The Rich Don't Save Money | Rich Dad

Why The Rich Don’t Save Money

The power of paying yourself and getting out of the rat race

What does it mean to be rich? Most people would say that being rich means having a high paying job and lots of nice things like cars, houses, and designer clothes.

But it’s not how much money you make that makes you rich. Take, for instance, the lottery winner who has lots of money but burns through it on all sorts of knick knacks. There are plenty stories of broke lotto winners. In fact, nearly one-third of all winners declare bankruptcy.

The same can go for young athletes who make it to the pros. One day they are broke, eating ramen for lunch and dinner, and the next day they are millionaires. Many of them simply don’t know how to manage their money.

But it’s not just lotto winners and athletes that don’t know what to do with money once they have it. Take a look at the findings of a recent survey of 7,000 people on their saving habits:

Of those whose incomes were less than $25,000, 38% had $0 saved, and 35% had less than $1,000. People who earned more fared better, but still reported low amounts of savings in savings accounts. Of those with incomes of $100,000 to $149,999, 18% had $0 saved in a savings account, and 26% had less than $1,000. And for earners of $150,000 annually or more, those numbers dropped slightly to 6% and 23%, respectively.

It may surprise you to see that those who are considered “rich”, those making over $100,000 a year in salary, save nearly as little as those who make $25,000. It does not surprise me.

Welcome to the rat race

When I created my board game CASHFLOW©, I did so to help people escape the rat race. The rat race is the cycle of poor financial habits that most people make in order to keep up with the Jonses. Most people, no matter how much money they make, can’t escape the rat race. Instead, they increase their lifestyle spending to match their new income.

There isn’t a problem with increasing lifestyle spending. I like nice things as much as the next person. Rather the problem is how that increase in spending is financed—mainly through a salary.

As an employee, most “rich” people are one bad economic downturn or disastrous decision by a company CEO from their own economic ruin. One exercise I like to ask people to do is to list out every expense they have in one column and then their income in another. Then I ask them to cover the income column. “How long,” I ask, “Would you survive without your salary?” For most people this is a moment of truth…and panic. It’s their first insight into their rat race.

The reason most people don’t save, including the so-called rich, is that they don’t understand how to make money work for them. They are poor when it comes to financial intelligence.

Cut expenses?

Unfortunately, most people’s initial reaction to the rat race is to cut their expenses. This can work for a time, but the reality is that you can never cut all your expenses. And let’s face it, cutting the fun things out of your budget is a miserable thing to have to do.

Cutting expenses is what the poor do. The rich do not cut expenses. Rather, they ask, like my rich dad taught me to ask, “How can I afford it?”

The rich, instead of cutting expenses, increase them. The key is that they increase a certain type of expense that will later make them richer.

The power of paying yourself first

A while back, I shared two stories that illustrate what I mean.

Here is the first story:

Rich Dad's Income Statement & Balance Sheet - first story

Here is the second story:

Rich Dad's Income Statement & Balance Sheet - second story

They say that a picture is worth a thousand words. Study the diagrams above and see if you can pick up some of the distinctions between the two stories. If you're financially intelligent, you can see important distinctions.

The first diagram depicts the actions of those who pay themselves first. Each month they allocate money to their asset column before they pay their monthly expenses.

The second diagram depicts the actions of those who pay everyone else before they pay themselves. Each month they allocate money to their expenses column and then invest with whatever is left over—which is usually nothing. This is the diagram of those in the rat race, no matter how much money they make, they are poor.

If you understand the power of cash flow, you will understand what is wrong with the second diagram. It's the reason why 90 percent of people work hard all their lives and need government support like Social Security when they are no longer able to work. The reason is they pay themselves last.

In order to be rich, you must have the self-discipline to pay yourself first. By this, I simply mean using your income to invest in cash-flowing assets before you pay your bills or buy anything fun. This in turn will create more income that you can use to invest in more, cash-flowing assets. Do that and you'll have more money than you know what to do with.

Paying yourself first is not easy. In fact, it can be scary, especially when the bills are piling up. But you must develop the self-discipline to do it.

Saving is not paying yourself first

It’s important to note that saving does not equal paying yourself first. I’ve written a lot about why savers are losers. If you simply save money each month, you will never get ahead financially.

Rather, you must save with a purpose. Both Kim and I have some savings set aside in the form of liquid assets like cash, gold, and silver, which we can use in an emergency. But the majority of our money goes into saving for investing into cash-flowing assets. It is these cash-flowing assets that then put money into our pockets each month. And it is cash-flowing assets—i.e., money working for you—that gets you out of the rat race.

When you have passive income coming in each month from your investments, you don’t need a job and you don’t need a salary. You are financially free, and only then are you truly rich.

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