problem is not enough money. One of the advantages I had growing up with the influence of two families was that I could see both types of problems. My poor dad never seemed to be able to have enough money, even though he had a good salary. My rich dad didn’t have much to begin with but grew his fortune to the point where he faced very real problems of having too much money.
Rich dad pointed out to me that people end up with “not-enough-money” problems because they view the world with a scarcity mindset. All they know is a world where there is never enough. That is why even if they become suddenly rich, through the luck of the lottery or inheritance, they often squander that money and become poor again.
Rich dad truly believed that the poor remain poor because that was the only world they knew. “Whatever your reality about money inside of you, it will be the reality of money outside of you,” he said. “You cannot change your outside reality until you first change the way you view the world from within you.”
Internal understanding results in your external reality.
Rich dad would drive this lesson home by taking a coin out of his pocket and say, “When a person says, ‘I can’t afford it,’ that person sees only one side of the coin. The moment you say, ‘How can I afford it?’ you begin to see the other side.”
Cut vs. Spend
Not only is “cut your expenses” lazy advice, it is also incorrect advice if you truly want financial security for life.
Consider this: you own a duplex that you rent out to two families. In any rental property, as in any business, your three key financial components are: 1) Income 2) Expenses 3) Debt. What are the first questions you should ask when it comes to income, expenses and debt?
Income– Very simply, “How do I increase my income?” Whether it’s your rental property, your business, or your personal household, often times, the solution to a financial problem is to increase your income. In real estate, ways to accomplish this are by lowering your vacancies, introducing alternate streams of income such as laundry services, and increasing rent payments.
Expenses– Most people automatically ask, “How do I cut my expenses?” Wrong question. The better question to ask is, “How do I spend my money more effectively to increase the value of my property?” “How do Ispendmy money more effectively to increase the value of my business?” (And yes, this is the question to ask when it comes to your personal finances as well.)
For example, you decide the water bill of the rental duplex you own is too high, so you choose to cut that expense by cutting back on the amount of water you use on the property. As a result of the water cutback, your trees and shrubs start dying. Now your tenants are unhappy because the landscape is brown and ugly.
Instead of cutting expenses, the better idea can be to spend money. As with a property I owned, instead of cutting back, I spent more money on additional trees and shrubs. This expenditure increased the curb appeal and made the property more attractive to the residents and prospective tenants.
Because this property now had such a lush look and feel, more and more people wanted to live there. This allowed me to increase the rents. Increased rents equal increased value of the property.
So if you need to compound your debt to make a greater return, that’s exactly what you should do.
How do you spend money more effectively to increase the value or income, is the exact same question you should be asking of your personal finances, “How can I spend, or use, my money to make more money?”
This is what I mean when I say don’t live below your means, instead expand your means.
Instead of focusing on reducing your expenses, focus instead on increasing your income. Increasing your income—not by you working harder, but by spending money that then works hard for you. It takes no brains to cut expenses. Anyone can do that. It takes creativity and a little bit of guts to figure out how to spend your money to make money. That’s financial intelligence.
What’s the Difference Between Good Debt and Bad Debt?
Good debt is debt you use to buy assets. (Assets are things that put money in your pocket whether you work or not.) Bad debt is debt you use to buy liabilities. (Liabilities are things that take money from your pocket.)
The key to having a secure and financially-healthy life is to Spend! Spend! Spend! Just be sure to spend your money in the right places. Financial intelligence is knowing how to spend your money to acquire assets that make money for you versus spending money to acquire liabilities that take money from you.
Change Your Reality
A big part of my success in life today was taking control of my internal reality about money. I had to constantly remind myself that there is a world of too much money, because deep down inside I often felt like a poor person.
Does that sound like a familiar sentiment to you? Do you often struggle with the feeling that the world is one of scarcity? We all do sometimes.
My rich dad, when I felt this way, taught me to always remind myself that there are two kinds of money problems and to ask myself which one I wanted.
I’m not a wishful thinker and I don’t believe solely in the power of affirmation, but asking myself that question allowed me to calm down and think clearly about the problems I was facing—and the potential solutions.
Today, begin changing the way you view money, and you’ll be on the first stepto changing your reality of money.
Editor, Rich Dad Poor Dad Daily
Source: Daily Reckoning