Blog | Personal Finance

Rich Dad Scam #4: Live Below Your Means

How to NOT live below your means and start expanding your them instead

This is the fourth post in a series I’m doing on what I call Rich Dad Scams, scams that we’ve identified that the rich perpetrate on the poor and middle class to keep them poor.

Perhaps you’ve heard this said before? “In order to be rich, you have to live below your means.”

Living below your means is the idea that you should not spend more money than you bring in each month. It is the kissing cousin of the scams, “Get out of debt” and “Save money.”

In fact, one of the top hits on Google for “live below your means” is an article called, “Want to get rich? This is the secret.” The author of that article advocates for eliminating your debt and creating a small budget to live on, sticking with it even when you get a raise or a bonus and saving that money. Among the tips given in the article are “Don’t go to the mall,” “Act like you have no money,” and “Don’t use credit cards.”

As the thinking goes by so-called experts, the reason why many people are poor is because they cannot control their spending. As soon as they get their paycheck, they go on a shopping spree, spending it all on things like clothes, cars, and more. The only way to stop this cycle of financial destruction is living below your means.

On the surface, it makes sense. You shouldn’t outspend your income on things like liabilities. That’s a core philosophy of Rich Dad as well. But the idea of “live below your means” is a scam. Only poor people live below their means. The rich don’t live below their means. Rather, they expand their means.

A poor mindset says, “Live below your means”

Whenever we wanted something nice, my poor dad said, “We can’t afford that.” When we would push back, asking again, he would say, “The most important lesson I can teach you is living below your means.”

The funny thing is that by many standards my poor dad was well off. He had a good, stable, high-level government job as the superintendent of the Hawaii school system. He was well respected. He was well educated with multiple advanced degrees. But he knew nothing about money.

As a result, even though my poor dad preached the scam of “live below your means,” he struggled financially all his life. Towards the end of his life, he lamented to me and my siblings that he didn’t have much to leave us. We, of course, told him we loved him and that didn’t matter, but he still felt the burden of it.

The biggest problem for my poor dad, and for most people, is that his “l can’t afford that, live below your means” mindset closed off a whole world of possibilities financially for him. That is why I call it a Rich Dad Scam.

“Live below your means,” is a poor mindset because it teaches you to think too narrowly. Rather than teach you to be creative in making more money, it teaches you to be merciless in what you spend your money on. In the article I mentioned above, the author writes, “Trimming relatively small expenses such as lattes, magazines, and gym membership is a common approach to reducing expenses. But to get rich, you need to learn how to live below your means. To do this, you need to examine your essential living expenses.”

No one likes finding things you can live without so you can afford something else. It’s awful. And I can tell you with certainty that rich people I know, the ones who are very rich and continue to get richer, don’t worry about living below their means. Rather they take all that mental energy it takes to cut expenses and they look at how to expand their means instead.

Instead of asking, “How can I live below my means?”, ask, “How can I expand my means?”

My rich dad asked, “How can I afford that? How can I expand my means?”

For my poor dad, the world was one of scarcity. He believed that if there was something he wanted in life, he needed to deny himself and save his resources for only necessities.

For my rich dad, the world was one of abundance. He believed that if there was something he wanted in life, there were many possibilities on how to attain it. Needless to say, my poor dad was wrong when he said the most important lesson he could teach us was living below our means. I took my rich dad’s view of the world to heart and made it my own. He taught me how to expand my means.

When my wife and I want to splurge on something, we don’t look at where to cut costs. Instead, we acquire an asset to offset the cost of what we want. So, instead of always looking for what we can cut to afford something, we’re always looking to expand our means to cover the cost of what we want. It’s a completely different mindset, given to me by my rich dad.

For instance, some years ago I wanted to get a new Bentley. I could have easily paid cash for the car, but I didn’t want to do that for a liability. Instead, I invested in assets that would provide enough cash flow to cover my new toy. I took a little longer, but six months later my investments created enough cash flow to pay for my car—and some. In the process, I got my fun car and also built my wealth.

This is the core of thinking like rich dad instead of like poor dad. Think like an investor or an entrepreneur. Identify what you want and work out a plan to get there in a smart way through assets.

If you live below your means, you can never add assets, so you’ll never break the chain of cutting costs and budgeting to afford something. Instead, you’ll be stuck hoping your income will increase courtesy of your employer.

Minimalism: the new “live below your means”

One of the most challenging things about the Rich Dad Scams I’ve written about is how ingrained they are. If you weren’t lucky enough to have a rich dad to teach you about them like I did, these scams probably make up your ideas and attitudes toward money. They feel built in. Most people believe they must be true because they’ve heard them all their life.

What’s worse is that these scams keep reincarnating themselves in new and shiny ways over time. For instance, today a big push is for minimalist living. To be clear, this is just “live below your means” in disguise. The problem is it’s now bound up with a vague kind of moralism to boot. So, it’s engineered to make you feel extra guilty for spending and enjoying things.

I wrote a post on minimalism a while back where I said, “[Minimalists] have a problem with spending and acquiring liabilities, but they are not sure how to get control over it. So, they take drastic action to cut spending, get rid of things, and pretend it has something to do with philosophy.” In that post, I advocated instead for living out the philosophy of minimalism if that’s your thing, but not cutting your spending. Instead, I advocated for investing in assets with your spare cash to increase your wealth. Then you can do whatever you want with the resulting wealthy, including living minimal and giving your money away. You’ll make a greater impact on the world that way.

It can be difficult to remember that the Rich Dad Scams we’ve identified are lies (especially when they get repackaged all the time), but it’s vital to know that they are. Because once you identify that the conventional ways of thinking about money that you’ve been taught your whole life are scams that keep you poor—and you truly believe it—you have the power to change your life. Why? Because Knowledge is power.

The good news is that you can start today. Anyone can begin to shift from a live-below-your-means mindset to an expand-your-means one. If you want to think like rich dad instead of poor dad, simply begin by asking, “How can I afford that?” rather than saying, “I can’t afford that.” In the process you’ll go from a poor mindset to a rich one—and you’ll also break out of the pattern set by Rich Dad Scam #4, “Live Below Your Means.”