There are some fundamental principles about money that are important to understand if you want to develop your financial literacy.
Unfortunately two of these principles are commonly misunderstood and continue to be perpetuated by our ignorance.
Common Misconceptions about Money
If you were fortunate enough to be raised by wealthy parents, you might have learned about money at home.
If that wasn’t your experience, and you haven’t done your own study, it’s likely you believe two of the most common misconceptions about money.
I know I did. Until I began my financial education.
These fallacies are reinforced in our culture everyday and they keep us from understanding how to accumulate real wealth.
We believe that:
- People who look rich, are rich
- Wealth is measured in money
Let’s unpack these and uncover the truth.
Fallacy #1 People who look rich, are rich
Based on the research of Thomas J. Stanley and William D. Danko in their book The Millionaire Next Door, most truly wealthy people don’t live in upscale neighbourhoods. They don’t drive expensive cars and generally they don’t buy lots of stuff. You would never suspect they had a net worth in the millions.
Too often those who look rich, are actually carrying huge debt and living paycheque to paycheque to pay for their lifestyle.
It’s part of our social culture that the more money you have, the more you should spend.
And if you’re a high level executive, there’s an expectation that you have all the toys and status symbols that go with the position.
So as soon as you get a raise, you go buy a new toy.
Expenses rise to meet income.
But the truly rich know how wealth is created. They’ve developed their financial intelligence. They understand the difference between an asset and a liability.
They know that
- an asset puts money in your pocket
- a liability takes money out of your pocket
So instead of accumulating liabilities (like things that require monthly payments or cost money to maintain), they focus on accumulating assets that pay them (like revenue property).
Then they take that money and buy more assets that will put more money in their pocket. This is what leads to true wealth.
Eventually there is more money coming in than going out, month after month, year after year, and eventually they’re living on what’s known as passive income.
Passive income is when your money works for you and you get paid while you sleep.
Here’s an example from Robert Kiyosaki’s best-selling book, Rich Dad Poor Dad: What The Rich Teach Their Kids About Money – That The Poor And Middle Class Do Not!
Many people think their home is an asset, but in fact, it’s a liability.
It costs you money every month. Even when you’ve paid off your mortgage, your house is still costing you in general upkeep and property taxes.
But if you were to move out of your house and rent it to others and you were making more in rent than all your expenses, including the maintenance, the property taxes and your cost of living somewhere else, then your house would become an asset.
It’s only an asset when it’s putting money in your pocket.
Seems simple, but not understanding this difference will make it extremely difficult to become wealthy.
Kiyosaki jokes that the bank isn’t lying to you when they call your house an asset. They’re just not telling you whose asset it is!
Fallacy #2 Wealth is measured in money
The second lie is that wealth is measured in money. The truth is that real wealth is measured in time.
It’s not how much money you have. It’s how long you keep it and how long it’s working for you that determines your wealth.
This is not what most of us have been taught.
If you’re living paycheque to paycheque, no matter how much you make, you’re not keeping it for long and it’s certainly not working for you.
I define real wealth as having the time and resources to live the life you want. The amount of money required to meet that criteria will be different for everyone.
Few of us were taught anything about money in school. But having an understanding of the fundamental principles that truly wealthy people follow, gives us the opportunity to expand our financial intelligence.
From there, one door after another begins to open.
What about you?
I’d love to hear your thoughts about this in the comments below. Did you also have these misconceptions? If so, how will this new understanding affect how you behave with money now?