Are you ready to discover the third key to financial intelligence?
Robert teaches us that the third financial IQ is all about budgeting your money.
His poor dad often said, “Live below our means,” but his rich dad had a different perspective: “If you want to be rich, you need to expand your means.”
So, which approach will you choose?
In this chapter, we'll explore what a budget really is and look at two different types of budgets. We'll also explain why simply living below your means might not be the smartest strategy for becoming wealthy.
Let’s dive in!
According to Robert's rich dad, a budget is a plan. He pointed out an interesting truth: “Most people use their budgets to stay poor or middle class instead of using them to build wealth.” There are two main types of budgets you should know about: budget deficit and budget surplus. Do you know the common mistake people make?
Most people end up living with a budget deficit, which means they're spending more than they're earning.
Let’s take a closer look at budget deficits.
According to Barron’s Finance and Investment Handbook, a budget deficit occurs when spending exceeds income, whether for a government, a company, or an individual.
Robert explains, “Many people find it easier to spend money than to earn it.” When a budget deficit happens, people often cut back on their spending. However, his rich dad advised, “Instead of reducing expenses, focus on increasing your income.”
He shares definitions of budget deficits for both governments and businesses, along with diagrams that help clarify these ideas.
For instance, one reason his rich dad encouraged him to work at Xerox was to learn how to boost sales and increase income.
Why is this important?
Cutting expenses, taking on more debt, or selling off your assets can often make your financial situation worse. His rich dad believed that focusing on increasing income is a more effective way to solve the problem of a budget deficit.
Many individuals struggle with debt because they spend more than they earn. Remember, we learned that “one reason people have less to spend is that financial predators take money from workers before they even get paid.”
So, what’s at the heart of this issue? It’s often a lack of financial knowledge!
The problem with letting banks manage your money is that they may treat it as if it’s theirs. Employees in the E quadrant, meaning they work for others, often have little control over major expenses like taxes, social security, pensions, and mortgage payments. On the other hand, financially savvy individuals know how to manage these costs effectively.
